----

----

**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, 2006**

**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**

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

** **
**YES**
**NO**

**Indicate        by check mark whether the registrant is a large accelerated filer, an        accelerated filer, or a non-accelerated filer. See definition of “accelerated        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check        one):**

| **Large                  accelerated filer**þ  | **Accelerated                  filer**o  | **Non-accelerated                  filer**o  |
|----------------------------------------------------------|-----------------------------------------------|---------------------------------------------------|

**       **
**       **

**Indicate        by check mark whether the registrant is a shell company (as defined in Rule        12b-2 of the Exchange Act).**

** **
**YES**
**NO**

**As          of October 5, 2006,**
**          18,576,096 **
**shares          of the Company’s common stock, without par value, were          outstanding.**

----

----

----

**CHATTEM,      INC.**

**INDEX**

|                                                                                                                                                            | **PAGE                NO.** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|
| **PART              I.    FINANCIAL INFORMATION**                                                                                                |                        |
|                                                                                                                                                            |                        |
| Item                1. Financial Statements                                                                                                                     |                        |
|                                                                                                                                                            |                        |
| Condensed                  Consolidated Balance Sheets as of August 31, 2006 and November                  30, 2005                                             | 3                           |
|                                                                                                                                                            |                        |
| Condensed                Consolidated Statements of Income for the Three and Nine Months Ended                August 31, 2006 and August 31, 2005               | 5                           |
|                                                                                                                                                            |                        |
| Condensed                  Consolidated Statements of Cash Flows for the Nine Months Ended                  August 31, 2006 and August 31, 2005                 | 6                           |
|                                                                                                                                                            |                        |
| Notes                to Condensed Consolidated Financial Statements                                                                                             | 7                           |
|                                                                                                                                                            |                        |
| Item                2. Management’s                Discussion                and Analysis of Financial Condition and                Results of Operations | 27                          |
|                                                                                                                                                            |                        |
| Item                3. Quantitative and Qualitative Disclosures About Market                Risk                                                                | 39                          |
|                                                                                                                                                            |                        |
| Item                4. Controls and Procedures                                                                                                                  | 39                          |
|                                                                                                                                                       |                        |
| **PART                II.    OTHER INFORMATION**                                                                                                 |                        |
|                                                                                                                                                            |                        |
| Item                1. Legal Proceedings                                                                                                                        | 40                          |
|                                                                                                                                                            |                        |
| Item                1A. Risk Factors                                                                                                                            | 40                          |
|                                                                                                                                                            |                        |
| Item                2. Unregistered Sales of Equity Securities and Use of                Proceeds                                                               | 40                          |
|                                                                                                                                                            |                        |
| Item                3. Defaults Upon Senior Securities                                                                                                          | 40                          |
|                                                                                                                                                            |                        |
| Item                4. Submission of Matters to a Vote of Security Holders                                                                                      | 40                          |
|                                                                                                                                                            |                        |
| Item                5. Other Information                                                                                                                        | 40                          |
|                                                                                                                                                            |                        |
| Item                6. Exhibits                                                                                                                                 | 40                          |
|                                                                                                                                                            |                        |
| **SIGNATURES**                                                                                                                                                  | 41                          |
|                                                                                                                                                            |                        |
|                                                                                                                                                            |                        |

----

**PART      1. FINANCIAL INFORMATION**

**Item      1.    Financial Statements**

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED BALANCE SHEETS**

|  ASSETS                                                                                                                         |   | August                31,                       2006                       |    | NOVEMBER                30,                       2005                       |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                 |   | (Unaudited)                                                                                                                            |    |                                                                                                                                          |   |
|                                                                                                                                 |   |                                                                                                                                   |    |                                                                                                                                          |   |
| CURRENT                ASSETS:                                                                                                       |   |                                                                                                                                   |    |                                                                                                                                          |   |
| Cash                and cash equivalents                                                                                             |   | $                                                                                                                                      | 26,903  |                                                                                                                                          | $      | 47,327 |   |
| Accounts                receivable, less allowances of $4,210 at August                31, 2006 and $2,338 at November 30, 2005 |   |                                                                                                                                   | 33,727  |                                                                                                                                          |   | 33,672 |   |
| Other                receivables                                                                                                     |   |                                                                                                                                   | 249     |                                                                                                                                          |   | 9,600 |   |
| Inventories                                                                                                                          |   |                                                                                                                                   | 28,903  |                                                                                                                                          |   | 23,631 |   |
| Refundable                income taxes                                                                                               |   |                                                                                                                                   | — |                                                                                                                                          |   | 1,207 |   |
| Deferred                income taxes                                                                                                 |   |                                                                                                                                   | 2,010   |                                                                                                                                          |   | 2,478 |   |
| Prepaid                expenses and other current assets                                                                             |   |                                                                                                                                   | 7,562   |                                                                                                                                          |   | 5,106 |   |
| Total                current assets                                                                                                  |   |                                                                                                                                   | 99,354  |                                                                                                                                          |   | 123,021 |   |
|                                                                                                                                 |   |                                                                                                                                   |    |                                                                                                                                          |   |   |   |
| PROPERTY,                PLANT AND EQUIPMENT, NET                                                                                    |   |                                                                                                                                   | 30,229  |                                                                                                                                          |   | 29,884 |   |
|                                                                                                                                 |   |                                                                                                                                   |    |                                                                                                                                          |   |   |   |
| OTHER                NONCURRENT ASSETS:                                                                                              |   |                                                                                                                                   |    |                                                                                                                                          |   |   |   |
| Patents,                trademarks and other purchased product rights, net                                                           |   |                                                                                                                                   | 206,209 |                                                                                                                                          |   | 206,387 |   |
| Debt                issuance costs, net                                                                                              |   |                                                                                                                                   | 8,225   |                                                                                                                                          |   | 4,297 |   |
| Other                                                                                                                                |   |                                                                                                                                   | 4,976   |                                                                                                                                          |   | 4,704 |   |
| Total                other noncurrent assets                                                                                         |   |                                                                                                                                   | 219,410 |                                                                                                                                          |   | 215,388 |   |
|                                                                                                                                 |   |                                                                                                                                   |    |                                                                                                                                          |   |   |   |
| TOTAL                ASSETS                                                                                                          |   | $                                                                                                                                      | 348,993 |                                                                                                                                          | $      | 368,293 |   |
|                                                                                                                                 |   |                                                                                                                                   |    |                                                                                                                                          |   |   |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED BALANCE SHEETS**

|  LIABILITIES                AND SHAREHOLDERS’ EQUITY                                                                                                                         |   | AUGUST                31,                     2006        |    | NOVEMBER                30,                       2005           |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                    |   | (Unaudited)                                                                                                      |    |                                                                                                                                                  |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |
| CURRENT                LIABILITIES:                                                                                                                                                     |   |                                                                                                             |    |                                                                                                                                                  |   |
| Current                maturities of long-term debt                                                                                                                                     |   | $                                                                                                                | — |                                                                                                                                                  | $      | 37,000 |   |
| Accounts                payable and other                                                                                                                                               |   |                                                                                                             | 7,634   |                                                                                                                                                  |   | 17,238 |   |
| Accrued                liabilities                                                                                                                                                      |   |                                                                                                             | 17,562  |                                                                                                                                                  |   | 16,327 |   |
| Total                current liabilities                                                                                                                                                |   |                                                                                                             | 25,196  |                                                                                                                                                  |   | 70,565 |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| LONG-TERM                DEBT, less current maturities                                                                                                                                  |   |                                                                                                             | 161,000 |                                                                                                                                                  |   | 145,500 |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| DEFERRED                INCOME TAXES                                                                                                                                                    |   |                                                                                                             | 30,862  |                                                                                                                                                  |   | 27,736 |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| OTHER                NONCURRENT LIABILITIES                                                                                                                                             |   |                                                                                                             | 1,425   |                                                                                                                                                  |   | 1,865 |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| COMMITMENTS                AND CONTINGENCIES (Note 18)                                                                                                                                  |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| SHAREHOLDERS’                EQUITY:                                                                                                                                              |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| Preferred                shares, without par value, authorized 1,000, none                issued                                                                                        |   |                                                                                                             | — |                                                                                                                                                  |   | — |   |
| Common                shares, without par value, authorized 50,000, issued                and outstanding 18,576 at August 31, 2006 and 19,668                at November 30, 2005 |   |                                                                                                             | 30,975  |                                                                                                                                                  |   | 63,876 |   |
| Retained                earnings                                                                                                                                                        |   |                                                                                                             | 101,055 |                                                                                                                                                  |   | 60,853 |   |
|                                                                                                                                                                                    |   |                                                                                                             | 132,030 |                                                                                                                                                  |   | 124,729 |   |
| Unamortized                value of restricted common shares issued Cumulative                other comprehensive income, net of tax:                                                   |   |                                                                                                             | (1,161  | )                                                                                                                                                     |   | (1,818 | ) |
| Interest                rate cap adjustment                                                                                                                                             |   |                                                                                                             | (18     | )                                                                                                                                                     |   | (83 | ) |
| Foreign                currency translation adjustment                                                                                                                                  |   |                                                                                                             | (341    | )                                                                                                                                                     |   | (201 | ) |
| Total                shareholders’ equity                                                                                                                                         |   |                                                                                                             | 130,510 |                                                                                                                                                  |   | 122,627 |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                         |   | $                                                                                                                | 348,993 |                                                                                                                                                  | $      | 368,293 |   |
|                                                                                                                                                                                    |   |                                                                                                             |    |                                                                                                                                                  |   |   |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED STATEMENTS OF INCOME**

|                                                               |   | FOR                THE THREE MONTHSENDED                AUGUST 31, |    | FOR                THE NINE MONTHSENDED                AUGUST 31, |   |
|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|-------------------------------------------------------------------|--------|
|                                                               |   | 2006                                                               |    | 2005                                                              |   | 2006 |   | 2005 |   |
| REVENUES:                                                          |   |                                                               |    |                                                              |   |   |   |   |   |
| Net                sales                                           |   | $                                                                  | 71,947  |                                                              | $      | 68,185 |   | $ | 235,276 |   | $ | 215,305 |   |
| Royalties                                                          |   |                                                               | 58      |                                                              |   | 30 |   |   | 164 |   |   | 128 |   |
| Total                revenues                                      |   |                                                               | 72,005  |                                                              |   | 68,215 |   |   | 235,440 |   |   | 215,433 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| COSTS                AND EXPENSES:                                 |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Cost                of sales                                       |   |                                                               | 22,238  |                                                              |   | 18,575 |   |   | 73,312 |   |   | 59,951 |   |
| Advertising                and promotion                           |   |                                                               | 23,607  |                                                              |   | 17,657 |   |   | 75,575 |   |   | 58,739 |   |
| Selling,                general and administrative                 |   |                                                               | 10,855  |                                                              |   | 12,122 |   |   | 33,974 |   |   | 36,341 |   |
| Executive                severance charges                         |   |                                                               | — |                                                              |   | 2,269 |   |   | — |   |   | 2,269 |   |
| Litigation                settlement                               |   |                                                               | (10,800 | )                                                                 |   | 431 |   |   | (19,305 | ) |   | (2,401 | ) |
| Total                costs and expenses                            |   |                                                               | 45,900  |                                                              |   | 51,054 |   |   | 163,556 |   |   | 154,899 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| INCOME                FROM OPERATIONS                              |   |                                                               | 26,105  |                                                              |   | 17,161 |   |   | 71,884 |   |   | 60,534 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                             |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Interest                expense                                    |   |                                                               | (3,018  | )                                                                 |   | (3,332 | ) |   | (8,318 | ) |   | (10,285 | ) |
| Investment                and other income, net                    |   |                                                               | 188     |                                                              |   | 274 |   |   | 616 |   |   | 676 |   |
| Loss                on early extinguishment of debt                |   |                                                               | — |                                                              |   | — |   |   | (2,805 | ) |   | (744 | ) |
| Total                other income (expense)                        |   |                                                               | (2,830  | )                                                                 |   | (3,058 | ) |   | (10,507 | ) |   | (10,353 | ) |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| INCOME                BEFORE INCOME TAXES                          |   |                                                               | 23,275  |                                                              |   | 14,103 |   |   | 61,377 |   |   | 50,181 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| PROVISION                FOR INCOME TAXES                          |   |                                                               | 8,046   |                                                              |   | 4,654 |   |   | 21,175 |   |   | 16,560 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| NET                INCOME                                          |   | $                                                                  | 15,229  |                                                              | $      | 9,449 |   | $ | 40,202 |   | $ | 33,621 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| NUMBER                OF COMMON SHARES:                            |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Weighted                average outstanding-basic                  |   |                                                               | 18,749  |                                                              |   | 19,762 |   |   | 19,195 |   |   | 19,669 |   |
| Weighted                average and potential dilutive outstanding |   |                                                               | 18,912  |                                                              |   | 20,487 |   |   | 19,468 |   |   | 20,456 |   |
|                                                               |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| NET                INCOME PER COMMON SHARE:                        |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                              |   | $                                                                  | .81     |                                                              | $      | .48 |   | $ | 2.09 |   | $ | 1.71 |   |
| Diluted                                                            |   | $                                                                  | .81     |                                                              | $      | .46 |   | $ | 2.07 |   | $ | 1.64 |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS**

|                                                                                                                                                         |   | FOR                THE NINE MONTHS ENDED |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                                                                                                         |   | AUGUST                31, 2006      |    | AUGUST                31, 2005 |   |
| OPERATING                ACTIVITIES:                                                                                                                         |   |                                     |    |   |   |
| Net                income                                                                                                                                    |   | $                                        | 40,202  |   | $ | 33,621 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities:                                              |   |                                     |    |   |   |   |   |
| Depreciation                and amortization                                                                                                                 |   |                                     | 4,339   |   |   | 4,372 |   |
| Deferred                income taxes                                                                                                                         |   |                                     | 3,554   |   |   | 7,111 |   |
| Excess                tax benefit from stock-based compensation                                                                                              |   |                                     | (744    | ) |   | — |   |
| Stock-based                compensation                                                                                                                      |   |                                     | 3,322   |   |   | 1,057 |   |
| Loss                on early extinguishment of debt                                                                                                          |   |                                     | 2,805   |   |   | 744 |   |
| Restricted                stock modification expense                                                                                                         |   |                                     | — |   |   | 1,360 |   |
| Other,                net                                                                                                                                    |   |                                     | 255     |   |   | 205 |   |
| Changes                in operating assets and liabilities:                                                                                                  |   |                                     |    |   |   |   |   |
| Accounts                receivable                                                                                                                           |   |                                     | 9,296   |   |   | (1,478 | ) |
| Inventories                                                                                                                                                  |   |                                     | (5,099  | ) |   | (1,128 | ) |
| Refundable                income taxes                                                                                                                       |   |                                     | 1,951   |   |   | 4,285 |   |
| Prepaid                expenses and other current assets                                                                                                     |   |                                     | (1,125  | ) |   | (3,272 | ) |
| Accounts                payable and accrued liabilities                                                                                                      |   |                                     | (7,057  | ) |   | (9,002 | ) |
| Net                cash provided by operating activities                                                                                                     |   |                                     | 51,699  |   |   | 37,875 |   |
|                                                                                                                                                         |   |                                     |    |   |   |   |   |
| INVESTING                ACTIVITIES:                                                                                                                         |   |                                     |    |   |   |   |   |
| Purchases                of property, plant and equipment                                                                                                    |   |                                     | (3,557  | ) |   | (2,353 | ) |
| Sales                of patents, trademarks and other product rights                                                                                         |   |                                     | — |   |   | 3,252 |   |
| Increase                in other assets, net                                                                                                                 |   |                                     | (2,078  | ) |   | (507 | ) |
| Net                cash provided by (used in) investing activities                                                                                           |   |                                     | (5,635  | ) |   | 392 |   |
|                                                                                                                                                         |   |                                     |    |   |   |   |   |
| FINANCING                ACTIVITIES:                                                                                                                         |   |                                     |    |   |   |   |   |
| Repayment                of long-term debt                                                                                                                   |   |                                     | (75,000 | ) |   | (17,500 | ) |
| Proceeds                from borrowings under revolving credit facility                                                                                      |   |                                     | 75,500  |   |   | — |   |
| Repayments                of revolving credit facility                                                                                                       |   |                                     | (22,000 | ) |   | — |   |
| Repayment                of policy loans                                                                                                                     |   |                                     | — |   |   | (1,031 | ) |
| Proceeds                from exercise of stock options                                                                                                       |   |                                     | 911     |   |   | 5,286 |   |
| Repurchase                of common shares                                                                                                                   |   |                                     | (39,332 | ) |   | (21,664 | ) |
| Increase                in debt issuance costs                                                                                                               |   |                                     | (5,634  | ) |   | — |   |
| Debt                retirement costs                                                                                                                         |   |                                     | (1,501  | ) |   | (282 | ) |
| Excess                tax benefit from stock-based compensation                                                                                              |   |                                     | 744     |   |   | — |   |
| Net                cash used in financing activities                                                                                                         |   |                                     | (66,312 | ) |   | (35,191 | ) |
|                                                                                                                                                         |   |                                     |    |   |   |   |   |
| EFFECT                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                                                                  |   |                                     | (176    | ) |   | (131 | ) |
|                                                                                                                                                         |   |                                     |    |   |   |   |   |
| CASH                AND CASH EQUIVALENTS:                                                                                                                    |   |                                     |    |   |   |   |   |
| Increase                (decrease) for the period                                                                                                            |   |                                     | (20,424 | ) |   | 2,945 |   |
| At                beginning of period                                                                                                                        |   |                                     | 47,327  |   |   | 40,193 |   |
| At                end of period                                                                                                                              |   | $                                        | 26,903  |   | $ | 43,138 |   |
|                                                                                                                                                         |   |                                     |    |   |   |   |   |
| SCHEDULE                OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                                                      |   |                                     |    |   |   |   |   |
| Issuance                of 50 shares of restricted common stock at a value of $35.37                per share for the nine months ended August 31, 2005 |   | $                                        | — |   | $ | 1,768 |   |
|                                                                                                                                                         |   |                                     |    |   |   |   |   |
| PAYMENTS                FOR:                                                                                                                                 |   |                                     |    |   |   |   |   |
| Interest                                                                                                                                                     |   | $                                        | 6,452   |   | $ | 7,797 |   |
| Taxes                                                                                                                                                        |   | $                                        | 14,706  |   | $ | 5,200 |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.    BASIS      OF      PRESENTATION**

**2.            CASH      AND CASH EQUIVALENTS**

**3.          RECLASSIFICATIONS**

**4.    RECENT      ACCOUNTING PRONOUNCEMENTS**

----

**5.    STOCK-BASED      COMPENSATION**

----

|                                   |   | Nine                Months Ended August                31, |                     |
|----------------------------------------|--------|-----------------------------------------------------------------|--------------------------|
|                                   |   | 2006                                                            |                     | 2005 |   |
| Expected                life           |   |                                                            | 6.0                years |   |   | 5.0                years |   |
| Volatility                             |   |                                                            | 43                       | % |   | 55 | % |
| Risk-free                interest rate |   |                                                            | 4.48                     | % |   | 4.02 | % |
| Dividend                yield          |   |                                                            | 0                        | % |   | 0 | % |
| Forfeitures                            |   |                                                            | 0.9                      | % |   | 0 | % |

|                                               |   | For                the Nine Months Ended |   |
|----------------------------------------------------|--------|------------------------------------------|--------|
|                                               |   |   SharesUnderOption            |   |  WeightedAverageExercisePrice |   | WeightedAverageRemainingContractualLife |   |   AggregateIntrinsicValue |   |
| Outstanding                at December 1, 2005     |   |                                     | 1,753  |   | $ | 23.94 |   |   |   |   |   |   |   |
| Granted                                            |   |                                     | 439    |   |   | 37.96 |   |   |   |   |   |   |   |
| Exercised                                          |   |                                     | (81    | ) |   | 11.27 |   |   |   |   |   |   |   |
| Cancelled                                          |   |                                     | (89    | ) |   | 32.31 |   |   |   |   |   |   |   |
|                                               |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding                at August 31, 2006 |   |                                     | 2,022  |   | $ | 27.12 |   |   | 6.2                years |   | $ | 19,582 |   |
|                                               |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable                at August 31, 2006 |   |                                     | 1,212  |   | $ | 24.49 |   |   | 6.0                years |   | $ | 15,187 |   |

----

|                                         |   |  Numberof Shares |    | Weighted                AverageGrant                DateFair Value |   |
|----------------------------------------------|--------|----------------------------|---------|-------------------------------------------------------------------------|--------|
| Nonvested                at December 1, 2005 |   |                       | 75      |                                                                    | $      | 24.27 |   |
| Granted                                      |   |                       | — |                                                                    |   | — |   |
| Vested                                       |   |                       | (26     | )                                                                       | $      | 21.13 |   |
| Forfeited                                    |   |                       | (3      | )                                                                       | $      | 35.37 |   |
| Nonvested                at August 31, 2006  |   |                       | 46      |                                                                    | $      | 25.46 |   |

|                                                          |   | For                theThree                Months EndedAugust                31, 2005 |   | For                theNine                Months EndedAugust                31, 2005 |   |
|---------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|
| Net                income :                                   |   |                                                                                  |   |                                                                                      |   |
| As                reported                                    |   | $                                                                                          | 9,449  |                                                                                      | $      | 33,621 |   |
| Fair                value method compensation costs, net |   |                                                                                       | (1,714 | )                                                                                         |   | (4,465 | ) |
| Pro                forma                                      |   | $                                                                                          | 7,735  |                                                                                      | $      | 29,156 |   |
|  Net                income per share, basic:             |   |                                                                                       |   |                                                                                      |   |   |   |
| As                reported                                    |   | $                                                                                          | .48    |                                                                                      | $      | 1.71 |   |
| Pro                forma                                      |   | $                                                                                          | .39    |                                                                                      | $      | 1.48 |   |
|  Net                income per share, diluted:           |   |                                                                                       |   |                                                                                      |   |   |   |
| As                reported                                    |   | $                                                                                          | .46    |                                                                                      | $      | 1.64 |   |
| Pro                forma                                      |   | $                                                                                          | .38    |                                                                                      | $      | 1.43 |   |

----

**6.    EARNINGS      PER SHARE**

|                                                                             |   | For                the Three MonthsEnded                August 31, |   | For                the Nine MonthsEnded                August 31, |   |
|----------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                             |   | 2006                                                               |   | 2005                                                              |   | 2006 |   | 2005 |   |
|                                                                             |   |                                                               |   |                                                              |   |   |   |   |   |
| NET                INCOME                                                        |   | $                                                                  | 15,229 |                                                              | $      | 9,449 |   | $ | 40,202 |   | $ | 33,621 |   |
|                                                                             |   |                                                               |   |                                                              |   |   |   |   |   |   |   |   |   |
| NUMBER                OF COMMON SHARES:                                          |   |                                                               |   |                                                              |   |   |   |   |   |   |   |   |   |
| Weighted                average outstanding                                      |   |                                                               | 18,749 |                                                              |   | 19,762 |   |   | 19,194 |   |   | 19,669 |   |
| Issued                upon assumed exercise of outstanding stock options    |   |                                                               | 126    |                                                              |   | 691 |   |   | 238 |   |   | 758 |   |
| Effect                of issuance of restricted common shares               |   |                                                               | 37     |                                                              |   | 34 |   |   | 36 |   |   | 29 |   |
| Weighted                average and potential dilutive outstanding (1) |   |                                                               | 18,912 |                                                              |   | 20,487 |   |   | 19,468 |   |   | 20,456 |   |
|                                                                             |   |                                                               |   |                                                              |   |   |   |   |   |   |   |   |   |
| NET                INCOME PER COMMON SHARE:                                      |   |                                                               |   |                                                              |   |   |   |   |   |   |   |   |   |
| Basic                                                                            |   | $                                                                  | .81    |                                                              | $      | .48 |   | $ | 2.09 |   | $ | 1.71 |   |
| Diluted                                                                          |   | $                                                                  | .81    |                                                              | $      | .46 |   | $ | 2.07 |   | $ | 1.64 |   |

**7.    ADVERTISING      EXPENSES**

**8.    SHIPPING      AND HANDLING**

**9.    PATENT,      TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS**

----

*Selsun*

**10.          INVENTORIES**

|                                             |   | 2006   |   | 2005   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|
|                                             |   |   |   |   |   |
| Raw                materials and work in process |   | $      | 13,917 |   | $      | 12,388 |   |
| Finished                goods                    |   |   | 14,986 |   |   | 11,243 |   |
| Total                inventories                 |   | $      | 28,903 |   | $      | 23,631 |   |

**11.               ACCRUED LIABILITIES**

|                                                  |   | 2006   |   | 2005   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                  |   |   |   |   |   |
| Interest                                              |   | $      | 4,363  |   | $      | 3,201 |   |
| Salaries,                wages and commissions   |   |   | 1,982  |   |   | 5,991 |   |
| Product                advertising and promotion      |   |   | 7,595  |   |   | 2,589 |   |
| Litigation                settlement and legal fees   |   |   | 1,649  |   |   | 2,212 |   |
| Other                                                 |   |   | 1,973  |   |   | 2,334 |   |
| Total                accrued liabilities              |   | $      | 17,562 |   | $      | 16,327 |   |
|                                                  |   |   |   |   |   |   |   |

**12.          LONG-TERM      DEBT**

|                                                                                                                                                                                                                                               |   | 2006   |    | 2005   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Revolving                Credit Facility due 2010 at a variable rate of 6.65% and 7.00%                as of August 31, 2006 and November 30,                2005, respectively                                                |   | $      | 53,500  |   | $      | — |   |
| Floating                  Rate Senior Notes due 2010 at a variable rate of 7.41%                  and 6.87% as of                  December 30, 2005 (date redeemed) and November 30, 2005,                  respectively |   |   | — |   |   | 75,000 |   |
| 7.0%                Senior Subordinated Notes due 2014                                                                                                                                                                                             |   |   | 107,500 |   |   | 107,500 |   |

| Total                long-term debt                            |   |   | 161,000 |   |   | 182,500 |   |
|----------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|
| Less:                current maturities                        |   |   | — |   |   | 37,000  |   |
| Total                long-term debt, net of current maturities |   | $      | 161,000 |   | $      | 145,500 |   |

----

----

| 2007       |   | $      | — |   |
|------------|--------|--------|---------|--------|
| 2008       |   |   | — |   |
| 2009       |   |   | — |   |
| 2010       |   |   | 53,500  |   |
| 2011       |   |   | — |   |
| Thereafter |   |   | 107,500 |   |
|       |   | $      | 161,000 |   |

**13.               COMPREHENSIVE INCOME**

|                                                           |   | For                the Three MonthsEnded August                31, |   | For                the Nine MonthsEnded August                31, |   |
|----------------------------------------------------------------|--------|-------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                                           |   | 2006                                                                    |   | 2005                                                                   |   | 2006 |   | 2005 |   |
|                                                           |   |                                                                    |   |                                                                   |   |   |   |   |   |
| Net                income                                      |   | $                                                                       | 15,229 |                                                                   | $      | 9,449 |   | $ | 40,202 |   | $ | 33,621 |   |
| Other                - interest rate cap adjustment            |   |                                                                    | 122    |                                                                   |   | 16 |   |   | 65 |   |   | (183 | ) |
| Other                - foreign currency translation adjustment |   |                                                                    | (151   | )                                                                      |   | (151 | ) |   | (140 | ) |   | (257 | ) |
| Total                                                          |   | $                                                                       | 15,200 |                                                                   | $      | 9,314 |   | $ | 40,127 |   | $ | 33,181 |   |

**14.          STOCK      REPURCHASE**

----

**15.               **
**RETIREMENT      PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS**

|                                                                     |   | For                the Three MonthsEnded                August 31, |    | For                the Nine MonthsEnded                August 31, |   |
|--------------------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|-------------------------------------------------------------------|--------|
|                                                                     |   | 2006                                                               |    | 2005                                                              |   | 2006 |   | 2005 |   |
| Service                cost                                              |   | $                                                                  | — |                                                              | $      | — |   | $ | — |   | $ | — |   |
| Interest                cost on projected benefit   obligation |   |                                                               | 156     |                                                              |   | 155 |   |   | 467 |   |   | 465 |   |
| Actual                return on plan assets                              |   |                                                               | (226    | )                                                                 |   | (214 | ) |   | (677 | ) |   | (642 | ) |
| Net                amortization and deferral                             |   |                                                               | — |                                                              |   | 7 |   |   | — |   |   | 21 |   |
| Net                pension benefit                                       |   | $                                                                  | (70     | )                                                                 | $      | (52 | ) | $ | (210 | ) | $ | (156 | ) |

|                                                                                      |   | For                the Three MonthsEnded                August 31, |    | For                the Nine MonthsEnded                August 31, |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|-------------------------------------------------------------------|--------|
|                                                                                      |   | 2006                                                               |    | 2005                                                              |   | 2006 |   | 2005 |   |
| Service                cost                                                               |   | $                                                                  | 20      |                                                              | $      | 18 |   | $ | 60 |   | $ | 54 |   |
| Interest                cost on accumulated   postretirement benefit obligation |   |                                                               | 22      |                                                              |   | 21 |   |   | 66 |   |   | 63 |   |
| Amortization                of prior service cost                                         |   |                                                               | 4       |                                                              |   | 4 |   |   | 11 |   |   | 12 |   |
| Amortization                of net gain                                                   |   |                                                               | (4      | )                                                                 |   | (4 | ) |   | (12 | ) |   | (12 | ) |
| Curtailment                gain                                                           |   |                                                               | — |                                                              |   | — |   |   | (496 | ) |   | — |   |
| Net                periodic postretirement benefits cost   (benefit)            |   | $                                                                  | 42      |                                                              | $      | 39 |   | $ | (371 | ) | $ | 117 |   |

**16.               **
**INCOME      TAXES**

----

**17.               **
**PRODUCT      SEGMENT INFORMATION**

|                                                                   |   | For                the Three MonthsEnded                August 31, |   | For                the Nine MonthsEnded                August 31, |   |
|------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                   |   | 2006                                                               |   | 2005                                                              |   | 2006 |   | 2005 |   |
| Topical                pain care products                         |   | $                                                                  | 21,767 |                                                              | $      | 20,965 |   | $ | 82,605 |   | $ | 67,415 |   |
| Medicated                skin care products                            |   |                                                               | 17,340 |                                                              |   | 15,775 |   |   | 49,620 |   |   | 49,232 |   |
| Dietary                supplements                                     |   |                                                               | 9,934  |                                                              |   | 8,521 |   |   | 27,696 |   |   | 27,461 |   |
| Medicated                dandruff shampoos and   conditioner |   |                                                               | 7,798  |                                                              |   | 7,653 |   |   | 28,075 |   |   | 25,341 |   |
| Other                OTC and toiletry products                         |   |                                                               | 9,472  |                                                              |   | 8,873 |   |   | 28,911 |   |   | 26,590 |   |
|   Total                                                      |   | $                                                                  | 66,311 |                                                              | $      | 61,787 |   | $ | 216,907 |   | $ | 196,039 |   |

**18.               **
**COMMITMENTS      AND CONTINGENCIES**

*Dexatrim*
*In      Re      Phenylpropanolamine (“PPA”) Products Liability Litigation, MDL No.      1407*

*Dexatrim*
*Dexatrim*

*Dexatrim*
*Dexatrim*
*Dexatrim*

*Dexatrim*

----

*Dexatrim*
*Dexatrim      *

*Dexatrim*
*Dexatrim*
*Dexatrim*

*Dexatrim*
*Dexatrim*
*Dexatrim*
*Dexatrim*

*Dexatrim*
*Dexatrim*
*Dexatrim*

*Dexatrim*
*Dexatrim*

*Bullfrog*

----

*Bullfrog*
*Bullfrog*

*New      Phase*
**.      **

**REGULATORY**

*Dexatrim*
*Dexatrim*

*Sportscreme*
*Aspercreme.*
*Sportscreme*
*Aspercreme*
*Sportscreme*
*Aspercreme*

*Icy      Hot*
*Icy      Hot*
*Icy      Hot Pro-Therapy*
*Capzasin*
*Icy      Hot*
*Aspercreme      *
*Icy      Hot*
*Icy*

----

*Hot      Pro-Therapy*
*Capzasin*

*Pamprin*
*Prēmsyn      PMS*
*Pamprin*
*Prēmsyn      PMS,*
*Pamprin*

*Pamprin      All Day *
*Pamprin      All Day*
*Pamprin*
*Prēmsyn      PMS*

*Bullfrog*

*Bullfrog*

----

| **19.                       ** | **SUBSEQUENT                EVENT** |
|-----------------------------------------------------------------------------|-------------------------------------|

**20.               **
**CONDENSED      CONSOLIDATING FINANCIAL STATEMENTS**

----

| ASSETS                                                                                                                                 |   |   CHATTEM |    | GUARANTORSUBSIDIARYCOMPANIES |   | NON-GUARANTORSUBSIDIARYCOMPANIES |   |   ELIMINATIONS |    |   CONSOLIDATED |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------------|--------|----------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |
| CURRENT                ASSETS:                                                                                                         |   |                |    |                         |   |                             |   |                     |    |                     |   |
|                  Cash and cash equivalents                                                                                        |   | $                   | 17,184  |                         | $      | 1,984                            |   | $                        | 7,735   |                     | $      | — |   | $ | 26,903 |   |
|   Accounts                receivable, less allowances of $4,210                                                         |   |                | 28,665  |                         |   | 10,946                           |   |                     | 5,062   |                     |   | (10,946 | ) |   | 33,727 |   |
|   Other                receivables                                                                                           |   |                | 249     |                         |   | —                          |   |                     | — |                     |   | — |   |   | 249 |   |
|   Interest                receivable                                                                                         |   |                | 17      |                         |   | 625                              |   |                     | — |                     |   | (642 | ) |   | — |   |
|   Inventories                                                                                                                |   |                | 23,191  |                         |   | 2,877                            |   |                     | 2,835   |                     |   | — |   |   | 28,903 |   |
|   Refundable                income taxes                                                                                     |   |                | — |                         |   | —                          |   |                     | — |                     |   | — |   |   | — |   |
|   Deferred                income taxes                                                                                       |   |                | 1,975   |                         |   | —                          |   |                     | 35      |                     |   | — |   |   | 2,010 |   |
|   Prepaid                expenses and other current assets                                                                   |   |                | 4,217   |                         |   | —                          |   |                     | 2,214   |                     |   | 1,131 |   |   | 7,562 |   |
|     Total                current assets                                                                            |   |                | 75,498  |                         |   | 16,432                           |   |                     | 17,881  |                     |   | (10,457 | ) |   | 99,354 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| PROPERTY,                PLANT AND EQUIPMENT, NET                                                                                      |   |                | 28,921  |                         |   | 775                              |   |                     | 533     |                     |   | — |   |   | 30,229 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| OTHER                NONCURRENT ASSETS:                                                                                                |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|   Patents,                trademarks and other purchased product rights, net                                            |   |                | 226     |                         |   | 268,273                          |   |                     | — |                     |   | (62,290 | ) |   | 206,209 |   |
|   Debt                issuance costs, net                                                                                    |   |                | 8,225   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 8,225 |   |
|   Investment                in subsidiaries                                                                                  |   |                | 305,401 |                         |   | 33,000                           |   |                     | 66,860  |                     |   | (405,261 | ) |   | — |   |
|   Note                receivable                                                                                             |   |                | — |                         |   | 33,000                           |   |                     | — |                     |   | (33,000 | ) |   | — |   |
|   Other                                                                                                                      |   |                | 4,976   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 4,976 |   |
|     Total                other noncurrent assets                                                                   |   |                | 318,828 |                         |   | 334,273                          |   |                     | 66,860  |                     |   | (500,551 | ) |   | 219,410 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|     TOTAL                ASSETS                                                                                    |   | $                   | 423,247 |                         | $      | 351,480                          |   | $                        | 85,274  |                     | $      | (511,008 | ) | $ | 348,993 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| LIABILITIES                AND SHAREHOLDERS’ EQUITY                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| CURRENT                LIABILITIES:                                                                                                    |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|   Current                maturities of long-term debt                                                                        |   | $                   | — |                         | $      | —                          |   | $                        | — |                     | $      | — |   | $ | — |   |
|   Accounts                payable and other                                                                                  |   |                | 5,568   |                         |   | —                          |   |                     | 2,066   |                     |   | — |   |   | 7,634 |   |
|   Accrued                liabilities                                                                                         |   |                | 23,991  |                         |   | 1,590                            |   |                     | 2,437   |                     |   | (10,456 | ) |   | 17,562 |   |
|     Total                current liabilities                                                                       |   |                | 29,559  |                         |   | 1,590                            |   |                     | 4,503   |                     |   | (10,456 | ) |   | 25,196 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| LONG-TERM                DEBT, less current maturities                                                                                 |   |                | 161,000 |                         |   | —                          |   |                     | 33,000  |                     |   | (33,000 | ) |   | 161,000 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| DEFERRED                INCOME TAXES                                                                                                   |   |                | (3,323  | )                            |   | 34,185                           |   |                     | — |                     |   | — |   |   | 30,862 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| OTHER                NONCURRENT LIABILITIES                                                                                            |   |                | 1,425   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 1,425 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| INTERCOMPANY                ACCOUNTS                                                                                                   |   |                | 104,072 |                         |   | (107,599                         | )      |                     | 3,527   |                     |   | — |   |   | — |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| SHAREHOLDERS’                EQUITY:                                                                                             |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|                  Preferred shares, without par value, authorized 1,000, none                issued                           |   |                | — |                         |   | —                          |   |                     | — |                     |   | — |   |   | — |   |
|   Common                shares, without par value, authorized 50,000, issued and                outstanding 18,576 |   |                | 30,975  |                         |   | —                          |   |                     | — |                     |   | — |   |   | 30,975 |   |
|   Shares                of subsidiaries                                                                                      |   |                | — |                         |   | 329,705                          |   |                     | 39,803  |                     |   | (369,508 | ) |   | — |   |
|   Retained                earnings                                                                                           |   |                | 101,055 |                         |   | 93,599                           |   |                     | 4,195   |                     |   | (97,794 | ) |   | 101,055 |   |
|     Total                                                                                                          |   |                | 132,030 |                         |   | 423,304                          |   |                     | 43,998  |                     |   | (467,302 | ) |   | 132,030 |   |
|   Unamortized                value of restricted common shares issued                                                   |   |                | (1,161  | )                            |   | —                          |   |                     | — |                     |   | — |   |   | (1,161 | ) |
|   Cumulative                other comprehensive income, net of tax:                                                     |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|       Interest                rate cap adjustment                                                        |   |                | (18     | )                            |   | —                          |   |                     | — |                     |   | — |   |   | (18 | ) |
|       Foreign                currency translation adjustment                                             |   |                | (337    | )                            |   | —                          |   |                     | 246     |                     |   | (250 | ) |   | (341 | ) |
|                          Total shareholders’ equity                                 |   |                | 130,514 |                         |   | 423,304                          |   |                     | 44,244  |                     |   | (467,552 | ) |   | 130,510 |   |
|                                                                                                                                   |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                   |   | $                   | 423,247 |                         | $      | 351,480                          |   | $                        | 85,274  |                     | $      | (511,008 | ) | $ | 348,993 |   |

----

| ASSETS                                                                                                                            |   |   CHATTEM |    | GUARANTORSUBSIDIARYCOMPANIES |   | NON-GUARANTORSUBSIDIARYCOMPANIES |   |   ELIMINATIONS |    |   CONSOLIDATED |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------------|--------|----------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |
| CURRENT                ASSETS:                                                                                                    |   |                |    |                         |   |                             |   |                     |    |                     |   |
|                  Cash and cash equivalents                                                                                   |   | $                   | 36,647  |                         | $      | 1,982                            |   | $                        | 8,698   |                     | $      | — |   | $ | 47,327 |   |
|   Accounts                receivable, less allowances of $2,338                                                         |   |                | 29,220  |                         |   | 11,181                           |   |                     | 4,452   |                     |   | (11,181 | ) |   | 33,672 |   |
|   Other                receivables                                                                                      |   |                | 9,600   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 9,600 |   |
|   Interest                receivable                                                                                    |   |                | 17      |                         |   | 625                              |   |                     | — |                     |   | (642 | ) |   | — |   |
|   Inventories                                                                                                           |   |                | 18,192  |                         |   | 2,429                            |   |                     | 3,010   |                     |   | — |   |   | 23,631 |   |
|   Refundable                income taxes                                                                                |   |                | 1,207   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 1,207 |   |
|   Deferred                income taxes                                                                                  |   |                | 2,478   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 2,478 |   |
|   Prepaid                expenses and other current assets                                                              |   |                | 4,241   |                         |   | —                          |   |                     | 1,285   |                     |   | (420 | ) |   | 5,106 |   |
|     Total                current assets                                                                       |   |                | 101,602 |                         |   | 16,217                           |   |                     | 17,445  |                     |   | (12,243 | ) |   | 123,021 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| PROPERTY,                PLANT AND EQUIPMENT, NET                                                                                 |   |                | 28,567  |                         |   | 775                              |   |                     | 542     |                     |   | — |   |   | 29,884 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| OTHER                NONCURRENT ASSETS:                                                                                           |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|   Patents,                trademarks and other purchased product rights, net                                       |   |                | 404     |                         |   | 268,273                          |   |                     | — |                     |   | (62,290 | ) |   | 206,387 |   |
|   Debt                issuance costs, net                                                                               |   |                | 4,297   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 4,297 |   |
|   Investment                in subsidiaries                                                                             |   |                | 276,987 |                         |   | 33,000                           |   |                     | 66,860  |                     |   | (376,847 | ) |   | — |   |
|   Note                receivable                                                                                        |   |                | — |                         |   | 33,000                           |   |                     | — |                     |   | (33,000 | ) |   | — |   |
|   Other                                                                                                                 |   |                | 4,704   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 4,704 |   |
|     Total                other noncurrent assets                                                              |   |                | 286,392 |                         |   | 334,273                          |   |                     | 66,860  |                     |   | (472,137 | ) |   | 215,388 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|       TOTAL                ASSETS                                                                   |   | $                   | 416,561 |                         | $      | 351,265                          |   | $                        | 84,847  |                     | $      | (484,380 | ) | $ | 368,293 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| LIABILITIES                AND SHAREHOLDERS’ EQUITY                                                                         |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| CURRENT                LIABILITIES:                                                                                               |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|   Current                maturities of long-term debt                                                                   |   | $                   | 37,000  |                         | $      | —                          |   | $                        | — |                     | $      | — |   | $ | 37,000 |   |
|   Accounts                payable and other                                                                             |   |                | 14,841  |                         |   | —                          |   |                     | 2,397   |                     |   | — |   |   | 17,238 |   |
|   Accrued                liabilities                                                                                    |   |                | 21,432  |                         |   | 969                              |   |                     | 6,169   |                     |   | (12,243 | ) |   | 16,327 |   |
|     Total                current liabilities                                                                  |   |                | 73,273  |                         |   | 969                              |   |                     | 8,566   |                     |   | (12,243 | ) |   | 70,565 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| LONG-TERM                DEBT, less current maturities                                                                            |   |                | 145,500 |                         |   | —                          |   |                     | 33,000  |                     |   | (33,000 | ) |   | 145,500 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| DEFERRED                INCOME TAXES                                                                                              |   |                | (795    | )                            |   | 28,531                           |   |                     | — |                     |   | — |   |   | 27,736 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| OTHER                NONCURRENT LIABILITIES                                                                                       |   |                | 1,865   |                         |   | —                          |   |                     | — |                     |   | — |   |   | 1,865 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| INTERCOMPANY                ACCOUNTS                                                                                              |   |                | 74,088  |                         |   | (75,941                          | )      |                     | 1,853   |                     |   | — |   |   | — |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| SHAREHOLDERS’                EQUITY:                                                                                        |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|                  Preferred shares, without par value, authorized 1,000,                none issued                           |   |                | — |                         |   | —                          |   |                     | — |                     |   | — |   |   | — |   |
|   Common                shares, without par value, authorized 50,000, issued and outstanding                19,668 |   |                | 63,876  |                         |   | —                          |   |                     | — |                     |   | — |   |   | 63,876 |   |
|   Share                capital of subsidiaries                                                                          |   |                | — |                         |   | 329,705                          |   |                     | 39,803  |                     |   | (369,508 | ) |   | — |   |
|   Retained                earnings                                                                                      |   |                | 60,853  |                         |   | 68,001                           |   |                     | 1,582   |                     |   | (69,583 | ) |   | 60,853 |   |
|     Total                                                                                                     |   |                | 124,729 |                         |   | 397,706                          |   |                     | 41,385  |                     |   | (439,091 | ) |   | 124,729 |   |
|   Unamortized                value of restricted common shares issued                                              |   |                | (1,818  | )                            |   | —                          |   |                     | — |                     |   | — |   |   | (1,818 | ) |
|   Cumulative                other comprehensive income, net of tax:                                                     |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
|                  Interest rate cap adjustment                                                                                |   |                | (83     | )                            |   | —                          |   |                     | — |                     |   | — |   |   | (83 | ) |
|   Foreign                currency translation adjustment                                                                |   |                | (198    | )                            |   | —                          |   |                     | 43      |                     |   | (46 | ) |   | (201 | ) |
|   Total                shareholders’ equity                                                                       |   |                | 122,630 |                         |   | 397,706                          |   |                     | 41,428  |                     |   | (439,137 | ) |   | 122,627 |   |
|                                                                                                                              |   |                |    |                         |   |                             |   |                     |    |                     |   |   |   |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS’ EQUITY                                                              |   | $                   | 416,561 |                         | $      | 351,265                          |   | $                        | 84,847  |                     | $      | (484,380 | ) | $ | 368,293 |   |

----

|                                                                      |   |    CHATTEM |    |  GUARANTORSUBSIDIARYCOMPANIES |   |  NON-GUARANTORSUBSIDIARYCOMPANIES |   |    ELIMINATIONS |    |    CONSOLIDATED |   |
|---------------------------------------------------------------------------|--------|---------------------------|---------|------------------------------------|--------|----------------------------------------|--------|--------------------------------|---------|--------------------------------|--------|
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |
| TOTAL                REVENUES                                             |   | $                         | 194,859 |                               | $      | 63,036                                 |   | $                              | 14,736  |                           | $      | (37,191 | ) | $ | 235,440 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| COSTS                AND EXPENSES:                                        |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|   Cost                of sales                                  |   |                      | 60,764  |                               |   | 7,730                                  |   |                           | 6,789   |                           |   | (1,971 | ) |   | 73,312 |   |
|   Advertising                and promotion                      |   |                      | 63,346  |                               |   | 8,371                                  |   |                           | 3,858   |                           |   | — |   |   | 75,575 |   |
|   Selling,                general and administrative            |   |                      | 33,800  |                               |   | (167                                   | )      |                           | 341     |                           |   | — |   |   | 33,974 |   |
|   Litigation                settlement                          |   |                      | (19,305 | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (19,305 | ) |
|   Equity                in subsidiary income                    |   |                      | (28,211 | )                                  |   | —                                |   |                           | — |                           |   | 28,211 |   |   | — |   |
|     Total                costs and expenses           |   |                      | 110,394 |                               |   | 15,934                                 |   |                           | 10,988  |                           |   | 26,240 |   |   | 163,556 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| INCOME                FROM OPERATIONS                                     |   |                      | 84,465  |                               |   | 47,102                                 |   |                           | 3,748   |                           |   | (63,431 | ) |   | 71,884 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|   Interest                expense                               |   |                      | (8,328  | )                                  |   | —                                |   |                           | (1,846  | )                              |   | 1,856 |   |   | (8,318 | ) |
|   Investment                and other income, net               |   |                      | 316     |                               |   | 1,897                                  |   |                           | 2,134   |                           |   | (3,731 | ) |   | 616 |   |
|   Loss                on early extinguishment of debt           |   |                      | (2,805  | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (2,805 | ) |
|   Royalties                                                     |   |                      | (30,743 | )                                  |   | (4,477                                 | )      |                           | — |                           |   | 35,220 |   |   | — |   |
|   Corporate                allocations                          |   |                      | 2,625   |                               |   | (2,578                                 | )      |                           | (47     | )                              |   | — |   |   | — |   |
|      Total                other income (expense) |   |                      | (38,935 | )                                  |   | (5,158                                 | )      |                           | 241     |                           |   | 33,345 |   |   | (10,507 | ) |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| INCOME                BEFORE INCOME TAXES                            |   |                      | 45,530  |                               |   | 41,944                                 |   |                           | 3,989   |                           |   | (30,086 | ) |   | 61,377 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| PROVISION                FOR INCOME TAXES                            |   |                      | 5,328   |                               |   | 14,471                                 |   |                           | 1,376   |                           |   | — |   |   | 21,175 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| NET                INCOME                                                 |   | $                         | 40,202  |                               | $      | 27,473                                 |   | $                              | 2,613   |                           | $      | (30,086 | ) | $ | 40,202 |   |

----

|                                                                      |   |    CHATTEM |    |  GUARANTORSUBSIDIARYCOMPANIES |   |  NON-GUARANTORSUBSIDIARYCOMPANIES |   |    ELIMINATIONS |    |    CONSOLIDATED |   |
|---------------------------------------------------------------------------|--------|---------------------------|---------|------------------------------------|--------|----------------------------------------|--------|--------------------------------|---------|--------------------------------|--------|
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |
| TOTAL                REVENUES                                             |   | $                         | 174,335 |                               | $      | 58,811                                 |   | $                              | 15,654  |                           | $      | (33,367 | ) | $ | 215,433 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| COSTS                AND EXPENSES:                                        |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|   Cost                of sales                                  |   |                      | 47,868  |                               |   | 7,095                                  |   |                           | 7,137   |                           |   | (2,149 | ) |   | 59,951 |   |
|   Advertising                and promotion                      |   |                      | 46,165  |                               |   | 9,252                                  |   |                           | 3,322   |                           |   | — |   |   | 58,739 |   |
|   Selling,                general and administrative            |   |                      | 35,321  |                               |   | 271                                    |   |                           | 749     |                           |   | — |   |   | 36,341 |   |
|   Executive                severance charges                    |   |                      | 2,269   |                               |   | —                                |   |                           | — |                           |   | — |   |   | 2,269 |   |
|   Litigation                settlement                          |   |                      | (4,476  | )                                  |   | —                                |   |                           | 2,075   |                           |   | — |   |   | (2,401 | ) |
|   Equity                in subsidiary income                    |   |                      | (24,632 | )                                  |   | —                                |   |                           | — |                           |   | 24,632 |   |   | — |   |
|     Total                costs and expenses           |   |                      | 102,515 |                               |   | 16,618                                 |   |                           | 13,283  |                           |   | 22,483 |   |   | 154,899 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| INCOME                FROM OPERATIONS                                     |   |                      | 71,820  |                               |   | 42,193                                 |   |                           | 2,371   |                           |   | (55,850 | ) |   | 60,534 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|   Interest                expense                               |   |                      | (10,285 | )                                  |   | —                                |   |                           | (1,873  | )                              |   | 1,873 |   |   | (10,285 | ) |
|   Investment                and other income, net               |   |                      | 545     |                               |   | 1,878                                  |   |                           | 2,001   |                           |   | (3,748 | ) |   | 676 |   |
|   Loss                on early extinguishment of debt           |   |                      | (744    | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (744 | ) |
|   Royalties                                                     |   |                      | (26,758 | )                                  |   | (4,460                                 | )      |                           | — |                           |   | 31,218 |   |   | — |   |
|   Corporate                allocations                          |   |                      | 2,547   |                               |   | (2,499                                 | )      |                           | (48     | )                              |   | — |   |   | — |   |
|      Total                other income (expense) |   |                      | (34,695 | )                                  |   | (5,081                                 | )      |                           | 80      |                           |   | 29,343 |   |   | (10,353 | ) |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| INCOME                BEFORE INCOME TAXES                            |   |                      | 37,125  |                               |   | 37,112                                 |   |                           | 2,451   |                           |   | (26,507 | ) |   | 50,181 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| PROVISION                FOR  INCOME TAXES                           |   |                      | 3,504   |                               |   | 12,247                                 |   |                           | 809     |                           |   | — |   |   | 16,560 |   |
|                                                                      |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| NET                INCOME                                                 |   | $                         | 33,621  |                               | $      | 24,865                                 |   | $                              | 1,642   |                           | $      | (26,507 | ) | $ | 33,621 |   |

----

|                                                                                                                      |   |    CHATTEM |    |  GUARANTOR                SUBSIDIARY  COMPANIES  |   |  NON-GUARANTOR                     SUBSIDIARY                       COMPANIES    |   |    ELIMINATIONS |    |    CONSOLIDATED |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|-----------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|--------------------------------|--------|
|                                                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |
| OPERATING                ACTIVITIES:                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |
|  Net                income                                                                                           |   | $                         | 40,202  |                                                            | $      | 27,473                                                                                                                                                           |   | $                              | 2,613   |                           | $      | (30,086 | ) | $ | 40,202 |   |
| Adjustments                to reconcile net income to net cash provided                by (used in) operating activities: |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
|                     Depreciation and amortization                                                     |   |                      | 4,124   |                                                            |   | —                                                                                                                                                          |   |                           | 215     |                           |   | — |   |   | 4,339 |   |
|                     Deferred income taxes                                                             |   |                      | (2,064  | )                                                               |   | 5,653                                                                                                                                                            |   |                           | (35     | )                              |   | — |   |   | 3,554 |   |
|                     Excess tax benefit from stock-based compensation                                  |   |                      | (744    | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | (744 | ) |
|      Stock-based                compensation                                                     |   |                      | 3,322   |                                                            |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | 3,322 |   |
|      Loss                on early extinguishment of debt                                         |   |                      | 2,805   |                                                            |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | 2,805 |   |
|                     Other, net                                                                        |   |                      | 78      |                                                            |   | —                                                                                                                                                          |   |                           | 177     |                           |   | — |   |   | 255 |   |
|                     Equity in subsidiary income                                                       |   |                      | (30,086 | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | 30,086 |   |   | — |   |
|                     Changes in operating assets and liabilities:                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
|                       Accounts receivable                                                   |   |                      | 9,906   |                                                            |   | 235                                                                                                                                                              |   |                           | (610    | )                              |   | (235 | ) |   | 9,296 |   |
|                       Inventories                                                           |   |                      | (4,826  | )                                                               |   | (447                                                                                                                                                             | )      |                           | 174     |                           |   | — |   |   | (5,099 | ) |
|                       Refundable income taxes                                               |   |                      | 1,951   |                                                            |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | 1,951 |   |
|                       Prepaid expenses and other current assets                             |   |                      | 23      |                                                            |   | —                                                                                                                                                          |   |                           | 403     |                           |   | (1,551 | ) |   | (1,125 | ) |
|                       Accounts payable and accrued liabilities                              |   |                      | (5,402  | )                                                               |   | 621                                                                                                                                                              |   |                           | (4,062  | )                              |   | 1,786 |   |   | (7,057 | ) |
|                         Net cash provided by (used in) operating activities       |   |                      | 19,289  |                                                            |   | 33,535                                                                                                                                                           |   |                           | (1,125  | )                              |   | — |   |   | 51,699 |   |
|                                                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |  |   |   |   |   |
| INVESTING                ACTIVITIES:                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
|   Purchases                of property, plant and equipment                                                     |   |                      | (3,350  | )                                                               |   | —                                                                                                                                                          |   |                           | (207    | )                              |   | — |   |   | (3,557 | ) |
|   Increase                in other assets, net                                                                  |   |                      | (949    | )                                                               |   | —                                                                                                                                                          |   |                           | (1,129  | )                              |   | — |   |   | (2,078 | ) |
|         Net                cash used in investing activities                 |   |                      | (4,299  | )                                                               |   | —                                                                                                                                                          |   |                           | (1,336  | )                              |   | — |   |   | (5,635 | ) |
|                                                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
| FINANCING                ACTIVITIES:                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
|   Repayment                of long-term debt                                                                    |   |                      | (75,000 | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | (75,000 | ) |
|   Proceeds                from borrowings under revolving credit facility                                       |   |                      | 75,500  |                                                            |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | 75,500 |   |
|   Payment                under revolver                                                                         |   |                      | (22,000 | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | (22,000 | ) |
|   Proceeds                from exercise of stock options                                                        |   |                      | 911     |                                                            |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | 911 |   |
|   Repurchase                of common shares                                                                    |   |                      | (39,332 | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | (39,332 | ) |
|   Increase                in debt issuance costs                                                                |   |                      | (5,634  | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | (5,634 | ) |
|   Debt                retirement costs                                                                          |   |                      | (1,501  | )                                                               |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | (1,501 | ) |
|                  Excess tax benefit from stock-based compensation                                                    |   |                      | 744     |                                                            |   | —                                                                                                                                                          |   |                           | — |                           |   | — |   |   | 744 |   |
|   Changes                in intercompany accounts                                                               |   |                      | 31,859  |                                                            |   | (31,658                                                                                                                                                          | )      |                           | (201    | )                              |   | — |   |   | — |   |
|   Dividends                paid                                                                                 |   |                      | — |                                                            |   | (1,875                                                                                                                                                           | )      |                           | 1,875   |                           |   | — |   |   | — |   |
|         Net                cash (used in) provided by financing activities        |   |                      | (34,453 | )                                                               |   | (33,533                                                                                                                                                          | )      |                           | 1,674   |                           |   | — |   |   | (66,312 | ) |
|                                                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
| EFFECT                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                          |   |                      | — |                                                            |   | —                                                                                                                                                          |   |                           | (176    | )                              |   | — |   |   | (176 | ) |
|                                                                                                                      |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
| CASH                AND CASH EQUIVALENTS:                                                                                 |   |                      |    |                                                            |   |                                                                                                                                                             |   |                           |    |                           |   |   |   |   |   |   |
|   (Decrease)                increase for the period                                                             |   |                      | (19,463 | )                                                               |   | 2                                                                                                                                                                |   |                           | (963    | )                              |   | — |   |   | (20,424 | ) |
|   At                beginning of period                                                                         |   |                      | 36,647  |                                                            |   | 1,982                                                                                                                                                            |   |                           | 8,698   |                           |   | — |   |   | 47,327 |   |
|   At                end of period                                                                               |   | $                         | 17,184  |                                                            | $      | 1,984                                                                                                                                                            |   | $                              | 7,735   |                           | $      | — |   | $ | 26,903 |   |

----

|                                                                                                                                    |   |    CHATTEM |    |  GUARANTORSUBSIDIARYCOMPANIES |   |  NON-GUARANTORSUBSIDIARYCOMPANIES |   |    ELIMINATIONS |    |    CONSOLIDATED |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|------------------------------------|--------|----------------------------------------|--------|--------------------------------|---------|--------------------------------|--------|
|                                                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |
| OPERATING                ACTIVITIES:                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |
|   Net                income                                                                                                   |   | $                         | 33,621  |                               | $      | 24,865                                 |   | $                              | 1,642   |                           | $      | (26,507 | ) | $ | 33,621 |   |
|   Adjustments                to reconcile net income to net cash provided                by operating activities:             |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|                     Depreciation and amortization                                                                   |   |                      | 4,397   |                               |   | —                                |   |                           | (25     | )                              |   | — |   |   | 4,372 |   |
|                     Deferred income taxes                                                                           |   |                      | 2,479   |                               |   | 4,632                                  |   |                           | — |                           |   | — |   |   | 7,111 |   |
|                     Stock-based compensation                                                                        |   |                      | 1,057   |                               |   | —                                |   |                           | — |                           |   | — |   |   | 1,057 |   |
|                     Loss on early extinguishment of debt                                                            |   |                      | 744     |                               |   | —                                |   |                           | — |                           |   | — |   |   | 744 |   |
|                     Restricted stock modification expense                                                           |   |                      | 1,360   |                               |   | —                                |   |                           | — |                           |   | — |   |   | 1,360 |   |
|                     Other, net                                                                                      |   |                      | 74      |                               |   | —                                |   |                           | 131     |                           |   | — |   |   | 205 |   |
|                     Equity in subsidiary income                                                                     |   |                      | (26,507 | )                                  |   | —                                |   |                           | — |                           |   | 26,507 |   |   | — |   |
|                     Changes in operating assets and liabilities:                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|                       Accounts receivable                                                                 |   |                      | (3,723  | )                                  |   | 2,068                                  |   |                           | (893    | )                              |   | 1,070 |   |   | (1,478 | ) |
|                       Interest receivable                                                                 |   |                      | (17     | )                                  |   | —                                |   |                           | — |                           |   | 17 |   |   | — |   |
|                       Inventories                                                                         |   |                      | (524    | )                                  |   | 1,081                                  |   |                           | (1,685  | )                              |   | — |   |   | (1,128 | ) |
|                       Refundable income taxes                                                             |   |                      | 4,285   |                               |   | —                                |   |                           | — |                           |   | — |   |   | 4,285 |   |
|                       Prepaid expenses and other current assets                                           |   |                      | (3,240  | )                                  |   | —                                |   |                           | (572    | )                              |   | 540 |   |   | (3,272 | ) |
|                       Accounts payable and accrued liabilities                                            |   |                      | (9,328  | )                                  |   | 328                                    |   |                           | 1,625   |                           |   | (1,627 | ) |   | (9,002 | ) |
|                         Net cash provided by operating activities                               |   |                      | 4,678   |                               |   | 32,974                                 |   |                           | 223     |                           |   | — |   |   | 37,875 |   |
|                                                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |  |   |   |   |   |
| INVESTING                ACTIVITIES:                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|   Purchases                of property, plant and equipment                                                                   |   |                      | (2,255  | )                                  |   | —                                |   |                           | (98     | )                              |   | — |   |   | (2,353 | ) |
|                  Sales of patents, trademarks and other product rights                                                             |   |                      | 3,252   |                               |   | —                                |   |                           | — |                           |   | — |   |   | 3,252 |   |
|   Decrease                (increase) in other assets, net                                                                     |   |                      | 86      |                               |   | —                                |   |                           | (593    | )                              |   | — |   |   | (507 | ) |
|                         Net cash provided by (used in)                investing activities |   |                      | 1,083   |                               |   | —                                |   |                           | (691    | )                              |   | — |   |   | 392 |   |
|                                                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| FINANCING                ACTIVITIES:                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|                  Repayment of long-term debt                                                                                       |   |                      | (17,500 | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (17,500 | ) |
|                  Repayment of policy loans                                                                                         |   |                      | (1,031  | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (1,031 | ) |
|   Proceeds                from exercise of stock options                                                                      |   |                      | 5,286   |                               |   | —                                |   |                           | — |                           |   | — |   |   | 5,286 |   |
|   Repurchase                of common shares                                                                                  |   |                      | (21,664 | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (21,664 | ) |
|                  Debt retirement costs                                                                                             |   |                      | (282    | )                                  |   | —                                |   |                           | — |                           |   | — |   |   | (282 | ) |
|   Changes                in intercompany accounts                                                                             |   |                      | 31,183  |                               |   | (31,088                                | )      |                           | (95     | )                              |   | — |   |   | — |   |
|   Dividends                paid                                                                                               |   |                      | — |                               |   | (1,875                                 | )      |                           | 1,875   |                           |   | — |   |   | — |   |
|                         Net cash (used in) provided by financing                activities      |   |                      | (4,008  | )                                  |   | (32,963                                | )      |                           | 1,780   |                           |   | — |   |   | (35,191 | ) |
|                                                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| EFFECT                OF EXCHANGE RATE CHANGES ON CASH AND CASH                  EQUIVALENTS                                  |   |                      | — |                               |   | —                                |   |                           | (131    | )                              |   | — |   |   | (131 | ) |
|                                                                                                                                    |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
| CASH                AND CASH EQUIVALENTS:                                                                                               |   |                      |    |                               |   |                                   |   |                           |    |                           |   |   |   |   |   |   |
|   Increase                for the period                                                                                      |   |                      | 1,753   |                               |   | 11                                     |   |                           | 1,181   |                           |   | — |   |   | 2,945 |   |
|   At                beginning of period                                                                                       |   |                      | 28,344  |                               |   | 1,967                                  |   |                           | 9,882   |                           |   | — |   |   | 40,193 |   |
|   At                end of period                                                                                             |   | $                         | 30,097  |                               | $      | 1,978                                  |   | $                              | 11,063  |                           | $      | — |   | $ | 43,138 |   |

----

| **Item                2.** | **Management’s                  Discussion and Analysis of Financial Condition and****Results                  of Operations** |
|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

***Overview***

|  | • | Topical                  pain care products such as *Icy                  Hot, Icy Hot Pro-Therapy*                  and *Aspercreme*; |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------|

|  | • | Medicated                  skin care products such as *Gold                  Bond*                  medicated skin care powder, cream, lotion and foot care                  products; |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | *Selsun                  Blue*                  and *Selsun                  Salon*                  medicated dandruff shampoos; |
|--|---------|-----------------------------------------------------------------------------------------------------------------------------------|

|  | • | Dietary                  supplements including *Dexatrim*,                  *Garlique*                  and *New                  Phase*;                  and |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | Other                  OTC and toiletry products such as *Pamprin*,                  a                  menstrual analgesic; *Herpecin-L*,                  a                  lip care product; *Benzodent*,                  a                  dental analgesic cream; *Bullfrog*,                  a                  line of suncare products; and toiletries such as *Ultraswim*,                  a                  chlorine-removing shampoo; and *Sun-In*,                  a                  hair lightener. |
|--|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Gold        Bond*

***Developments        During Fiscal 2006***

***Products***

*Icy        Hot Pro-Therapy*
*Selsun        Salon,*
*Bullfrog*
*Mosquito        Coast*
*Garlique        CardioAssist*
*Capzasin*
*        Pamprin*
*Dexatrim        *

***Debt***

***Stock        Repurchase***

----

***Litigation***

*Dexatrim*
*Dexatrim*
*Dexatrim        *

*Dexatrim*
*Dexatrim*
*Dexatrim*
*Dexatrim*

----

***Results        of Operations***

|                                                  |   | For                  the Three Months Ended |    | For                  the Nine Months Ended |   |
|-------------------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------------|--------|
|                                                  |   | August                  31, 2006            |    | August                  31, 2005           |   | August                  31, 2006 |   | August                  31, 2005 |   |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |
| TOTAL                  REVENUES                       |   |                                        | 100.0   | %                                          |   | 100.0 | % |   | 100.0 | % |   | 100.0 | % |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| COSTS                  AND EXPENSES:                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| Cost                  of sales                        |   |                                        | 30.9    |                                       |   | 27.2 |   |   | 31.2 |   |   | 27.8 |   |
| Advertising                  and promotion            |   |                                        | 32.8    |                                       |   | 25.9 |   |   | 32.1 |   |   | 27.3 |   |
| Selling,                  general and administrative  |   |                                        | 15.1    |                                       |   | 17.8 |   |   | 14.4 |   |   | 16.9 |   |
| Executive                  severance charges          |   |                                        | — |                                       |   | 3.3 |   |   | — |   |   | 1.0 |   |
| Litigation                  settlement                |   |                                        | (15.0   | )                                          |   | 0.6 |   |   | (8.2 | ) |   | (1.1 | ) |
| Total                  costs and expenses             |   |                                        | 63.8    |                                       |   | 74.8 |   |   | 69.5 |   |   | 71.9 |   |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| INCOME                  FROM OPERATIONS               |   |                                        | 36.2    |                                       |   | 25.2 |   |   | 30.5 |   |   | 28.1 |   |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| OTHER                  INCOME (EXPENSE):              |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| Interest                  expense                     |   |                                        | (4.2    | )                                          |   | (4.9 | ) |   | (3.5 | ) |   | (4.8 | ) |
| Investment                  and other income, net     |   |                                        | 0.3     |                                       |   | 0.4 |   |   | 0.3 |   |   | 0.3 |   |
| Loss                  on early extinguishment of debt |   |                                        | — |                                       |   | — |   |   | (1.2 | ) |   | (0.3 | ) |
| Total                  other income (expense)         |   |                                        | (3.9    | )                                          |   | (4.5 | ) |   | (4.4 | ) |   | (4.8 | ) |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| INCOME                  BEFORE INCOME TAXES           |   |                                        | 32.3    |                                       |   | 20.7 |   |   | 26.1 |   |   | 23.3 |   |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| PROVISION                  FOR INCOME TAXES           |   |                                        | 11.2    |                                       |   | 6.8 |   |   | 9.0 |   |   | 7.7 |   |
|                                                  |   |                                        |    |                                       |   |   |   |   |   |   |   |   |   |
| NET                  INCOME                           |   |                                        | 21.1    | %                                          |   | 13.9 | % |   | 17.1 | % |   | 15.6 | % |

***Critical        Accounting Policies***

***Allowance        for Doubtful Accounts***

***Revenue        Recognition***

----

***Income        Taxes***

----

***Compensation        Expense***

----

***Comparison        of Three Months Ended August 31, 2006 and 2005***

|                                                          |   |                                                                         |    |                                                                         |   |          Increase                  (Decrease)      |   |
|---------------------------------------------------------------|--------|------------------------------------------------------------------------------|---------|------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|
|                                                          |   |       2006       |    |       2005       |   |    Amount                                                                                       |   | Percentage |   |
|                                                          |   | (dollars                  in thousands)                                      |    |
| Domestic                  net sales                           |   | $                                                                            | 66,311  |                                                                         | $      | 61,787                                                                                                                   |   | $ | 4,524 |   |   | 7.3 | % |
| International                  revenues (including royalties) |   |                                                                         | 5,694   |                                                                         |   | 6,428                                                                                                                    |   |   | (734 | ) |   | (11.4 | ) |
| Total                  revenues                               |   |                                                                         | 72,005  |                                                                         |   | 68,215                                                                                                                   |   |   | 3,790 |   |   | 5.6 |   |
| Cost                  of sales                                |   |                                                                         | 22,238  |                                                                         |   | 18,575                                                                                                                   |   |   | 3,663 |   |   | 19.7 |   |
| Advertising                  and promotion expense            |   |                                                                         | 23,607  |                                                                         |   | 17,657                                                                                                                   |   |   | 5,950 |   |   | 33.7 |   |
| Selling,                  general and administrative expense  |   |                                                                         | 10,855  |                                                                         |   | 12,122                                                                                                                   |   |   | (1,267 | ) |   | (10.5 | ) |
| Executive                  severance charges                  |   |                                                                         | — |                                                                         |   | 2,269                                                                                                                    |   |   | (2,269 | ) |   | (100.0 | ) |
| Litigation                  settlement                        |   |                                                                         | (10,800 | )                                                                            |   | 431                                                                                                                      |   |   | (11,231 | ) |   | (2,605.8 | ) |
| Interest                  expense                             |   |                                                                         | 3,018   |                                                                         |   | 3,332                                                                                                                    |   |   | (314 | ) |   | (9.4 | ) |
| Net                  income                                   |   |                                                                         | 15,229  |                                                                         |   | 9,449                                                                                                                    |   |   | 5,780 |   |   | 61.2 |   |

**Domestic        Net Sales**

|                                                         |   |                                                 |   |
|--------------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                         |   |                                                 |   |   |   |            Increase                  (Decrease)      |   |
|                                                         |   |      2006    |   |      2005     |   |    Amount    |   | Percentage |   |
|                                                         |   | (dollars                  in thousands)              |   |
| Topical                  pain care products                  |   | $                                                    | 21,767 |   | $ | 20,965 |   | $ | 802 |   |   | 3.8 | % |
| Medicated                  skin care products                |   |                                                 | 17,340 |   |   | 15,775 |   |   | 1,565 |   |   | 9.9 |   |
| Dietary                  supplements                         |   |                                                 | 9,934  |   |   | 8,521 |   |   | 1,413 |   |   | 16.6 |   |
| Medicated                  dandruff shampoos and conditioner |   |                                                 | 7,798  |   |   | 7,653 |   |   | 145 |   |   | 1.9 |   |
| Other                  OTC and toiletry products             |   |                                                 | 9,472  |   |   | 8,873 |   |   | 599 |   |   | 6.8 |   |
|   Total                                            |   | $                                                    | 66,311 |   | $ | 61,787 |   | $ | 4,524 |   |   | 7.3 |   |

*Icy        Hot*
*Pro-Therapy*
*Icy        Hot Pro-Therapy,*

*Gold        Bond*
*Gold        Bond*
*Gold        Bond Ultimate*
*Gold        Bond*
*Ultimate*
*Gold        Bond*
*Gold        Bond*

*Dexatrim*
*Dexatrim*
*New        Phase*

*Selsun*
*Salon.*
*Selsun        Blue*

----

*Pamprin*
*Bullfrog,*
*Pamprin*
*Bullfrog        Mosquito Coast*

**International        Revenues**

*Icy        Ho*

**Cost        of Sales**

*Icy        Hot*
*Pro-Therapy*

**Advertising        and Promotion Expense**

**Selling,        General and Administrative Expense**

**Litigation        Settlement **

*Dexatrim*
*Dexatrim*

**Interest        Expense**

----

**Comparison        of Nine Months Ended August 31, 2006 and 2005**

|                                                          |   |                                                             |    |                                                             |   |         Increase                  (Decrease)      |   |
|---------------------------------------------------------------|--------|------------------------------------------------------------------|---------|------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                          |   |       2006     |    |       2005     |   |    Amount                                                                                 |   | Percentage |   |
|                                                          |   | (dollars                  in thousands)                          |    |
| Domestic                  net sales                           |   | $                                                                | 216,907 |                                                             | $      | 196,039                                                                                                            |   | $ | 20,868 |   |   | 10.6 | % |
| International                  revenues (including royalties) |   |                                                             | 18,533  |                                                             |   | 19,394                                                                                                             |   |   | (861 | ) |   | (4.4 | ) |
| Total                  revenues                               |   |                                                             | 235,440 |                                                             |   | 215,433                                                                                                            |   |   | 20,007 |   |   | 9.3 |   |
| Cost                  of sales                                |   |                                                             | 73,312  |                                                             |   | 59,951                                                                                                             |   |   | 13,361 |   |   | 22.3 |   |
| Advertising                  and promotion expense            |   |                                                             | 75,575  |                                                             |   | 58,739                                                                                                             |   |   | 16,836 |   |   | 28.7 |   |
| Selling,                  general and administrative expense  |   |                                                             | 33,974  |                                                             |   | 36,341                                                                                                             |   |   | (2,367 | ) |   | (6.5 | ) |
| Executive                  severance charges                  |   |                                                             | — |                                                             |   | 2,269                                                                                                              |   |   | (2,269 | ) |   | (100.0 | ) |
| Litigation                  settlement                        |   |                                                             | (19,305 | )                                                                |   | (2,401                                                                                                             | )      |   | (16,904 | ) |   | 704.0 |   |
| Interest                  expense                             |   |                                                             | 8,318   |                                                             |   | 10,285                                                                                                             |   |   | (1,967 | ) |   | (19.1 | ) |
| Loss                  on early extinguishment of debt         |   |                                                             | 2,805   |                                                             |   | 744                                                                                                                |   |   | 2,061 |   |   | 277.0 |   |
| Net                  income                                   |   |                                                             | 40,202  |                                                             |   | 33,621                                                                                                             |   |   | 6,581 |   |   | 19.6 |   |

**Domestic        Net Sales**

|                                                         |   |                                                 |    |
|--------------------------------------------------------------|--------|------------------------------------------------------|---------|
|                                                         |   |                                                 |    |   |   |                                       Increase (Decrease)   |   |
|                                                         |   |      2006    |    |      2005     |   |    Amount  |   | Percentage |   |
|                                                         |   | (dollars                  in thousands)              |    |
| Topical                  pain care products                  |   | $                                                    | 82,605  |   | $ | 67,415 |   | $ | 15,190 |   |   | 22.5 | % |
| Medicated                  skin care products                |   |                                                 | 49,620  |   |   | 49,232 |   |   | 388 |   |   | 0.8 |   |
| Dietary                  supplements                         |   |                                                 | 27,696  |   |   | 27,461 |   |   | 235 |   |   | 0.9 |   |
| Medicated                  dandruff shampoos and conditioner |   |                                                 | 28,075  |   |   | 25,341 |   |   | 2,734 |   |   | 10.8 |   |
| Other                  OTC and toiletry products             |   |                                                 | 28,911  |   |   | 26,590 |   |   | 2,321 |   |   | 8.7 |   |
|   Total                                            |   | $                                                    | 216,907 |   | $ | 196,039 |   | $ | 20,868 |   |   | 10.6 |   |

*Icy        Hot Pro-Therapy*
*Capzasin*
*Capzasin        *
*Icy        Hot Pro-Therapy*

*Gold        Bond*
*Gold        Bond*
*Gold        Bond Ultimate *
*Gold        Bond*

*Dexatrim*
*Dexatrim*
*New        Phase*
*New        Phase*

*Selsun        Salon*
*Selsun        Blue*

----

*Pamprin        MAX *
*Bullfrog        Mosquito Coast*

**International        Revenues**

*Icy        Hot*

**Cost        of Sales**

*Icy        Hot Pro-Therapy*

**Advertising        and Promotion Expense**

**Selling,        General and Administrative Expense**

**Litigation        Settlement**

*Dexatrim*
*Dexatrim*
*Dexatrim*
*Dexatrim*

**Interest        Expense**

**Loss        on Early Extinguishment of Debt**

----

***Liquidity        and Capital Resources***

*Selsun*

***Foreign        Operations***

*Selsun        Blue*
*Selsun        Blue*
*Selsun*
** **

***Recent        Accounting Pronouncements***

----

***Forward        Looking Statements***

*Dexatrim*

----

*Dexatrim*
*Selsun*

----

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

*Selsun*
*Selsun*

**Item        4. Controls and Procedures**

----

**PART        II. OTHER INFORMATION**

**Item        1. Legal Proceedings**

**Item        1A. Risk Factors**

**Item        2. Unregistered Sales of Equity Securities and Use of        Proceeds**

|                     Period                       |   |   Total                  Number of                   Shares Purchased |    |    Average                  Price Paid                  Per Share (1) |   | Total                  Number of Shares                  Purchased as                  Part of Publicly Announced Plans or      Programs                  (2)      |   | Approximate                  Dollar Value                  that may yet be                  Purchased under the                  Plans or          Programs (2)    |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                                                                                                                                                                                                                               |   |                                                                                 |    |                                                                                 |   |                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                |    |
| June                  1- June 30                                                                                                                                                                                                                                   |   |                                                                                 | 236,200 |                                                                                 | $      | 30.69                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                | 236,200 |   | $ | 98,899,394 |   |
| July                  1 - July 31                                                                                                                                                                                                                                  |   |                                                                                 | 172,092 |                                                                                 |   | 30.91                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                | 172,092 |   |   | 93,579,201 |   |
| August                  1 - August 31                                                                                                                                                                                                                              |   |                                                                                 | 164,571 |                                                                                 |   | 33.01                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                | 164,571 |   |   | 88,147,224 |   |
| Total                  Third Quarter                                                                                                                                                                                                                               |   |                                                                                 | 572,863 |                                                                                 |   | 31.42                                                                                                                                                                                                                     |   |                                                                                                                                                                                                                                | 572,863 |   |   | 88,147,224 |   |

| (1)   | Average                  price paid per share includes broker commissions. |
|-----------------|----------------------------------------------------------------------------|

| (2)   | In                  January 2005, our board of directors increased the total authorization                  to                  repurchase our common stock under our stock buyback program to                  $30.0                  million. A total of $17.3 million remained available under the                  stock                  buyback authority prior to July 29, 2005, when our board of directors                  increased the total buyback authorization back to $30.0 million.                  Subsequent to share purchases made in the fourth quarter of fiscal                  2005,                  our board of directors again increased the total buyback authorization                  back to $30.0 million, effective November 29, 2005. On June 26,                  2006 our                  board of directors authorized the repurchase of up to an additional                  $100.0                  million of our common stock under our existing stock repurchase                  program.                  There is no expiration date specified for our stock buyback                  program. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Item        3. Defaults Upon Senior Securities**

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

**Item        5. Other Information**

**Item        6. Exhibits **

| **Exhibit                  Number** | **Description**                                                                                                                                                  |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                             |
| 31.1                                | Certification                  required by Rule 13a-14(a) under the Securities Exchange Act of                  1934                                             |
| 31.2                                | Certification                  required by Rule 13a-14(a) under the Securities Exchange Act of                  1934                                             |
| 32                                  | Certification                  required by Rule 13a-14(b) under the Securities Exchange Act of                  1934 and                  18 U.S.C. Section 1350 |

----

**CHATTEM,        INC.**

**SIGNATURES**

|                                   |                                                            |                                                     |
|----------------------------------------|-----------------------------------------------------------------|----------------------------------------------------------|
|                                   | **CHATTEM,                  INC.**(Registrant)                  |
|                              |                                                       |                                                |
| Dated:                October 10, 2006 | By:                                                   | /s/                Zan                Guerry   |
|                                   | Zan                  Guerry                                |
|                                   | Chairman                and Chief Executive Officer   |

|                                   |                                                                       |                                                            |
|----------------------------------------|----------------------------------------------------------------------------|-----------------------------------------------------------------|
|                                   |                                                                            |
|                              |                                                                  |                                                       |
| Dated:                October 10, 2006 | By:                                                              | /s/ Robert                E.                Bosworth  |
|                                   | Robert                E. Bosworth                                     |
|                                   | President                and Chief Operating Officer   |

----

**Chattem,        Inc. and Subsidiaries**

**Exhibit        Index**

| **Exhibit                  Number** | **Description**                                                                                                                                                  |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                             |
| 31.1                                | Certification                  required by Rule 13a-14(a) under the Securities Exchange Act of                  1934                                             |
| 31.2                                | Certification                  required by Rule 13a-14(a) under the Securities Exchange Act of                  1934                                             |
| 32                                  | Certification                  required by Rule 13a-14(b) under the Securities Exchange Act of                  1934 and                  18 U.S.C. Section 1350 |

----