================================================================================


                                  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, 2005
                          COMMISSION FILE NUMBER 0-5905




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








REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

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

AS OF SEPTEMBER 29, 2005, 19,640,232 SHARES OF THE COMPANY'S COMMON STOCK,
WITHOUT PAR VALUE, WERE OUTSTANDING.


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

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

                                      INDEX
                                      -----



                                                                        PAGE NO.
                                                                        --------
PART I.  FINANCIAL INFORMATION


         Item 1.   Financial Statements

         Condensed Consolidated Balance Sheets as of August 31,
         2005 and November 30, 2004 ........................................   3

         Condensed Consolidated Statements of Income for the Three
         and Nine Months Ended August 31, 2005 and August 31, 2004 .........   5

         Condensed Consolidated Statements of Cash Flows for the
         Nine Months Ended August 31, 2005 and August 31, 2004 .............   6

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


         Item 2.   Management's Discussion and Analysis of
                   Financial Condition and Results of Operations ...........  26


         Item 3.   Quantitative and Qualitative Disclosures About
                   Market Risks ............................................  38


         Item 4.   Controls and Procedures .................................  38




PART II. OTHER INFORMATION


         Item 1.   Legal Proceedings .......................................  39


         Item 2.   Unregistered Sales of Equity Securities and Use
                   of Proceeds .............................................  39


         Item 3.   Defaults Upon Senior Securities .........................  39


         Item 4.   Submission of Matters to a Vote of Security Holders .....  39


         Item 5.   Other Information .......................................  39


         Item 6.   Exhibits and Reports on Form 8-K ........................  40



SIGNATURES .................................................................  41





                                        2
<PAGE>
                          PART 1. FINANCIAL INFORMATION
                          -----------------------------

ITEM 1.  FINANCIAL STATEMENTS


                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------
                                 (In thousands)



<TABLE><CAPTION>
                                                                  AUGUST 31,      NOVEMBER 30,
ASSETS                                                               2005             2004
------                                                           ------------     ------------
                                                                  (Unaudited)
<S>                                                              <C>              <C>
CURRENT ASSETS:
  Cash and cash equivalents                                      $     43,138     $     40,193
  Accounts receivable, less allowances of $2,971 at
    August 31, 2005 and $1,682 at November 30, 2004                    33,576           32,098
  Inventories                                                          22,818           21,690
  Refundable income taxes                                               1,474            4,702
  Deferred income taxes                                                 2,240            4,308
  Prepaid expenses and other current assets                             8,164            3,683
                                                                 ------------     ------------
      Total current assets                                            111,410          106,674
                                                                 ------------     ------------

PROPERTY, PLANT AND EQUIPMENT, NET                                     28,628           28,765
                                                                 ------------     ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product rights, net         222,117          225,560
  Debt issuance costs, net                                              4,161            5,174
  Other                                                                 5,115            5,551
                                                                 ------------     ------------
      Total other noncurrent assets                                   231,393          236,285
                                                                 ------------     ------------

      TOTAL ASSETS                                               $    371,431     $    371,724
                                                                 ============     ============
</TABLE>


                 The accompanying notes are an integral part of
               these condensed consolidated financial statements.

                                        3
<PAGE>
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------
                                 (In thousands)




<TABLE><CAPTION>
                                                                  AUGUST 31,      NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY                                 2005             2004
------------------------------------                             ------------     ------------
                                                                  (Unaudited)
<S>                                                              <C>              <C>
CURRENT LIABILITIES:
  Accounts payable and other                                     $     12,067     $     13,341
  Accrued liabilities                                                  17,092           23,763
                                                                 ------------     ------------
      Total current liabilities                                        29,159           37,104
                                                                 ------------     ------------

LONG-TERM DEBT                                                        182,500          200,000
                                                                 ------------     ------------

DEFERRED INCOME TAXES                                                  30,527           25,732
                                                                 ------------     ------------

OTHER NONCURRENT LIABILITIES                                            1,859            1,776
                                                                 ------------     ------------

COMMITMENTS AND CONTINGENCIES (Note 17)

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized 1,000,
      none issued                                                          --               --
  Common shares, without par value, authorized 50,000,
      issued and outstanding 19,920 at August 31, 2005
      and 19,882 at November 30, 2004                                  72,664           85,949
  Retained earnings                                                    57,509           23,888
  Unamortized value of restricted common shares issued                 (2,008)          (2,386)
  Cumulative other comprehensive income, net of tax:
      Interest rate cap adjustment                                       (499)            (316)
      Foreign currency translation adjustment                            (280)             (23)
                                                                 ------------     ------------
      Total shareholders' equity                                      127,386          107,112
                                                                 ------------     ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              $    371,431     $    371,724
                                                                 ============     ============
</TABLE>



                 The accompanying notes are an integral part of
               these condensed consolidated financial statements.

                                        4
<PAGE>
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------

                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                   -------------------------------------------
             (Unaudited and in thousands, except per share amounts)





<TABLE><CAPTION>
                                                           FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                              ENDED AUGUST 31,                ENDED AUGUST 31,
                                                        ----------------------------    ----------------------------
                                                            2005            2004            2005            2004
                                                        ------------    ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>             <C>
REVENUES:
  Net sales                                             $     68,185    $     66,096    $    215,305    $    196,909
  Royalties                                                       30              39             128             555
                                                        ------------    ------------    ------------    ------------
      Total revenues                                          68,215          66,135         215,433         197,464
                                                        ------------    ------------    ------------    ------------

COSTS AND EXPENSES:
  Cost of sales                                               18,575          19,135          59,951          56,643
  Advertising and promotion                                   17,657          18,666          58,739          56,278
  Selling, general and administrative                         12,122          11,525          36,341          32,831
  Executive severance charges                                  2,269              --           2,269              --
  Litigation settlement                                          431             834          (2,401)          4,491
                                                        ------------    ------------    ------------    ------------
      Total costs and expenses                                51,054          50,160         154,899         150,243
                                                        ------------    ------------    ------------    ------------

INCOME FROM OPERATIONS                                        17,161          15,975          60,534          47,221
                                                        ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest expense                                            (3,332)         (3,284)        (10,285)        (11,678)
  Investment and other income, net                               274              45             676             205
  Loss on early extinguishment of debt                            --              --            (744)        (12,958)
                                                        ------------    ------------    ------------    ------------
      Total other income (expense)                            (3,058)         (3,239)        (10,353)        (24,431)
                                                        ------------    ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                                    14,103          12,736          50,181          22,790

PROVISION FOR INCOME TAXES                                     4,654           4,002          16,560           7,521
                                                        ------------    ------------    ------------    ------------

NET INCOME                                              $      9,449    $      8,734    $     33,621    $     15,269
                                                        ============    ============    ============    ============

NUMBER OF COMMON SHARES:
  Weighted average outstanding-basic                          19,762          19,498          19,669          19,295
                                                        ============    ============    ============    ============
  Weighted average and potential dilutive outstanding         20,487          20,308          20,456          20,148
                                                        ============    ============    ============    ============

NET INCOME PER COMMON SHARE:
      Basic                                             $        .48    $        .45    $       1.71    $        .79
                                                        ============    ============    ============    ============
      Diluted                                           $        .46    $        .43    $       1.64    $        .76
                                                        ============    ============    ============    ============
</TABLE>

                 The accompanying notes are an integral part of
               these condensed consolidated financial statements.

                                        5
<PAGE>
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 -----------------------------------------------
              (Unaudited and in thousands, except per share amount)
<TABLE><CAPTION>
                                                                        FOR THE NINE MONTHS ENDED
                                                                      ----------------------------
                                                                        AUGUST 31,      AUGUST 31,
                                                                          2005            2004
                                                                      ------------    ------------
<S>                                                                   <C>             <C>
OPERATING ACTIVITIES:
  Net income                                                          $     33,621    $     15,269
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization                                          4,372           4,609
      Deferred income taxes                                                  7,111           6,280
      Tax benefit realized from stock option plans                           1,057           4,036
      Loss on early extinguishment of debt                                     744          12,958
      Restricted stock modification expense                                  1,360              --
      Other, net                                                               205              53
      Changes in operating assets and liabilities:
        Accounts receivable                                                 (1,478)         (6,763)
        Inventories                                                         (1,128)         (1,990)
        Refundable income taxes                                              4,285            (842)
        Prepaid expenses and other current assets                           (3,272)             54
        Accounts payable and accrued liabilities                            (9,002)         (4,326)
                                                                      ------------    ------------
           Net cash provided by operating activities                        37,875          29,338
                                                                      ------------    ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                (2,353)         (1,763)
  Sales (purchases) of patents, trademarks and other product rights          3,252              (8)
  Increase in other assets, net                                               (507)           (594)
                                                                      ------------    ------------
           Net cash provided by (used in) investing activities                 392          (2,365)
                                                                      ------------    ------------
FINANCING ACTIVITIES:
  Repayment of long-term debt                                              (17,500)       (212,288)
  Proceeds from long-term debt                                                  --         200,000
  Proceeds from borrowings under revolving credit facility                      --          25,000
  Repayments of revolving credit facility                                       --         (25,000)
  Repayment of policy loans                                                 (1,031)             --
  Proceeds from exercise of stock options                                    5,286           5,139
  Repurchase of common shares                                              (21,664)         (5,015)
  Increase in debt issuance costs                                               --          (5,729)
  Debt retirement costs                                                       (282)         (7,861)
  Premium on interest rate cap agreement                                        --          (1,375)
                                                                      ------------    ------------
           Net cash used in financing activities                           (35,191)        (27,129)
                                                                      ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                  (131)            (20)
                                                                      ------------    ------------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the period                                         2,945            (176)
  At beginning of period                                                    40,193          26,931
                                                                      ------------    ------------
  At end of period                                                    $     43,138    $     26,755
                                                                      ============    ============

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Issuance of 50 and 70 shares of restricted common stock at a
  value of $35.37 and $19.98 per share for the nine months
  ended August 31, 2005 and 2004, respectively                        $      1,768    $      1,399

PAYMENTS FOR:
  Interest                                                            $      7,797    $      8,737
  Taxes                                                               $      5,200    $        228
</TABLE>

                 The accompanying notes are an integral part of
               these condensed consolidated financial statements.

                                        6
<PAGE>
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              ----------------------------------------------------
                                   (UNAUDITED)


All monetary and share amounts are expressed in thousands.

1.   BASIS OF PRESENTATION
     ---------------------

          The accompanying unaudited condensed consolidated financial statements
     have been prepared in accordance with generally accepted accounting
     principles for interim financial information and the instructions to Form
     10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
     of the information and footnotes required by generally accepted accounting
     principles for complete financial statements. These condensed consolidated
     financial statements should be read in conjunction with the audited
     consolidated financial statements and related notes thereto included in our
     Annual Report on Form 10-K for the year ended November 30, 2004. The
     accompanying unaudited condensed consolidated financial statements, in the
     opinion of management, include all adjustments necessary for a fair
     presentation. All such adjustments are of a normal recurring nature.


2.   CASH AND CASH EQUIVALENTS
     -------------------------

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


3.   RECENT ACCOUNTING PRONOUNCEMENTS
     --------------------------------

          In December 2003, the Financial Accounting Standards Board ("FASB")
     issued Interpretation No. 46R, "Consolidation of Variable Interest
     Entities" ("FIN 46R"), which supercedes Interpretation No. 46,
     "Consolidation of Variable Interest Entities" issued in January 2003. FIN
     46R requires a company to consolidate a variable interest entity ("VIE"),
     as defined, when the company will absorb a majority of the VIE's expected
     losses, receives a majority of the VIE's expected residual returns or both.
     FIN 46R also requires consolidation of existing, non-controlled affiliates
     if the VIE is unable to finance its operations without investor support, or
     where the other investors do not have exposure to the significant risks and
     rewards of ownership. FIN 46R applies immediately to a VIE created or
     acquired after January 31, 2003. For a VIE created before February 1, 2003,
     FIN 46R applies in the first fiscal year or interim period beginning after
     March 15, 2004, our third fiscal quarter beginning June 1, 2004.
     Application of FIN 46R is also required in financial statements that have
     interests in structures that are commonly referred to as special-purpose
     entities for periods ending after December 15, 2003. The adoption of FIN
     46R did not have an impact on our financial position, results of operations
     or cash flows.

          In November 2004, the FASB issued Statement of Financial Accounting
     Standards ("SFAS") No. 151, "Inventory Costs" ("SFAS 151"). SFAS 151 amends
     the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory
     Pricing", to clarify that abnormal amounts of idle facility expense,
     freight, handling costs and wasted materials (spoilage) should be
     recognized as current-period charges and requires the allocation of fixed
     production overheads to inventory based on normal capacity of the
     production facilities. This statement is effective for inventory costs
     incurred during fiscal years beginning after June 15, 2005. The adoption of
     SFAS 151 is not expected to have an impact on our financial position,
     results of operations or cash flows.

          In November 2004, the Emerging Issues Task Force ("EITF") reached a
     consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of
     FASB Statement No. 144, "Accounting for the Impairment or Disposal of
     Long-Lived Assets" in Determining Whether to Report Discontinued
     Operations" ("EITF 03-13"). Under the consensus, the approach for assessing
     whether cash flows of the component have been eliminated from the ongoing
     operations of the entity focuses on whether continuing cash flows are
     direct or indirect cash flows. Cash flows of the component would not be
     eliminated if the continuing cash flows to the entity are considered direct
     cash flows. The consensus should be applied to a component of an enterprise
     that is either disposed of or classified as held for sale in fiscal periods
     beginning after December 15, 2004. The adoption of EITF 03-13 did not have
     an impact on our financial position, results of operations or cash flows.

          In December 2004, the FASB issued SFAS No. 123 (revised 2004),
     "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
     "Accounting for Stock-Based Compensation". SFAS 123R supercedes APB Opinion
     No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
     "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for
     transactions in which an entity obtains employee services in share-based
     payment transactions and requires all share-based payments to employees,
     including grants of employee stock options, to be recognized in the income
     statement based on their fair values. Accordingly, the adoption of SFAS
     123R's fair value method will have a significant impact on our results of
     operations, although it will have no impact on our overall financial
     position. The impact of

                                        7
<PAGE>
     the adoption of SFAS 123R cannot be predicted at this time because it will
     depend on the levels of share-based payments granted in the future.
     However, had we adopted SFAS 123R in prior periods the impact of that
     standard would have approximated the impact of SFAS 123 as described in the
     disclosure of proforma net income and earnings per share in Note 4. SFAS
     123R also requires the benefits of tax deductions in excess of recognized
     compensation costs to be reported as a financing cash flow, rather than as
     an operating cash flow as required under current literature. This
     requirement will reduce net operating cash flows and increase net financing
     cash flows in periods after adoption. While we cannot estimate what those
     amounts will be in the future (because they depend on, among other things,
     when employees exercise stock options), the amount of operating cash flows
     recognized in prior periods for such excess tax deductions were not
     material to our consolidated financial position or results of operations.
     This statement is effective for our fiscal year that begins December 1,
     2005.

          In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
     Assets" ("SFAS 153"). SFAS 153 amends the guidance in APB Opinion No. 29,
     "Accounting for Nonmonetary Transactions" to eliminate certain exceptions
     to the principle that exchanges of nonmonetary assets be measured based on
     the fair value of the assets exchanged. SFAS 153 eliminates the exception
     for nonmonetary exchanges of similar productive assets and replaces it with
     a general exception for exchanges of nonmonetary assets that do not have
     commercial substance. This statement is effective for nonmonetary asset
     exchanges in fiscal years beginning after June 15, 2005. The adoption of
     SFAS 153 is not expected to have an impact on our financial position,
     results of operations or cash flows.

          The American Jobs Creation Act of 2004 (the "AJCA") was enacted on
     October 22, 2004. The AJCA repeals an export incentive, creates a new
     deduction for qualified domestic manufacturing activities and includes a
     special one-time deduction of 85% of certain foreign earnings repatriated
     to the U.S.

          The FASB issued Staff Position FAS 109-1, "Application of FASB
     Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
     Qualified Production Activities Provided by the American Jobs Creation Act
     of 2004" ("FSP FAS 109-1") on December 21, 2004. In accordance with FSP FAS
     109-1, we will treat the deduction for qualified domestic manufacturing
     activities, which is effective upon issuance, as a reduction of the income
     tax provision in future years as realized.

          In December 2004, the FASB issued Staff Position FAS 109-2,
     "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
     Provision within the American Jobs Creation Act of 2004," allowing
     companies additional time to evaluate the effect of the AJCA on plans for
     reinvestment or repatriation of foreign earnings. We are in the process of
     evaluating the effects of the repatriation provision.


4.   STOCK-BASED COMPENSATION
     ------------------------

          Our 1998 Non-Statutory Stock Option Plan provides for the issuance of
     up to 1,400 shares of common stock to key employees, while the 1999
     Non-Statutory Stock Option Plan for Non-Employee Directors allows for the
     issuance of up to 200 shares of common stock. The 2000 Non-Statutory Stock
     Option Plan provides for the issuance of up to 1,500 shares of common
     stock. The 2003 and 2005 Stock Incentive Plans provide for the issuance of
     up to 1,500 shares of common stock each. Options vest ratably over four
     years and are exercisable for a period of up to ten years from the date of
     grant.

          For SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
     123") purposes, as amended by SFAS No. 148, "Accounting for Stock-Based
     Compensation - Transition and Disclosure", the fair value of each option
     grant has been estimated as of the date of grant using the Black-Scholes
     option-pricing model with the following weighted average assumptions for
     grants in 2005 and 2004: expected dividend yield of 0%, expected volatility
     of 55% and 59%, respectively, risk-free interest rates of 4.02% and 4.12%,
     respectively, and expected lives of approximately five years, respectively.




                                        8
<PAGE>
          Had compensation expense for stock option grants been determined based
     on the fair value at the grant dates consistent with the method prescribed
     by SFAS 123, our net income and net income per share would have been
     adjusted to the pro forma amounts for the three and nine months ended
     August 31, 2005 and 2004, respectively, as indicated below:

<TABLE><CAPTION>
                                              For the Three Months Ended      For the Nine Months Ended
                                                      August 31,                      August 31,
                                              --------------------------      --------------------------
                                                 2005            2004            2005            2004
                                              ----------      ----------      ----------      ----------
     <S>                                      <C>             <C>             <C>             <C>
     Net income:
          As reported                         $    9,449      $    8,734      $   33,621      $   15,269
          Fair value method compensation
          cost, net                                1,714           1,348           4,465           3,228
                                              ----------      ----------      ----------      ----------
          Pro forma                           $    7,735      $    7,386      $   29,156      $   12,041
                                              ==========      ==========      ==========      ==========

     Net income per share, basic:
          As reported                         $      .48      $      .45      $     1.71      $      .79
          Pro forma                           $      .39      $      .38      $     1.48      $      .62

     Net income per share, diluted:
          As reported                         $      .46      $      .43      $     1.64      $      .76
          Pro forma                           $      .38      $      .36      $     1.43      $      .60
     </TABLE>

5.   EARNINGS PER SHARE
     ------------------

          The following table presents the computation of per share earnings for
     the three and nine months ended August 31, 2005 and 2004, respectively:

<TABLE><CAPTION>
                                              For the Three Months Ended      For the Nine Months Ended
                                                      August 31,                      August 31,
                                              --------------------------      --------------------------
                                                 2005            2004            2005            2004
                                              ----------      ----------      ----------      ----------
     <S>                                      <C>             <C>             <C>             <C>
     NET INCOME                               $    9,449      $    8,734      $   33,621      $   15,269
                                              ==========      ==========      ==========      ==========

     NUMBER OF COMMON SHARES:
        Weighted average outstanding              19,762          19,498          19,669          19,295
        Issued upon assumed exercise of
          outstanding stock options                  691             735             758             795
        Effect of issuance of restricted
          common shares                               34              75              29              58
                                              ----------      ----------      ----------      ----------
        Weighted average and potential
          dilutive outstanding(1)                 20,487          20,308          20,456          20,148
                                              ==========      ==========      ==========      ==========

     NET INCOME PER COMMON SHARE:
          Basic                               $      .48      $      .45      $     1.71      $      .79
                                              ==========      ==========      ==========      ==========
          Diluted                             $      .46      $      .43      $     1.64      $      .76
                                              ==========      ==========      ==========      ==========
</TABLE>

      (1) Because their effects are anti-dilutive, excludes shares issuable
      under stock option plans and restricted stock issuance whose grant price
      was greater than the average market price of common shares outstanding as
      follows: 10 and 5 shares for the three months ended August 31, 2005 and
      2004, respectively, and 227 and 247 shares for the nine months ended
      August 31, 2005 and 2004, respectively.

6.   ADVERTISING EXPENSES
     --------------------

          We incur significant expenditures on television, radio and print
     advertising to support our nationally branded over-the-counter ("OTC")
     health care products and toiletries. Customers purchase products from us
     with the understanding that the brands will be supported by our extensive
     media advertising. This advertising supports the retailers' sales effort
     and maintains the important brand franchise with the consuming public.
     Accordingly, we consider our advertising program to be clearly implicit in
     our sales arrangements with our customers. Therefore, we believe it is
     appropriate to allocate a percentage of the necessary supporting
     advertising expenses to each dollar of sales by charging a percentage of
     sales on

                                       9
<PAGE>

     an interim basis based upon anticipated annual sales and advertising
     expenditures (in accordance with Accounting Principles Board Opinion No.
     28, "Interim Financial Reporting") and adjusting that accrual to the actual
     expenses incurred at the end of the year.

7.   SHIPPING AND HANDLING
     ---------------------

          Shipping and handling costs of $1,817 and $2,036 are included in
     selling expenses for the three months ended August 31, 2005 and 2004,
     respectively, and $5,878 and $5,469 for the nine months ended August 31,
     2005 and 2004, respectively.

8.   PATENT, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
     -----------------------------------------------------

          The carrying value of trademarks, which are not subject to
     amortization under the provisions of SFAS No. 142, "Goodwill and Other
     Intangible Assets" ("SFAS 142"), was $221,654 and $224,797 as of August 31,
     2005 and November 30, 2004, respectively. The gross carrying amount of
     intangible assets subject to amortization at August 31, 2005 and November
     30, 2004, which consist primarily of non-compete agreements, was $2,139 and
     $2,400, respectively. The related accumulated amortization of intangible
     assets at August 31, 2005 and November 30, 2004 was $1,676 and $1,637,
     respectively. Amortization of our intangible assets subject to amortization
     under the provisions of SFAS 142 for the three months ended August 31, 2005
     and 2004 was $46 and $73, respectively, and for the nine months ended
     August 31, 2005 and 2004 was $191 and $222, respectively. Estimated annual
     amortization expense for these assets for the years ended November 30,
     2006, 2007, 2008, 2009 and 2010 is $290, $123, $40, $20 and $0,
     respectively.

          On February 28, 2005, we entered into an agreement to sell the
     trademark and product rights of our SELSUN business in certain countries in
     Africa and Asia. As a result of the sale, $3,143 of indefinite-lived assets
     and $108 of intangible assets subject to amortization were retired, which
     resulted in an insignificant loss.

9.   INVENTORIES
     -----------

          Inventories consisted of the following as of August 31, 2005 and
     November 30, 2004:

                                                     2005             2004
                                                  ----------       ----------
     Raw materials and work in process            $   12,011       $   10,728
     Finished goods                                   12,240           12,395
     Excess of current cost over LIFO values          (1,433)          (1,433)
                                                  ----------       ----------
         Total inventories                        $   22,818       $   21,690
                                                  ==========       ==========


10.  ACCRUED LIABILITIES
     -------------------

          Accrued liabilities consisted of the following as of August 31, 2005
     and November 30, 2004:

                                                     2005             2004
                                                  ----------       ----------
     Interest                                     $    4,978       $    3,152
     Salaries, wages and commissions                   5,459            4,886
     Product advertising and promotion                 2,971            3,750
     Litigation settlement and legal fees              2,428           10,046
     Other                                             1,256            1,929
                                                  ----------       ----------
         Total accrued liabilities                $   17,092       $   23,763
                                                  ==========       ==========

                                       10
<PAGE>

11.  LONG-TERM DEBT
     --------------

          Long-term debt consisted of the following as of August 31, 2005 and
     November 30, 2004:

<TABLE><CAPTION>
                                                              2005            2004
                                                           ----------      ----------
<S>                                                        <C>             <C>
     Revolving Credit Facility due 2009 at a variable
       rate of 6.75% and 5.50% as of August 31,
       2005 and November 30, 2004, respectively            $     --        $     --
     Floating Rate Senior Notes due 2010
       at a variable rate of 6.31% and 4.78% as
       of  August 31, 2005 and November 30,
       2004, respectively                                      75,000          75,000
     7.0% Senior Subordinated Notes due 2014                  107,500         125,000
                                                           ----------      ----------
     Total long-term debt                                     182,500         200,000
     Less:  current maturities                                   --              --
                                                           ----------      ----------
     Total long-term debt, net of current maturities       $  182,500      $  200,000
                                                           ==========      ==========
</TABLE>

          On February 26, 2004, we entered into a new Senior Secured Revolving
     Credit Facility that matures February 26, 2009 (the "Revolving Credit
     Facility") with Bank of America, N.A. that provided an initial borrowing
     capacity of $25,000 and an additional $25,000, subject to successful
     syndication. On March 9, 2004, we entered into a new commitment agreement
     with a syndicate of commercial banks led by Bank of America, N.A., as
     agent, that enables us to borrow up to a total of $50,000 under the
     Revolving Credit Facility. Borrowings under our Revolving Credit Facility
     bear interest at LIBOR plus applicable percentages of 1.75% to 2.50% or a
     base rate (the higher of the federal funds rate plus 0.5% or the prime
     rate) plus applicable percentages of 0.25% to 1.0%. The applicable
     percentages are calculated based on our leverage ratio. As of August 31,
     2005, no amounts were outstanding under the Revolving Credit Facility, and
     the variable rate was 6.75%. Borrowings under our Revolving Credit Facility
     are secured by substantially all of our assets, except real property and
     shares of capital stock of our domestic subsidiaries held by us, and by the
     assets of the guarantors (our domestic subsidiaries). The Revolving Credit
     Facility contains covenants, representations, warranties and other
     agreements by us that are customary in credit agreements and security
     instruments relating to financings of this type. The significant financial
     covenants include fixed charge coverage ratio, leverage ratio, senior
     secured leverage ratio, net worth and brand value calculations. On
     September 29, 2005, we had no borrowings outstanding under our Revolving
     Credit Facility.

          On March 28, 2002, we obtained a $60,000 senior secured credit
     facility from a syndicate of commercial banks led by Bank of America, N.A.,
     as agent (the "Credit Facility"). The Credit Facility included a $15,000
     revolving credit line and a $45,000 term loan. The remaining balance of the
     term loan under the Credit Facility was repaid as part of the refinancing
     transactions discussed herein, and the revolving credit line under the
     Credit Facility was terminated on February 26, 2004.

          On February 10, 2004, we commenced a cash tender offer and consent
     solicitation for the $204,538 outstanding principal amount of our 8.875%
     Senior Subordinated Notes due 2008 (the "8.875% Subordinated Notes"). The
     consent solicitation expired on February 24, 2004, and a total of
     approximately $174,530, or approximately 85.3% of the 8.875% Subordinated
     Notes, were tendered and accepted for payment on February 26, 2004. The
     remaining principal outstanding, call premium, accrued interest and
     interest to call date amounting to $32,227 was placed in escrow with the
     indenture trustee to fund the purchase of additional 8.875% Subordinated
     Notes tendered prior to March 9, 2004, the expiration date of the tender
     offer, and the redemption of the remaining 8.875% Subordinated Notes not
     tendered. The remaining 8.875% Subordinated Notes not tendered in such
     offer were called in accordance with their terms on April 1, 2004 at a
     redemption price of 102.9583% of their aggregate principal amount. On April
     1, 2004, the remaining amount held in escrow was released for payment and
     all outstanding 8.875% Subordinated Notes were redeemed.

          The completion of our refinancing of the Credit Facility and purchase
     of approximately $174,530 of our 8.875% Subordinated Notes that were
     tendered on February 26, 2004 resulted in a loss on early extinguishment of
     debt of $11,309 in the first quarter of fiscal 2004. Also in the second
     quarter of fiscal 2004, we recorded a loss on early extinguishment of debt
     of $1,649 related to the redemption of the remaining $30,008 of our 8.875%
     Subordinated Notes.

          Due to our refinancing transactions, during the nine months ended
     August 31, 2004 tender premiums and related fees of $7,861 were paid and
     net debt issuance costs of $5,097 were written off and charged to loss on
     early extinguishment of debt in the Condensed Consolidated Statements of
     Income. In addition, new debt issuance costs of $5,718 were capitalized.

          Also on February 26, 2004, we issued and sold $75,000 of Floating Rate
     Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125,000 of
     7.0% Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated

                                       11
<PAGE>

     Notes"), the proceeds of which were used to purchase our 8.875%
     Subordinated Notes and refinance the Credit Facility as discussed above.

          During the second quarter of fiscal 2005, we repurchased $17,500 of
     our 7.0% Subordinated Notes in the open market at an average premium of
     1.6% over the principal amount of the notes. The repurchases resulted in a
     loss on early extinguishment of debt of $744. The outstanding balance of
     the remaining 7.0% Subordinated Notes was reduced to $107,500.

          The Floating Rate Notes bear interest at a three-month LIBOR plus
     3.00% per year (6.31% as of August 31, 2005). Interest payments are due
     quarterly in arrears commencing on June 1, 2004. On March 8, 2004, we
     entered into an interest rate cap agreement effective June 1, 2004 with
     decreasing annual notional principal amounts of $15,000 beginning March 1,
     2006 and cap rates ranging from 4.0% to 5.0% over the life of the
     agreement. We paid a $1,375 premium to enter into the interest rate cap
     agreement, which will be amortized over the life of the agreement. The
     current portion of the premium on the interest rate cap agreement of $328
     is included in prepaid expenses and other current assets, and the long-term
     portion of $220 is included in other noncurrent assets. The amortized value
     of the premium on the interest rate cap was compared to its fair value as
     of August 31, 2005, and a charge of $183, net of tax, was recorded to other
     comprehensive income during the nine months ended August 31, 2005. The fair
     value of the interest rate cap agreement is valued by a third party. The
     interest rate cap agreement terminates on March 1, 2010. Our domestic
     subsidiaries are guarantors of the Floating Rate Notes. The guarantees of
     the Floating Rate Notes are unsecured senior obligations of the guarantors
     and rank equally with all of the current and future unsecured senior debt
     of the guarantors. The guarantees of the Floating Rate Notes effectively
     rank junior to any secured debt of the guarantors, including the
     guarantors' guarantee of our indebtedness under the Revolving Credit
     Facility. At any time after March 1, 2005, we may redeem any of the
     Floating Rate Notes upon not less than 30 nor more than 60 days' notice at
     redemption prices (expressed in percentages of principal amount), plus
     accrued and unpaid interest, if any, and liquidated damages, if any, to the
     applicable redemption rate, if redeemed during the twelve-month periods
     beginning March 1, 2005 at 102.0%, March 1, 2006 at 101.0% and March 1,
     2007 and thereafter at 100.0%.

          Interest payments on the 7.0% Subordinated Notes are due semi-annually
     in arrears on March 1 and September 1, commencing on September 1, 2004. Our
     domestic subsidiaries are guarantors of the 7.0% Subordinated Notes. The
     guarantees of the 7.0% Subordinated Notes are unsecured senior subordinated
     obligations of the guarantors. At any time after March 1, 2009, we may
     redeem any of the 7.0% Subordinated Notes upon not less than 30 nor more
     than 60 days' notice at redemption prices (expressed in percentages of
     principal amount), plus accrued and unpaid interest, if any, and liquidated
     damages, if any, to the applicable redemption rate, if redeemed during the
     twelve-month periods beginning March 1, 2009 at 103.500%, March 1, 2010 at
     102.333%, March 1, 2011 at 101.167% and March 1, 2012 and thereafter at
     100.000%. At any time prior to March 1, 2007, we may redeem up to 35% of
     the aggregate principal amount of the 7.0% Subordinated Notes (including
     any additional 7.0% Subordinated Notes) at a redemption price of 107.0% of
     the principal amount thereof, plus accrued and unpaid interest and
     liquidated damages, if any, thereon to the applicable redemption rate, with
     the net cash proceeds of one or more qualified equity offerings; provided,
     that (i) at least 65.0% of the aggregate principal amount of the 7.0%
     Subordinated Notes remains outstanding immediately after the occurrence of
     such redemption (excluding 7.0% Subordinated Notes held by us and our
     subsidiaries); and (ii) the redemption must occur within 90 days of the
     date of the closing of such qualified equity offering.

          The indentures governing the Floating Rate Notes and 7.0% Subordinated
     Notes, among other things, limit our ability and the ability of our
     restricted subsidiaries to: (i) borrow money or sell preferred stock, (ii)
     create liens, (iii) pay dividends on or redeem or repurchase stock, (iv)
     make certain types of investments, (v) sell stock in our restricted
     subsidiaries, (vi) restrict dividends or other payments from restricted
     subsidiaries, (vii) enter into transactions with affiliates, (viii) issue
     guarantees of debt and (ix) sell assets or merge with other companies. In
     addition, if we experience specific kinds of changes in control, we must
     offer to purchase the Floating Rate Notes and 7.0% Subordinated Notes at
     101.0% of their principal amount plus accrued and unpaid interest.

          The future maturities of long-term debt outstanding as of August 31,
     2005 are as follows:

          2006                              $       --
          2007                                      --
          2008                                      --
          2009                                      --
          2010                                  75,000
          Thereafter                           107,500
                                            ----------
                                            $  182,500
                                            ==========


                                       12
<PAGE>

12.  COMPREHENSIVE INCOME
     --------------------

          Comprehensive income consisted of the following components for the
     three and nine months ended August 31, 2005 and 2004, respectively:

<TABLE><CAPTION>
                                                   For the Three Months Ended      For the Nine Months Ended
                                                           August 31,                      August 31,
                                                   --------------------------      --------------------------
                                                      2005            2004            2005            2004
                                                   ----------      ----------      ----------      ----------
     <S>                                           <C>             <C>             <C>             <C>
     Net income                                    $    9,449      $    8,734      $   33,621      $   15,269
     Other - interest rate cap adjustment                  16            (259)           (183)           (259)
     Other - foreign currency translation
       adjustment                                        (151)            120            (257)            189
                                                   ----------      ----------      ----------      ----------
        Total                                      $    9,314      $    8,595      $   33,181      $   15,199
                                                   ==========      ==========      ==========      ==========
</TABLE>

13.  STOCK BUYBACK
     -------------

          In January 2005, our board of directors authorized the repurchase of
     $30,000 of our common stock under our stock buyback program. A total of
     $17,250 remained available under the stock buyback authority prior to July
     29, 2005, when our board of directors increased the total buyback
     authorization back to $30,000. During the nine months ended August 31,
     2005, we repurchased 547 shares at a total cost of $21,664 pursuant to our
     buyback authority. As of August 31, 2005, $23,000 of the stock buyback
     authority was available. We, however, are limited in our ability to
     repurchase shares due to restrictions under the terms of our Revolving
     Credit Facility, Floating Rate Notes and 7.0% Subordinated Notes. As of
     September 29, 2005, we have repurchased 335 shares of our common stock for
     $12,417 subsequent to August 31, 2005.

14.  RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS
     --------------------------------------------------------

          RETIREMENT PLANS

          We have a noncontributory defined benefit pension plan ("the Plan"),
     which covers substantially all employees as of December 31, 2000. The Plan
     provides benefits based upon years of service and the employee's
     compensation. Our contributions are based on computations by independent
     actuaries. Plan assets at August 31, 2005 and November 30, 2004 were
     invested primarily in United States government and agency securities and
     corporate debt and equity securities. In October 2000, our board of
     directors adopted an amendment to the Plan that freezes benefits of the
     Plan and prohibits new entrants to the Plan effective December 31, 2000.

          Net periodic pension cost for the three and nine months ended August
     31, 2005 and 2004 comprised the following components:

<TABLE><CAPTION>
                                                   For the Three Months Ended      For the Nine Months Ended
                                                           August 31,                      August 31,
                                                   --------------------------      --------------------------
                                                      2005            2004            2005            2004
                                                   ----------      ----------      ----------      ----------
     <S>                                           <C>             <C>             <C>             <C>
     Service cost                                  $     --        $     --        $     --        $     --
     Interest cost on projected benefit
       obligation                                         155             155             465             465
     Actual return on plan assets                        (214)           (178)           (642)           (534)
     Net amortization and deferral                          7              28              21              84
                                                   ----------      ----------      ----------      ----------
     Net pension cost (benefit)                    $      (52)     $        5      $     (156)     $       15
                                                   ==========      ==========      ==========      ==========
</TABLE>

          No employer contributions were made for the nine months ended August
     31, 2005 and 2004, and no employer contributions are expected to be made in
     fiscal 2005.

          POSTRETIREMENT HEALTH CARE BENEFITS

          We maintain certain postretirement health care benefits for eligible
     employees. Employees become eligible for these benefits if they meet
     certain age and service requirements. We pay a portion of the cost of
     medical benefits for certain retired employees over the age of 65.
     Effective January 1, 1993, our contribution is a service-based percentage
     of the full premium. We pay these benefits as claims are incurred. Employer
     contributions expected for fiscal 2005 are approximately $70.

                                       13
<PAGE>

          Net periodic postretirement health care benefits cost for the three
     and nine months ended August 31, 2005 and 2004 comprised the following
     components:

<TABLE><CAPTION>
                                                   For the Three Months Ended      For the Nine Months Ended
                                                           August 31,                      August 31,
                                                   --------------------------      --------------------------
                                                      2005            2004            2005            2004
                                                   ----------      ----------      ----------      ----------
     <S>                                           <C>             <C>             <C>             <C>
     Service cost                                  $       18      $       16      $       54      $       48
     Interest cost on accumulated
       postretirement benefit obligation                   21              20              63              60
     Amortization of prior service cost                     4               4              12              12
     Amortization of net gain                              (4)             (8)            (12)            (24)
                                                   ----------      ----------      ----------      ----------
     Net periodic postretirement benefits cost     $       39      $       32      $      117      $       96
                                                   ==========      ==========      ==========      ==========
</TABLE>

15.  INCOME TAXES
     ------------

          We account for income taxes using the asset and liability approach as
     prescribed by SFAS No. 109, "Accounting for Income Taxes". This approach
     requires recognition of deferred tax assets and liabilities for the
     expected future tax consequences of events that have been included in the
     consolidated financial statements or tax returns. Using the enacted tax
     rates in effect for the year in which the differences are expected to
     reverse, deferred tax assets and liabilities are determined based on the
     differences between the financial reporting and the tax basis of an asset
     or liability. We record income tax expense in our consolidated financial
     statements based on an estimated annual effective income tax rate. Our
     effective tax rate for the three and nine months ended August 31, 2005 was
     33%, as compared to 31% and 33% for the three and nine months ended August
     31, 2004. The rate for the three and nine months ended August 31, 2005
     reflects the implementation of a number of foreign and state tax planning
     initiatives, which include our determination during the third quarter of
     fiscal 2004 to reinvest indefinitely all undistributed earnings of Chattem
     Canada, a wholly-owned subsidiary.

          Undistributed earnings of Chattem Canada amounted to approximately
     $572 and $1,323 for the three and nine months ended August 31, 2005. These
     earnings are considered to be reinvested indefinitely and, accordingly, no
     provision for U.S. federal and state income taxes has been provided
     thereon. Upon distribution of those earnings in the form of dividends or
     otherwise, we would be subject to U.S. income taxes (subject to an
     adjustment for foreign tax credits).

16.  PRODUCT SEGMENT INFORMATION
     ---------------------------

          Net sales of our domestic product categories within our single
     healthcare business segment for the three and nine months ended August 31,
     2005 and 2004 are as follows:

<TABLE><CAPTION>
                                                   For the Three Months Ended      For the Nine Months Ended
                                                           August 31,                      August 31,
                                                   --------------------------      --------------------------
                                                      2005            2004            2005            2004
                                                   ----------      ----------      ----------      ----------
     <S>                                           <C>             <C>             <C>             <C>
     Topical analgesics                            $   20,965      $   20,118      $   67,415      $   53,964
     Medicated skin care products                      15,775          17,257          49,232          47,920
     Dietary supplements                                8,523           7,774          27,467          26,654
     Medicated dandruff shampoos and conditioner        7,653           6,480          25,341          23,107
     Other OTC and toiletry products                    8,871           8,210          26,584          27,485
                                                   ----------      ----------      ----------      ----------
       Total                                       $   61,787      $   59,839      $  196,039      $  179,130
                                                   ==========      ==========      ==========      ==========
</TABLE>

17.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

          GENERAL LITIGATION

          We were named as a defendant in a number of lawsuits alleging that the
     plaintiffs were injured as a result of ingestion of products containing
     phenylpropanolamine ("PPA"), which was an active ingredient in most of our
     DEXATRIM products until November 2000. The lawsuits filed in federal court
     were transferred to the United States District Court for the Western
     District of Washington before United States District Judge Barbara Jacobs
     Rothstein (IN RE PHENYLPROPANOLAMINE ("PPA") PRODUCTS LIABILITY LITIGATION,
     MDL NO. 1407). The remaining lawsuits were filed in state court in a number
     of different states.

          On April 13, 2004, we entered into a class action settlement agreement
     with representatives of the plaintiffs' settlement class, which provided
     for a national class action settlement of all DEXATRIM PPA claims. On
     November 12, 2004, Judge Barbara J. Rothstein of the United States District
     Court for the Western District of Washington entered a final order and
     judgment certifying the class and granting approval of the DEXATRIM PPA
     settlement. After the final judgment was entered,

                                       14
<PAGE>

     two parties who had objected to the settlement filed appeals challenging
     and seeking to set aside the final judgment. Both of these appeals have now
     been dismissed.

          The DEXATRIM PPA settlement includes claims against us involving
     alleged injuries by DEXATRIM products containing PPA in which the alleged
     injury occurred after December 21, 1998, the date we acquired the DEXATRIM
     brand. In accordance with the terms of the class action settlement
     agreement, we previously published notice of the settlement and details as
     to the manner in which claims could be submitted. The deadline for
     submission of claims was July 7, 2004. A total of 391 claims were certified
     by the court as timely submitted. Of these 391 claims, 173 alleged stroke
     as an injury and 218 alleged other non-stroke injuries. Of the 391 total
     claims, only 371 claimants actually had alleged injuries that occurred
     after December 21, 1998 and continued to pursue their claims in the
     settlement. The remaining claimants have either withdrawn their claims or
     cannot be located. A total of 14 claimants with alleged injuries that
     occurred after December 21, 1998 elected to opt out of the class
     settlement. Subsequently, we have settled eight of the opt out claims. The
     six remaining opt out claimants may pursue claims for damages against us in
     separate lawsuits. As of September 29, 2005, three of the six remaining opt
     out claimants have filed lawsuits against us that we are continuing to
     defend.

          We previously reached an agreement with Kemper Indemnity Insurance
     Company ("Kemper") to settle its lawsuit that sought to rescind our policy
     for $50,000 of excess coverage for product liability claims. After giving
     effect to the settlement with Kemper, we have available for the claims
     against us related to the PPA litigation, through our first three layers of
     insurance coverage, approximately $60,885 of the $77,000 of product
     liability coverage provided by these insurance policies. The $60,885 of
     available coverage consists of $37,500 of insurance under the Kemper policy
     and approximately $23,385 under policies with two other insurance
     companies. In accordance with the terms of the class action settlement
     agreement, this $60,885 of coverage has been funded into a settlement
     trust. In addition, on July 14, 2004, we entered into a settlement
     agreement with Sidmak Laboratories, Inc. ("Sidmak"), the manufacturer of
     DEXATRIM products containing PPA, pursuant to which Sidmak has contributed
     $10,000 into the settlement trust. We have also entered into a settlement
     agreement with Interstate Fire & Casualty Company ("Interstate") with
     regard to its $25,000 of coverage in excess of the insurance funds
     available in the settlement trust.

          During the third quarter of fiscal 2005, we resolved substantially all
     of the claims submitted in the DEXATRIM PPA settlement and now estimate
     that the total cost of the DEXATRIM settlement will be approximately
     $56,000. As indicated above, a total of $70,885 has been funded into a
     settlement trust by our insurers and Sidmak and is available to pay claims
     in the settlement. Any funds remaining in the settlement trust after all
     claims and expenses of the trust have been paid will be distributed as
     approved by the court in accordance with the class action settlement
     agreement and our settlement agreements with each of Kemper and Sidmak. We
     currently expect that after all claims and expenses of the settlement trust
     have been paid, we could recover up to approximately $8,500 from the
     settlement trust. If realized, this potential recovery is estimated to
     occur in the fourth quarter of 2005 or the first quarter of fiscal 2006. We
     currently do not expect to record any additional charges relative to the
     settlement of the PPA litigation, except for legal expenses that will be
     recorded in the period incurred. During the third fiscal quarter, we
     incurred and recorded $431 of legal expenses related to the DEXATRIM
     litigation.

          We are also named as a defendant in approximately 206 lawsuits
     relating to DEXATRIM containing PPA which involve alleged injuries by
     DEXATRIM products containing PPA manufactured and sold prior to our
     acquisition of DEXATRIM on December 21, 1998. In these lawsuits, we are
     being defended on the basis of indemnification obligations assumed by The
     DELACO Company ("DELACO"), successor by merger to the Thompson Medical
     Company, Inc., which owned the brand prior to December 21, 1998. On
     February 12, 2004, DELACO filed a Chapter 11 bankruptcy petition in the
     United States Bankruptcy Court for the Southern District of New York.
     Accordingly, it is uncertain whether DELACO will be able to indemnify us
     for claims arising from products manufactured and sold prior to our
     acquisition of DEXATRIM on December 21, 1998. However, DELACO is seeking to
     resolve all DEXATRIM cases with injury dates prior to December 21, 1998 as
     part of a liquidating Chapter 11 bankruptcy plan. We understand that
     DELACO's product liability insurance carriers and other sources are
     expected to fund this plan. We have filed a claim in DELACO's bankruptcy
     case in order to preserve our claims for indemnification against DELACO.

          In order to resolve DELACO's indemnity obligations to us, we have
     entered into a settlement agreement with DELACO dated June 30, 2005 ("the
     DELACO Agreement"). Pursuant to the DELACO Agreement, we will accept
     liability for all claims against DELACO and its predecessor, Thompson
     Medical Company, Inc., or us relating to DEXATRIM products involving an
     injury date after December 21, 1998, and will hold the DELACO bankruptcy
     estate completely harmless from any such claims. In exchange, a settlement
     trust to be established under DELACO's bankruptcy plan will pay us $8,750
     and will assume potential liability for all claims related to DEXATRIM
     products alleging injury dates on or before December 21, 1998. Upon the
     effective date of the bankruptcy plan, we expect that the plan will release
     us from all liability from holders of DEXATRIM claims with injury dates
     prior to December 21,1998, whether brought by an injured party or a
     co-defendant to a DEXATRIM products liability case. We expect all claims
     with injury dates prior to December 21, 1998 to be channeled to the DELACO
     settlement trust, which we expect to come into existence and be funded
     prior to the effective date of the DELACO

                                       15
<PAGE>

     bankruptcy plan. This payment and the channeling injunction and release
     described above will conclusively compromise and settle our previously
     filed claim in the DELACO bankruptcy case. The DELACO Agreement was
     approved by the Bankruptcy Court on July 28, 2005. The DELACO Agreement and
     our receipt of $8,750 from the DELACO settlement trust is conditioned upon
     final confirmation and approval of the DELACO bankruptcy plan, and funding
     of the DELACO settlement trust by the insurance companies and other parties
     obligated to fund the trust. We currently expect the confirmation hearing
     to occur before the end of calendar year 2005.

          Our product liability insurance, as described above, would not apply
     to claims arising from products manufactured and sold prior to our
     acquisition of DEXATRIM. If the DELACO bankruptcy plan does not resolve
     these cases as we expect, we will also seek to defend ourselves in these
     lawsuits on the basis that we did not manufacture and sell products
     containing PPA prior to December 21, 1998. In the approximately 206 cases
     that have been filed against us for products manufactured and sold prior to
     December 21, 1998, approximately half of the plaintiffs are in cases filed
     in states that we believe do not under current law impose liability upon a
     successor. The remaining plaintiffs are in cases filed in states that may
     in some circumstances permit liability against a successor. Even in these
     cases, although there can be no assurances, we do not believe that
     successor liability would be imposed against us. The reasons for our
     belief, among others, are that we did not purchase all of DELACO's assets
     and DELACO continued to operate its remaining business after December 21,
     1998; we did not cause DELACO's bankruptcy; and many plaintiffs included in
     cases filed in states that in some circumstances impose successor liability
     are actually residents of other states. If the DELACO bankruptcy plan is
     confirmed with the terms required by the DELACO Agreement, we will be
     released from potential liability in these cases.

          We maintain a significantly lower level of insurance coverage for all
     other potential claims relating to our products including DEXATRIM products
     containing ephedrine. For the current policy period, we are insured for
     product liability insurance for all of our other products, including
     DEXATRIM products containing ephedrine, for up to $20,000 through our
     captive insurance subsidiary, of which approximately $4,891 is funded as of
     September 29, 2005. We also have $30,000 of excess coverage through third
     party insurers. We have been served with process and are currently
     defending three lawsuits related to DEXATRIM containing ephedrine.

          On December 30, 2003, the United States Food and Drug Administration
     ("FDA") issued a consumer alert on the safety of dietary supplements
     containing ephedrine alkaloids and on February 6, 2004 published a final
     rule with respect to these products. The final rule prohibits the sale of
     dietary supplements containing ephedrine alkaloids because such supplements
     present an unreasonable risk of illness or injury. The final rule became
     effective on April 11, 2004. Although we discontinued the manufacturing and
     shipment of DEXATRIM containing ephedrine in September 2002, the FDA's
     final rule may result in additional lawsuits being filed against us
     alleging damages related to the use or purchase of DEXATRIM containing
     ephedrine.

          We have been named as a defendant in a putative class action suit
     filed in the Superior Court of the State of California for the County of
     Los Angeles on February 11, 2004. The lawsuit seeks certification of
     classes consisting of residents of the United States, or residents of the
     State of California, who have purchased our BULLFROG sun care products
     during the past four years. The lawsuit seeks injunctive relief and
     compensatory damages under the California Business and Professions Code
     against us arising out of alleged deceptive, untrue or misleading
     advertising, and breach of warranty, in connection with the manufacturing,
     labeling, advertising, promotion and sale of BULLFROG products. The
     plaintiff has stipulated that the amount in controversy with respect to
     plaintiff's individual claim and each member of the proposed class does not
     exceed $75. We filed an answer on June 28, 2004 and are vigorously
     defending the lawsuit.

          We have been named as a defendant in a putative class action suit
     filed in the Superior Court of the State of California, County of Los
     Angeles, on January 13, 2005. The lawsuit seeks injunctive relief,
     compensatory damages and attorney fees against us under the California
     Business and Professions Code, arising out of alleged deceptive, untrue or
     misleading advertising and breach of express warranty in connection with
     the manufacturing, labeling, advertising, promotion and sale of certain
     DEXATRIM Natural products. The lawsuit seeks certification of a class
     consisting of all persons who purchased DEXATRIM Natural in California
     during the four year period prior to the filing of the lawsuit up to the
     date of any judgment obtained. The plaintiff has stipulated that the amount
     in controversy with respect to each individual claim and each member of the
     proposed class in the action does not exceed $75. We filed an answer on
     March 1, 2005, and are vigorously defending the lawsuit.

                                       16
<PAGE>

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

     REGULATORY

          The FDA, the Drug Enforcement Administration and a number of state and
     local governments have enacted or proposed restrictions or prohibitions on
     the sale of products that contain ephedrine. Ephedrine can refer to the
     herbal substance derived from the plant ephedra or the plant heart leaf,
     which, until September 2002, was used in the manufacturing of some forms of
     DEXATRIM Natural and DEXATRIM Results, or synthetic ephedrine, a FDA
     regulated ingredient used in some OTC drug products, which has not been
     used in our products. These restrictions include the prohibition of OTC
     sales, required warnings or labeling statements, record keeping and
     reporting requirements, the prohibition of sales to minors, per transaction
     limits on the quantity of product that may be purchased and limitations on
     advertising and promotion. The enactment of further restrictions or
     prohibitions on sales, the perceived safety concerns related to ephedrine
     and the possibility of further regulatory action could result in an
     increase in the number of ephedrine related lawsuits filed including ones
     in which we are named as a defendant.

          In 1997, the FDA published a proposed rule on the use of dietary
     supplements containing ephedrine alkaloids. In June 2002, the United States
     Department of Health and Human Services ("HHS") proposed an expanded
     scientific evaluation of ephedra which led to the issuance of a report by
     the RAND-based Southern California Evidence-Based Practice Center (the
     "RAND Report"). The RAND Report concluded that ephedrine, ephedrine plus
     caffeine and ephedra-containing dietary supplements with or without herbs
     containing caffeine all promote modest amounts of weight loss over the
     short term and use of ephedra or ephedrine plus caffeine is associated with
     an increased risk of gastrointestinal, psychiatric and autonomic symptoms.
     The adverse event reports contained a smaller number of more serious
     adverse events. Given the small number of such events, the RAND Report
     concluded that further study would be necessary to determine whether
     consumption of ephedra or ephedrine may be causally related to these
     serious adverse events. In connection with the RAND Report, HHS has sought
     public comment on whether additional measures are required concerning the
     sale and distribution of dietary supplements containing ephedrine
     alkaloids.

          On December 30, 2003, the FDA issued a consumer alert on the safety of
     dietary supplements containing ephedrine alkaloids and on February 6, 2004
     published a final rule with respect to these products. The final rule
     prohibits the sale of dietary supplements containing ephedrine alkaloids
     because such supplements present an unreasonable risk of illness or injury.
     The final rule became effective on April 11, 2004. Although we discontinued
     the manufacturing and shipment of DEXATRIM containing ephedrine in
     September 2002, the FDA's final rule may result in lawsuits in addition to
     those we currently have being filed against us alleging damages related to
     the use or purchase of DEXATRIM containing ephedrine.

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

          Certain of our topical analgesic products are currently marketed under
     a FDA tentative final external analgesic monograph. The FDA has proposed
     that the final monograph exclude external analgesic products in patch,
     plaster or poultice form, unless the FDA receives additional data
     supporting the safety and efficacy of these products. On October 14, 2003,
     we submitted to the FDA information regarding the safety of our ICY HOT
     patches and arguments to support our product's inclusion in the final
     monograph. We have also participated in an industry effort coordinated by
     Consumer Healthcare Products Association ("CHPA") to establish with the FDA
     a protocol of additional research that will allow the patches to be
     marketed under the final monograph even if the final monograph does not
     explicitly allow them. The CHPA submission to FDA was made on October 15,
     2003. Thereafter, in April 2004, we launched the ICY HOT Sleeve, a
     flexible, non-occlusive fabric patch with menthol levels consistent with
     the OTC monograph. If additional research is required either as a
     preliminary to final FDA monograph approval and/or as a requirement of
     future individual product sale, we may need to

                                       17
<PAGE>

     invest in a considerable amount of expensive testing and data analysis. Any
     preliminary cost may be shared with other patch manufacturers. Because the
     submissions made into the FDA docket have been forwarded from its OTC
     Division to its Dermatological Division within the Center for Drug
     Evaluation and Research ("CDER"), we are uncertain as to when this matter
     is likely to become final. For example, the FDA could choose to hold in
     abeyance a final ruling on alternative dose forms even if the monograph is
     otherwise finalized. If neither action described above is successful and
     the final monograph excludes such products, we will have to file a new drug
     application ("NDA") for previously marketed drugs in order to continue to
     market the ICY HOT Patch, ICY HOT Sleeve or similar delivery systems under
     our other topical analgesic brands. In such case, we would have to remove
     the existing products from the market one year from the effective date of
     the final monograph, pending FDA review and approval of an NDA. The
     preparation of an NDA would likely take us six to 18 months and would be
     expensive. It typically takes the FDA at least 12 months to rule on an NDA
     once it is submitted.

          We have responded to certain questions with respect to efficacy
     received from the FDA in connection with clinical studies for pyrilamine
     maleate, one of the active ingredients used in certain of the PAMPRIN and
     PREMSYN PMS products. While we addressed all of the FDA questions in
     detail, the final monograph for menstrual drug products, which has not yet
     been issued, will determine if the FDA considers pyrilamine maleate safe
     and effective for menstrual relief products. If pyrilamine maleate were not
     included in the final monograph, we would be required to reformulate the
     products to continue to provide the consumer with multi-symptom relief
     benefits. We have been actively monitoring the process and do not believe
     that either PAMPRIN or PREMSYN PMS, as brands, will be materially affected
     by the FDA review. We believe that any adverse finding by the FDA would
     likewise affect our principal competitors in the menstrual product category
     and that finalization of the menstrual products monograph is not imminent.

          In early 2005, infrequent, but serious, adverse cardiovascular events
     were reported to the FDA associated with patients who were prescribed a
     subclass of COX-2 inhibitor non-steroidal anti-inflammatory drugs
     ("NSAID's") for long periods to relieve pain of chronic diseases such as
     arthritis. These products include Vioxx(R), Bextra(R), and Celebrex(R). In
     February 2005, the FDA held a joint advisory committee meeting to seek
     external counsel on the extent to which manufacturers might further warn
     patients of these cardiovascular risks on prescription product labeling, or
     prohibit sale of these prescription products. As part of its response on
     this issue, the FDA has recommended labeling changes for both the
     prescription and OTC NSAID's. Well-known OTC NSAID's such as ibuprofen and
     naproxen, which have been sold in vast quantities since the 1970s, will be
     affected by this regulatory action. Manufacturers of OTC NSAID's are being
     asked to revise their labeling to provide more specific information about
     the potential cardiovascular and gastrointestinal risks recognizing the
     limited dose and duration of treatment of these products. Our PAMPRIN ALL
     DAY product, which contains naproxen sodium, will be subject to these new
     labeling requirements. PAMPRIN ALL DAY is manufactured for us by The
     Perrigo Company ("Perrigo"), holder of an abbreviated NDA for naproxen
     sodium. As holder of the abbreviated NDA, Perrigo expects to make the
     mandated labeling changes within the time frame required by the FDA. We do
     not currently expect the distribution of PAMPRIN ALL DAY to be adversely
     affected as a result of the required labeling changes. We are also aware of
     the FDA's concern about the potential toxicity due to concomitant use of
     OTC and prescription products that contain the analgesic ingredient
     acetaminophen, an ingredient also found in PAMPRIN and PREMSYN PMS. We are
     participating in an industry-wide effort to reassure the FDA that the
     current recommended dosing regimen is safe and effective and that proper
     labeling and public education by both OTC and prescription drug companies
     are the best policies to abate the FDA's concern. The FDA will address this
     issue in its effort to finalize the monograph on internal analgesic
     products. We believe the FDA may issue revised labeling requirements within
     the next year, perhaps prior to closure, that will cause the industry to
     relabel its analgesic products to better inform consumers of concomitant
     use.

          During the finalization of the monograph on sunscreen products the FDA
     chose to hold in abeyance specific requirements relating to the
     characterization of a product's ability to reduce UVA radiation. A final
     ruling on this matter would be expected to result in new UVA testing
     requirements and subsequent labeling changes related to sun protection
     factor, or SPF, ratings, and other labeling claims. We expect that the FDA
     may take action on this matter within the next six months. If implemented,
     the final rules would likely result in new testing requirements and revised
     labeling of our BULLFROG product line, and all of our competitors' products
     in the suncare category, within one year after issuance of the final rules.

          Our business is also regulated by the California Safe Drinking Water
     and Toxic Enforcement Act of 1986, known as Proposition 65. Proposition 65
     prohibits businesses from exposing consumers to chemicals that the state
     has determined cause cancer or reproduction toxicity without first giving
     fair and reasonable warning unless the level of exposure to the carcinogen
     or reproductive toxicant falls below prescribed levels. From time to time,
     one or more ingredients in our products could become subject to an inquiry
     under Proposition 65. If an ingredient is on the state's list as a
     carcinogen, it is possible that a claim could be brought, in which case we
     would be required to demonstrate that exposure is below a "no significant
     risk" level for consumers. Any such claims may cause us to incur
     significant expense, and we may face monetary penalties or injunctive
     relief, or both, or be required to reformulate our product to acceptable
     levels. The State of California under Proposition 65 is also considering
     the inclusion of titanium dioxide on the state's list of suspected
     carcinogens. Titanium dioxide has a long history of widespread use as an
     excipient in prescription and OTC pharmaceuticals, cosmetics, dietary
     supplements and skin care products and is an active ingredient in our
     BULLFROG Superblock products. We have participated in

                                       18
<PAGE>

     an industry-wide submission to the State of California, facilitated through
     the CHPA, presenting evidence that titanium dioxide presents "no
     significant risk" to consumers.

18.  EXECUTIVE SEVERANCE CHARGE
     --------------------------

          We entered into a separation agreement with our former president and
     chief operating officer on August 24, 2005. In connection with the
     separation agreement, we incurred a $2,269 executive severance charge
     consisting of a $909 lump-sum cash payment and a $1,360 non-cash charge as
     a result of accelerating the vesting of restricted stock.

19.  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
     --------------------------------------------

          The condensed consolidating financial statements, for the dates or
     periods indicated, of Chattem, Inc. ("Chattem"), Signal Investment &
     Management Co. ("Signal"), SunDex, LLC ("SunDex") and Chattem (Canada)
     Holdings, Inc. ("Canada"), the guarantors of the long-term debt of Chattem,
     and the non-guarantor direct and indirect wholly-owned subsidiaries of
     Chattem are presented below. Signal is 89% owned by Chattem and 11% owned
     by Canada. SunDex and Canada are wholly-owned subsidiaries of Chattem. The
     guarantees of Signal, SunDex and Canada are full and unconditional and
     joint and several. The guarantees of Signal, SunDex and Canada as of August
     31, 2005 arose in conjunction with Chattem's Revolving Credit Facility and
     Chattem's issuance of the Floating Rate Notes and the 7.0% Subordinated
     Notes (See Note 11). The maximum amount of future payments the guarantors
     would be required to make under the guarantees as of August 31, 2005 is
     $182,500.




















                                       19

<PAGE>
                                                                         Note 19
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATING BALANCE SHEETS
--------------------------------------

AUGUST 31, 2005
(Unaudited and in thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR      NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES        COMPANIES     ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
ASSETS
------

CURRENT ASSETS:
  Cash and cash equivalents                            $     30,097    $      1,978    $     11,063    $         --    $     43,138
  Accounts receivable, less allowances of $2,971             27,306           9,808           6,270          (9,808)         33,576
  Interest receivable                                            17             619              --            (636)             --
  Inventories                                                17,206           1,939           3,673              --          22,818
  Refundable income taxes                                     1,474              --              --              --           1,474
  Deferred income taxes                                       2,240              --              --              --           2,240
  Prepaid expenses and other current assets                   6,728              --           1,976            (540)          8,164
                                                       ------------    ------------    ------------    ------------    ------------
     Total current assets                                    85,068          14,344          22,982         (10,984)        111,410
                                                       ------------    ------------    ------------    ------------    ------------

PROPERTY, PLANT AND EQUIPMENT, NET                           27,463             775             390              --          28,628
                                                       ------------    ------------    ------------    ------------    ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product
   rights, net                                                  463         283,944              --         (62,290)        222,117
  Debt issuance costs, net                                    4,161              --              --              --           4,161
  Investment in subsidiaries                                274,703          33,000          70,266        (377,969)             --
  Note receivable                                                --          33,000              --         (33,000)             --
  Other                                                       5,115              --              --              --           5,115
                                                       ------------    ------------    ------------    ------------    ------------
     Total other noncurrent assets                          284,442         349,944          70,266        (473,259)        231,393
                                                       ------------    ------------    ------------    ------------    ------------

        TOTAL ASSETS                                   $    396,973    $    365,063    $     93,638    $   (484,243)   $    371,431
                                                       ============    ============    ============    ============    ============

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

CURRENT LIABILITIES:
  Accounts payable and other                           $      7,948    $         --    $      4,119    $         --    $     12,067
  Accrued liabilities                                        22,613           1,435           4,028         (10,984)         17,092
                                                       ------------    ------------    ------------    ------------    ------------
     Total current liabilities                               30,561           1,435           8,147         (10,984)         29,159
                                                       ------------    ------------    ------------    ------------    ------------

LONG-TERM DEBT                                              182,500              --          33,000         (33,000)        182,500
                                                       ------------    ------------    ------------    ------------    ------------

DEFERRED INCOME TAXES                                          (348)         30,875              --              --          30,527
                                                       ------------    ------------    ------------    ------------    ------------

OTHER NONCURRENT LIABILITIES                                  1,859              --              --              --           1,859
                                                       ------------    ------------    ------------    ------------    ------------

INTERCOMPANY ACCOUNTS                                        55,010         (56,571)          1,561              --              --
                                                       ------------    ------------    ------------    ------------    ------------

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized
     1,000, none issued                                          --              --              --              --              --
  Common shares, without par value, authorized
     50,000, issued and outstanding 19,920                   72,664              --              --              --          72,664
  Share capital of subsidiaries                                  --         329,704          43,209        (372,913)             --
  Retained earnings                                          57,509          59,620           7,757         (67,377)         57,509
  Unamortized value of restricted common shares
     issued                                                  (2,008)             --              --              --          (2,008)
  Cumulative other comprehensive income, net of taxes:
     Interest rate cap adjustment                              (499)             --              --              --            (499)
     Foreign currency translation adjustment                   (275)             --             (36)             31            (280)
                                                       ------------    ------------    ------------    ------------    ------------
     Total shareholders' equity                             127,391         389,324          50,930        (440,259)        127,386
                                                       ------------    ------------    ------------    ------------    ------------

     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $    396,973    $    365,063    $     93,638    $   (484,243)   $    371,431
                                                       ============    ============    ============    ============    ============
</TABLE>

                                       20
<PAGE>
                                                                         Note 19
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATING BALANCE SHEETS
--------------------------------------

NOVEMBER 30, 2004
(In thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR      NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES        COMPANIES     ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
ASSETS
------

CURRENT ASSETS:
  Cash and cash equivalents                            $     28,344    $      1,967    $      9,882    $         --    $     40,193
  Accounts receivable, less allowances of $1,682             26,727           8,733           5,376          (8,738)         32,098
  Interest receivable                                            --             619              --            (619)             --
  Inventories                                                16,681           3,020           1,989              --          21,690
  Refundable income taxes                                     4,702              --              --              --           4,702
  Deferred income taxes                                       4,308              --              --              --           4,308
  Prepaid expenses and other current assets                   3,489              --             194              --           3,683
                                                       ------------    ------------    ------------    ------------    ------------
     Total current assets                                    84,251          14,339          17,441          (9,357)        106,674
                                                       ------------    ------------    ------------    ------------    ------------

PROPERTY, PLANT AND EQUIPMENT, NET                           27,724             775             266              --          28,765
                                                       ------------    ------------    ------------    ------------    ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product
   rights, net                                                  763         287,087              --         (62,290)        225,560
  Debt issuance costs, net                                    5,174              --              --              --           5,174
  Investment in subsidiaries                                249,999          33,000          68,477        (351,476)             --
  Note receivable                                                --          33,000              --         (33,000)             --
  Other                                                       4,681              --             870              --           5,551
                                                       ------------    ------------    ------------    ------------    ------------
     Total other noncurrent assets                          260,617         353,087          69,347        (446,766)        236,285
                                                       ------------    ------------    ------------    ------------    ------------

        TOTAL ASSETS                                   $    372,592    $    368,201    $     87,054    $   (456,123)   $    371,724
                                                       ============    ============    ============    ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and other                           $     11,398    $         --    $      1,943    $         --    $     13,341
  Accrued liabilities                                        27,435           1,107           4,578          (9,357)         23,763
                                                       ------------    ------------    ------------    ------------    ------------
     Total current liabilities                               38,833           1,107           6,521          (9,357)         37,104
                                                       ------------    ------------    ------------    ------------    ------------

LONG-TERM DEBT                                              200,000              --          33,000         (33,000)        200,000
                                                       ------------    ------------    ------------    ------------    ------------

DEFERRED INCOME TAXES                                          (511)         26,243              --              --          25,732
                                                       ------------    ------------    ------------    ------------    ------------

OTHER NONCURRENT LIABILITIES                                  1,776              --              --              --           1,776
                                                       ------------    ------------    ------------    ------------    ------------

INTERCOMPANY ACCOUNTS                                        25,382         (25,484)            102              --              --
                                                       ------------    ------------    ------------    ------------    ------------

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized
     1,000, none issued                                          --              --              --              --              --
  Common shares, without par value, authorized
     50,000, issued and outstanding 19,882                   85,949              --              --              --          85,949
  Share capital of subsidiaries                                  --         329,705          41,100        (370,805)             --
  Retained earnings                                          23,888          36,630           6,115         (42,745)         23,888
  Unamortized value of restricted common shares
     issued                                                  (2,386)             --              --              --          (2,386)
  Cumulative other comprehensive income, net of taxes:
     Interest rate cap adjustment                              (316)             --              --              --            (316)
     Foreign currency translation adjustment                    (23)             --             216            (216)            (23)
                                                       ------------    ------------    ------------    ------------    ------------
     Total shareholders' equity                             107,112         366,335          47,431        (413,766)        107,112
                                                       ------------    ------------    ------------    ------------    ------------

        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     $    372,592    $    368,201    $     87,054    $   (456,123)   $    371,724
                                                       ============    ============    ============    ============    ============
</TABLE>

                                       21
<PAGE>
                                                                         Note 19
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
--------------------------------------------

FOR THE NINE MONTHS ENDED AUGUST 31, 2005
(Unaudited and in thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR      NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES        COMPANIES     ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
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
                                                       ============    ============    ============    ============    ============
</TABLE>






                                       22
<PAGE>
                                                                         Note 19
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
--------------------------------------------

FOR THE NINE MONTHS ENDED AUGUST 31, 2004
(Unaudited and in thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR      NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES        COMPANIES     ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
TOTAL REVENUES                                         $    158,569    $     55,984    $     13,360    $    (30,449)   $    197,464
                                                       ------------    ------------    ------------    ------------    ------------

COSTS AND EXPENSES:
  Cost of sales                                              45,211           7,701           5,401          (1,670)         56,643
  Advertising and promotion                                  44,765           8,089           3,424              --          56,278
  Selling, general and administrative                        31,711             339             781              --          32,831
  Litigation settlement                                       4,491              --              --              --           4,491
  Equity in subsidiary income                               (24,783)             --              --          24,783              --
                                                       ------------    ------------    ------------    ------------    ------------
     Total costs and expenses                               101,395          16,129           9,606          23,113         150,243
                                                       ------------    ------------    ------------    ------------    ------------

INCOME FROM OPERATIONS                                       57,174          39,855           3,754         (53,562)         47,221
                                                       ------------    ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest expense                                          (11,678)             --          (1,856)          1,856         (11,678)
  Investment and other income, net                              100           1,859           1,352          (3,106)            205
  Loss on early extinguishment of debt                      (12,958)             --              --              --         (12,958)
  Royalties                                                 (24,359)         (4,420)             --          28,779              --
  Corporate allocations                                       2,631          (2,545)            (86)             --              --
                                                       ------------    ------------    ------------    ------------    ------------
     Total other income (expense)                           (46,264)         (5,106)           (590)         27,529         (24,431)
                                                       ------------    ------------    ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                                   10,910          34,749           3,164         (26,033)         22,790
                                                       ------------    ------------    ------------    ------------    ------------

(BENEFIT FROM) PROVISION FOR INCOME TAXES                    (4,359)         11,467             413              --           7,521
                                                       ------------    ------------    ------------    ------------    ------------

NET INCOME                                             $     15,269    $     23,282    $      2,751    $    (26,033)   $     15,269
                                                       ============    ============    ============    ============    ============
</TABLE>






                                       23
<PAGE>
                                                                         Note 19

CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
------------------------------------------------

FOR THE NINE MONTHS ENDED AUGUST 31, 2005
(Unaudited and in thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR      NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES        COMPANIES     ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net income                                           $     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
     Tax benefit realized from stock option plans             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
                                                       ============    ============    ============    ============    ============
</TABLE>






                                       24
<PAGE>
                                                                         Note 19
CHATTEM, INC. AND SUBSIDIARIES
------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
------------------------------------------------

FOR THE NINE MONTHS ENDED AUGUST 31, 2004
(Unaudited and in thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR      NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES        COMPANIES     ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net income                                           $     15,269    $     23,282    $      2,751    $    (26,033)   $     15,269
  Adjustments to reconcile net income to net cash
  provided by operating activities:
     Depreciation and amortization                            4,549              --              60              --           4,609
     Deferred income taxes                                    1,260           5,020              --              --           6,280
     Tax benefit realized from stock option exercises         4,036              --              --              --           4,036
     Loss on early extinguishment of debt                    12,958              --              --              --          12,958
     Other, net                                                  33              --              20              --              53
     Equity in subsidiary income                            (26,033)             --              --          26,033              --
     Changes in operating assets and liabilities:
        Accounts receivable                                  (5,200)         (2,588)         (1,563)          2,588          (6,763)
        Interest receivable                                      --            (619)             --             619              --
        Inventories                                            (688)         (1,743)            441              --          (1,990)
        Refundable income taxes                                (844)             --               2              --            (842)
        Prepaid expenses and other current assets             1,223              --              (2)         (1,167)             54
        Accounts payable and accrued liabilities             (3,341)            678             377          (2,040)         (4,326)
                                                       ------------    ------------    ------------    ------------    ------------
           Net cash provided by operating activities          3,222          24,030           2,086              --          29,338
                                                       ------------    ------------    ------------    ------------    ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                 (1,753)             --             (10)             --          (1,763)
  Purchases of patents, trademarks and other product
   rights                                                        --              (8)             --              --              (8)
  Increase in note receivable                                    --         (33,000)             --          33,000              --
  (Increase) decrease in other assets, net                     (998)             --             404              --            (594)
                                                       ------------    ------------    ------------    ------------    ------------
           Net cash (used in) provided by investing
           activities                                        (2,751)        (33,008)            394          33,000          (2,365)
                                                       ------------    ------------    ------------    ------------    ------------

FINANCING ACTIVITIES:
  Repayment of long-term debt                              (212,288)             --              --              --        (212,288)
  Proceeds from long-term debt                              200,000              --              --              --         200,000
  Proceeds from borrowings under revolving credit
    facility                                                 25,000              --              --              --          25,000
  Repayments of revolving credit facility                   (25,000)             --              --              --         (25,000)
  Proceeds from exercise of stock options                     5,139              --              --              --           5,139
  Repurchase of common shares                                (5,015)             --              --              --          (5,015)
  Increase in debt issuance costs                            (5,729)             --              --              --          (5,729)
  Debt retirement costs                                      (7,861)             --              --              --          (7,861)
  Premium on interest rate cap agreement                     (1,375)             --              --              --          (1,375)
  Intercompany debt proceeds, net                                --              --          33,000         (33,000)             --
  Changes in intercompany accounts                           23,805          10,787         (34,592)             --              --
  Dividends paid                                                 --          (1,250)          1,250              --              --
                                                       ------------    ------------    ------------    ------------    ------------
           Net cash (used in) provided by financing
           activities                                        (3,324)          9,537            (342)        (33,000)        (27,129)
                                                       ------------    ------------    ------------    ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS                                                    --              --             (20)             --             (20)
                                                       ------------    ------------    ------------    ------------    ------------
CASH AND CASH EQUIVALENTS:
  (Decrease) increase for the period                         (2,853)            559           2,118              --            (176)
  At beginning of period                                     18,702           1,964           6,265              --          26,931
                                                       ------------    ------------    ------------    ------------    ------------
  At end of period                                     $     15,849    $      2,523    $      8,383    $         --    $     26,755
                                                       ============    ============    ============    ============    ============
</TABLE>

                                       25
<PAGE>
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in our 2004
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those described in our filings
with the Securities and Exchange Commission.

OVERVIEW

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

     o    Topical analgesics such as ICY HOT and ASPERCREME;

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

     o    SELSUN BLUE medicated dandruff shampoos and conditioner;

     o    Dietary supplements including DEXATRIM, GARLIQUE and NEW PHASE; and

     o    Other OTC and toiletry products such as PAMPRIN, a menstrual
          analgesic; HERPECIN-L, a lip care product; BENZODENT, a dental
          analgesic cream; and toiletries such as BULLFROG, a line of sunblocks;
          ULTRASWIM, a chlorine-removing shampoo; and SUN-IN, a hair lightener.

     Our products typically target niche markets that are often outside the core
product areas of larger companies where we believe we can achieve and sustain
significant market penetration through innovation and strong advertising and
promotion support. Many of our products are among the U.S. market leaders in
their respective categories. For example, our portfolio of topical analgesic
brands and our GOLD BOND medicated body powders have the leading U.S. market
share in these categories. We support our brands through extensive and
cost-effective advertising and promotion, the expenditures for which represented
approximately 27% of our total revenues in the nine months ended August 31,
2005. We sell our products nationally through mass merchandiser, drug and food
channels principally utilizing our own sales force.

     Our net income margin (net income/total revenues) was 13.9% and 13.2% for
the third quarter of fiscal 2005 and 2004, respectively, and 15.6% and 7.7% for
the nine months ended August 31, 2005 and 2004, respectively. Our adjusted net
income (net income excluding debt extinguishment, litigation settlement and
executive severance charges) margin (adjusted net income /total revenues) was
16.5% and 14.1% for the third quarter of fiscal 2005 and 2004, respectively, and
15.8% and 13.7% for the nine months ended August 31, 2005 and 2004,
respectively. Adjusted net income (net income excluding debt extinguishment,
litigation settlement and executive severance charges) margin is a non-GAAP
financial measure. We believe that disclosure of adjusted net income margin
provides investors with useful information regarding our financial performance
and allows for easier comparison with net income margin without the effect of
the charges in prior periods. We use this non-GAAP financial measure to analyze
our performance to forecasted and prior period results and for other internal
purposes. A reconciliation of adjusted net income to net income for the three
and nine months ended August 31, 2005 and 2004 is presented in the following
table:

                                       26
<PAGE>
<TABLE><CAPTION>
                                              For the Three Months Ended   For the Nine Months Ended
                                              --------------------------   -------------------------
                                                August 31,   August 31,      August 31,   August 31,
                                                   2005         2004            2005         2004
                                                 --------     --------        --------     --------
                                                    (dollars in thousands, except per share data)
<S>                                              <C>          <C>             <C>          <C>
Net income                                       $  9,449     $  8,734        $ 33,621     $ 15,269
Add:
      Loss on early extinguishment of debt           --           --               744       12,958
      Litigation settlement                           431          834          (2,401)       4,491
      Executive severance charges                   2,269         --             2,269         --

      Provision for income taxes                     (891)        (275)           (202)      (5,758)
                                                 --------     --------        --------     --------
Adjusted net income (excluding debt
  extinguishment, litigation settlement and
  executive severance charges)                   $ 11,258     $  9,293        $ 34,031     $ 26,960
                                                 ========     ========        ========     ========
Adjusted net income (excluding debt
  extinguishment, litigation settlement and
  executive severance charges) margin               16.5%        14.1%           15.8%        13.7%
                                                 ========     ========        ========     ========
</TABLE>

     EBITDA, earnings before interest, taxes, depreciation and amortization, is
a key non-GAAP financial measure used by us to measure operating performance but
may not be comparable to similarly titled measures reported by other companies.
The most directly comparable U.S. generally accepted accounting principles
("GAAP") financial measure is net income. EBITDA and adjusted EBITDA (EBITDA
excluding litigation settlement and executive severance charges) are used by us
to supplement net income as an indicator of operating performance and not as an
alternative to measures defined and required by GAAP. We consider EBITDA and
adjusted EBITDA as well as EBITDA margin and adjusted EBITDA margin as important
indicators of our operational strength and performance, including our ability to
pay interest, service debt and fund capital expenditures. We believe that
presenting EBITDA and EBITDA margin, both adjusted to exclude litigation
settlement and executive severance charges, provides investors with a useful
measure of our ongoing operating performance. Further, EBITDA adjusted to
exclude litigation settlement charges is one measure used in the calculation of
certain ratios to determine our compliance with the terms of our Revolving
Credit Facility. Our presentation of EBITDA and EBITDA margin, as we have
adjusted such measures, should not be construed as an inference that our future
results will be unaffected by items similar to those excluded from the
calculation of EBITDA and EBITDA margin, as we have adjusted such measures.
EBITDA and adjusted EBITDA are not measurements of financial performance and
liquidity under GAAP and should not be considered as alternatives to operating
income, net income and other measures of financial performance reported in
accordance with GAAP or as alternatives to cash flows provided by operating,
investing or financing activities.

     A reconciliation of EBITDA and adjusted EBITDA to net income is presented
in the following tables:
<TABLE><CAPTION>
                                                                  For the Three Months Ended
                                                  ----------------------------------------------------------
                                                                                    Dollar        Percentage
                                                  August 31,      August 31,       Increase        Increase
                                                     2005            2004         (Decrease)      (Decrease)
                                                  ----------      ----------      ----------      ----------
                                                                    (dollars in thousands)
<S>                                               <C>             <C>             <C>             <C>
Net income                                        $    9,449      $    8,734      $      715          8.2%
Add:
  Provision for income taxes                           4,654           4,002             652         16.3
  Interest expense, net                                3,058           3,239            (181)        (5.6)
  Depreciation and amortization less
    amounts included in interest                       1,094           1,341            (247)       (18.4)
                                                  ----------      ----------      ----------
EBITDA                                            $   18,255      $   17,316      $      939          5.4
                                                  ==========      ==========      ==========
  Executive severance charges                          2,269             --            2,269        100.0
  Litigation settlement                                  431             834            (403)       (48.3)
                                                  ----------      ----------      ----------
Adjusted EBITDA (excluding litigation
 settlement and executive severance charges)      $   20,955      $   18,150      $    2,805         15.5
                                                  ==========      ==========      ==========

EBITDA margin (EBITDA/total revenues)                  26.8%           26.2%
                                                  ==========      ==========
Adjusted EBITDA margin (Adjusted EBITDA
  /total revenues)                                     30.7%           27.4%
                                                  ==========      ==========
</TABLE>

                                       27
<PAGE>
<TABLE><CAPTION>
                                                                  For the Nine Months Ended
                                                  ----------------------------------------------------------
                                                                                    Dollar        Percentage
                                                  August 31,      August 31,       Increase        Increase
                                                     2005            2004         (Decrease)      (Decrease)
                                                  ----------      ----------      ----------      ----------
                                                                    (dollars in thousands)
<S>                                               <C>             <C>             <C>             <C>
Net income                                        $   33,621      $   15,269      $   18,352         120.2%
Add:
  Provision for income taxes                          16,560           7,521           9,039         120.2
  Interest expense, net (1)                           10,353          24,431         (14,078)        (57.6)
  Depreciation and amortization less
    amounts included in interest                       3,820           3,958            (138)         (3.5)
                                                  ----------      ----------      ----------
EBITDA                                            $   64,354        $ 51,179      $   13,175          25.7
                                                  ==========      ==========      ==========
Executive severance charges                            2,269             --            2,269         100.0
Litigation settlement                                 (2,401)          4,491          (6,892)       (153.5)
                                                  ----------      ----------      ----------
Adjusted EBITDA (excluding litigation
  settlement and executive severance
  charges)                                        $   64,222      $   55,670      $    8,552          15.4
                                                  ==========      ==========      ==========

EBITDA margin (EBITDA/total revenues)                  29.9%           25.9%
                                                  ==========      ==========
Adjusted EBITDA margin
   (Adjusted EBITDA/total revenues)                    29.8%           28.2%
                                                  ==========      ==========
</TABLE>

(1)  The nine months ended August 31, 2005 and 2004 includes a loss on early
extinguishment of debt of $0.7 million and $13.0 million, respectively.

DEVELOPMENTS DURING FISCAL 2005

     In the first quarter of fiscal 2005, we introduced the following product
line extensions: ASPERCREME Odor-Free Therapy Back and Body Patch, GOLD BOND
Ultimate Comfort Powder, PHISODERM PH2O, NEW PHASE Extra Strength, DEXATRIM Max
and BULLFROG Kids UV Defender.

     On December 13, 2004, we entered into a term sheet of settlement with
Interstate Fire & Casualty Company ("Interstate") with regard to Interstate's
lawsuit to rescind its $25.0 million of excess coverage for product liability
claims relating to DEXATRIM products containing PPA. On March 18, 2005, we
entered into a settlement and coverage-in-place agreement with Interstate
consistent with the term sheet of settlement (the "Settlement Agreement"). In
accordance with the Settlement Agreement, Interstate will provide coverage of
DEXATRIM PPA claims that are covered by its policy after $78.5 million has been
paid toward covered claims. If the $78.5 million threshold is met, Interstate
has agreed to pay 100% of the next $4.0 million of claims covered by its policy;
75% of the next $8.5 million of such claims; and 50% of the last $12.5 million
of such claims. We are responsible for any claims not covered by the Interstate
policy either because the alleged injury did not occur before May 31, 2001, or
the claim was first made against us after May 31, 2004.

     In the first quarter of fiscal 2005, we sold our SELSUN business in certain
countries in Africa and Asia to The Mentholatum Co., Inc. We maintain our rights
to SELSUN in Australia, New Zealand and worldwide (except India). The divested
territory was not compatible with our strategic goals for the remainder of our
international SELSUN operations and contributed only $1.3 million in net sales
in fiscal 2004.

     During the second quarter of fiscal 2005, we repurchased $17.5 million of
our 7.0% Senior Subordinated Notes due March 1, 2014 ("7.0% Subordinated Notes")
in the open market at an average premium of 1.6% over the principal amount of
the notes. The repurchases resulted in a loss on early extinguishment of debt of
$0.7 million. The outstanding balance of the remaining 7.0% Subordinated Notes
was reduced to $107.5 million.

     Prior to the fourth quarter of fiscal 2004, we were unable to estimate
reasonably the amount of liability related to the DEXATRIM litigation, due to
the significant assumptions and uncertainty involved in estimating the value of
the claims involved. As a result of the final approval of the DEXATRIM PPA
settlement on November 12, 2004 and the term sheet of settlement reached with
Interstate on December 13, 2004, as of November 30, 2004 we were able to
estimate reasonably the probable loss related to the DEXATRIM litigation. Based
upon the then-estimated litigation settlement costs relating to our DEXATRIM
products, we recorded a litigation settlement charge of $11.3 million in the
fourth quarter of fiscal 2004, of which $9.5 million was included in accrued
liabilities in our Consolidated Balance Sheet as of November 30, 2004.

     During the second quarter of fiscal 2005, we resolved approximately 125, or
approximately 75%, of the alleged stroke claims submitted in the settlement. The
value of these claims was determined through negotiations with representatives
of the claimants during which we valued claims using the settlement matrix
contained in the court-approved class action settlement

                                       28
<PAGE>

agreement. Based on the agreed upon values of the resolved stroke claims as
compared to previous estimates, the number of claims actually submitted in
accordance with the requirements of the settlement agreement and the estimated
remaining settlement costs, we revised our previous estimate of the DEXATRIM
litigation settlement costs. As a result of the revised estimate, in the second
quarter of fiscal 2005 we reversed $6.0 million of the litigation settlement
charge that was previously taken in the fourth quarter of fiscal 2004. During
the second quarter of fiscal 2005, we incurred and recorded $1.0 million of
legal expenses related to the DEXATRIM litigation offset by a $0.5 million
reimbursement from the settlement trust for previously incurred administrative
costs.

     During the third quarter of fiscal 2005, we resolved substantially all of
the remaining claims submitted in the DEXATRIM PPA settlement and now estimate
that the total cost of the DEXATRIM settlement will be approximately $56.0
million. As previously reported, a total of $70.9 million has been funded into a
settlement trust by our insurers and Sidmak Laboratories, Inc. ("Sidmak"), the
manufacturer of DEXATRIM products containing PPA, and is available to pay claims
in the settlement. Any funds remaining in the settlement trust after all claims
and expenses of the trust have been paid will be distributed as approved by the
court in accordance with the class action settlement agreement and our
settlement agreements with each of Kemper Indemnity Insurance Company and
Sidmak. We currently expect that after all claims and expenses of the settlement
trust have been paid, we could recover up to approximately $8.5 million from the
settlement trust. If realized, this potential recovery is estimated to occur in
the fourth quarter of 2005 or the first quarter of fiscal 2006. We currently do
not expect to record any additional charges relative to the settlement of the
PPA litigation, except for legal expenses that will be recorded in the period
incurred. During the third fiscal quarter, we incurred and recorded $0.4 million
of legal expenses related to the DEXATRIM litigation.

     Also during the third quarter of fiscal 2005, we entered into a settlement
agreement with the DELACO Company ("DELACO"), successor by merger to the
Thompson Medical Company, Inc., which owned the DEXATRIM brand prior to December
21, 1998 (the "DELACO Agreement"). Pursuant to the DELACO Agreement, we will
accept liability for all claims against DELACO and its predecessor, Thompson
Medical Company, Inc., or us relating to DEXATRIM products involving an injury
date after December 21, 1998 and will hold the DELACO bankruptcy estate
completely harmless from any such claims. In exchange, a settlement trust to be
established under DELACO's bankruptcy plan will pay us $8.75 million and will
assume potential liability for all claims related to DEXATRIM products alleging
injury dates on or before December 21, 1998. The DELACO Agreement was approved
by the Bankruptcy Court on July 28, 2005. The DELACO Agreement and our receipt
of $8.75 million from the DELACO settlement trust is conditioned upon final
confirmation and approval of the DELACO bankruptcy plan and funding of the
DELACO settlement trust by the insurance companies and other parties obligated
to fund the trust. We currently expect the confirmation hearing to occur before
the end of calendar year 2005.

     As previously announced, we entered into a separation agreement with our
former president and chief operating officer on August 24, 2005. In connection
with the separation agreement, we incurred a $2.3 million executive severance
charge consisting of a $0.9 million lump-sum cash payment and a $1.4 million
non-cash charge as a result of accelerating the vesting of restricted stock. We
also announced that Robert E. Bosworth was named our president and chief
operating officer effective September 19, 2005.

                                       29
<PAGE>
RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain items
from our Condensed Consolidated Statements of Income expressed as a percentage
of total revenues:
<TABLE><CAPTION>
                                            For the Three Months Ended          For the Nine Months Ended
                                         ---------------------------------   ---------------------------------
                                         August 31, 2005   August 31, 2004   August 31, 2005   August 31, 2004
                                         ---------------   ---------------   ---------------   ---------------
<S>                                          <C>               <C>               <C>               <C>
TOTAL REVENUES                                100.0%            100.0%            100.0%            100.0%
                                             ------            ------            ------            ------

COSTS AND EXPENSES:
  Cost of sales                                27.2              28.9              27.8              28.7
  Advertising and promotion                    25.9              28.2              27.3              28.5
  Selling, general and administrative          17.8              17.4              16.9              16.6
  Executive severance charges                   3.3               --                1.0               --
  Litigation settlement                         0.6               1.3              (1.1)              2.3
                                             ------            ------            ------            ------
    Total costs and expenses                   74.8              75.8              71.9              76.1
                                             ------            ------            ------            ------

INCOME FROM OPERATIONS                         25.2              24.2              28.1              23.9
                                             ------            ------            ------            ------

OTHER INCOME (EXPENSE):
  Interest expense                             (4.9)             (5.0)             (4.8)             (5.9)
  Investment and other income, net              0.4               0.1               0.3               0.1
  Loss on early extinguishment of debt          --                --               (0.3)             (6.6)
                                             ------            ------            ------            ------
     Total other income (expense)              (4.5)             (4.9)             (4.8)            (12.4)
                                             ------            ------            ------            ------

INCOME BEFORE INCOME TAXES                     20.7              19.3              23.3              11.5

PROVISION FOR INCOME TAXES                      6.8               6.1               7.7               3.8
                                             ------            ------            ------            ------

NET INCOME                                     13.9%             13.2%             15.6%              7.7%
                                             ======            ======            ======            ======
</TABLE>

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to use estimates. Several
different estimates or methods can be used by management that might yield
different results. The following are the significant estimates used by
management in the preparation of the August 31, 2005 condensed consolidated
financial statements:

     ALLOWANCE FOR DOUBTFUL ACCOUNTS

     As of August 31, 2005, an estimate was made of the collectibility of the
outstanding accounts receivable balances. This estimate requires the utilization
of outside credit services, knowledge about the customer and the customer's
industry, new developments in the customer's industry and operating results of
the customer as well as general economic conditions and historical trends. When
all these facts are compiled, a judgment as to the collectibility of the
individual account is made. Many factors can impact this estimate, including
those noted in this paragraph. The adequacy of the estimated allowance may be
impacted by the deterioration in the financial condition of a large customer,
weakness in the economic environment resulting in a higher level of customer
bankruptcy filings or delinquencies and the competitive environment in which the
customer operates. During the nine months ended August 31, 2005, we performed a
detailed assessment of the collectibility of trade accounts receivable and
reduced our estimate of allowance for doubtful accounts by approximately $0.3
million, which resulted in a decrease to selling, general and administrative
expense in our condensed consolidated financial statements.

     REVENUE RECOGNITION

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

                                       30
<PAGE>

     In accordance with industry practice, we allow our customers to return
unsold sun care products (i.e. BULLFROG and SUN IN lines of products) at the end
of the sun care season. We record the sales at the time the products are shipped
and title transfers. At the time of shipment, we also record a reduction in
sales and an allowance on our balance sheet for anticipated returns based upon
an estimated return level. The level of returns may fluctuate from our estimates
due to several factors including weather conditions, customer inventory levels
and competitive conditions. Each percentage point change in our return rate
would impact our net sales by approximately $ 0.2 million. As a result of higher
sales volumes in the nine months ended August 31, 2005 and 2004, we increased
our estimate of seasonal returns by approximately $0.8 million and $0.4 million,
respectively, which resulted in a decrease to net sales in our condensed
consolidated financial statements. During the nine months ended August 31, 2005,
as a result of our estimate of customer inventory levels and based on historical
non-seasonal product returns, we increased our estimate of non-seasonal returns
by approximately $0.7 million, which resulted in a decrease to net sales in our
condensed consolidated financial statements, as compared to a $0.7 million
decrease in our estimate for the nine months ended August 31, 2004.

     We routinely enter into agreements with our customers to participate in
promotional programs. These programs generally take the form of coupons,
temporary price reductions, scan downs, display activity and participations in
advertising vehicles provided uniquely by the customer. The ultimate cost of
these programs is often variable based on the number of units actually sold.
Estimated unit sales of a product under a promotional program are used to
estimate the total cost of the program, which is recorded as a reduction of
sales. Actual results can differ from the original estimate. We also consider
customer delays in requesting promotional program payments when evaluating the
required accrual. Many customers audit programs significantly after the date of
performance to determine the actual amount due and make a claim for
reimbursement at that time. As a result, changes in the unit sales trends under
promotional programs as well as the timing of payments could result in changes
in the accrual. During the nine months ended August 31, 2005 and 2004, primarily
as a result of the sales volume impact on variable based programs, we decreased
our estimate of promotional accruals by approximately $0.8 million and $0.9
million, respectively, which resulted in an increase to net sales in our
condensed consolidated financial statements.

     INCOME TAXES

     We account for income taxes using the asset and liability approach as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". This approach requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in our condensed consolidated financial statements or
tax returns. Using the enacted tax rates in effect for the year in which the
differences are expected to reverse, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and the tax
basis of an asset or liability. We record income tax expense in our condensed
consolidated financial statements based on an estimated annual effective income
tax rate. Our effective tax rate for the three and nine months ended August 31,
2005 was 33%, as compared to 31% and 33% in the three and nine months ended
August 31, 2004, respectively. The rate for the three and nine months ended
August 31, 2005 reflects the implementation of a number of foreign and state tax
planning initiatives, which include our determination during the third quarter
of fiscal 2004 to reinvest indefinitely all undistributed earnings of Chattem
Canada, a wholly-owned subsidiary.

     Undistributed earnings of Chattem Canada amounted to approximately $0.6
million and $1.3 million for the three and nine months ended August 31, 2005,
respectively. These earnings are considered to be reinvested indefinitely and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, we would be subject to U.S. income taxes (subject to an adjustment
for foreign tax credits).

     For a summary of our significant accounting policies, see Note 2 of Notes
to Consolidated Financial Statements included in our Annual Report on Form 10-K
for the year ended November 30, 2004 filed with the Securities and Exchange
Commission.

                                       31
<PAGE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2005 AND 2004
---------------------------------------------------------
     To facilitate discussion of our operating results for the three months
ended August 31, 2005 and 2004, we have included the following selected data
from our Condensed Consolidated Statements of Income:
<TABLE><CAPTION>
                                                                            Increase (Decrease)
                                                                         -----------------------
                                                  2005         2004        Amount     Percentage
                                               ----------   ----------   ----------   ----------
                                                             (dollars in thousands)
<S>                                            <C>          <C>          <C>               <C>
Domestic net sales                             $   61,787   $   59,839   $    1,948        3.3%
International revenues (including royalties)        6,428        6,296          132        2.1
Total revenues                                     68,215       66,135        2,080        3.1
Cost of sales                                      18,575       19,135         (560)      (2.9)
Advertising and promotion expense                  17,657       18,666       (1,009)      (5.4)
Selling, general and administrative expense        12,122       11,525          597        5.2
Executive severance charges                         2,269         --          2,269      100.0
Litigation settlement                                 431          834         (403)     (48.3)
Interest expense                                    3,332        3,284           48        1.5
Net  income                                         9,449        8,734          715        8.2
</TABLE>

     DOMESTIC NET SALES

     Domestic net sales for the three months ended August 31, 2005 increased
$1.9 million, or 3.3%, as compared to the comparable period of 2004. A
comparison of domestic net sales for the categories of products included in our
portfolio of OTC healthcare products is as follows:
<TABLE><CAPTION>
                                                                            Increase (Decrease)
                                                                         -----------------------
                                                  2005         2004        Amount     Percentage
                                               ----------   ----------   ----------   ----------
                                                            (dollars in thousands)
<S>                                            <C>          <C>          <C>              <C>
Topical analgesics                             $   20,965   $   20,118   $      847       4.2%
Medicated skin care products                       15,775       17,257       (1,482)     (8.6)
Dietary supplements                                 8,523        7,774          749       9.6
Medicated dandruff shampoos and
   conditioner                                      7,653        6,480        1,173      18.1
Other OTC and toiletry products                     8,871        8,210          661       8.1
                                               ----------   ----------   ----------
  Total                                        $   61,787   $   59,839   $    1,948       3.3
                                               ==========   ==========   ==========
</TABLE>
     Net sales growth in the topical analgesic category was led by 22% and 12%
increases in sales of ASPERCREME and CAPZASIN, respectively. ASPERCREME
continued to benefit from the launch of the Odor-Free Therapy Back and Body
Patch, and CAPZASIN continued to experience strong market share growth. The
balance of the portfolio, including ICY HOT, remained essentially flat, as the
ICY HOT Medicated Sleeve reached its first anniversary in distribution.

     The decrease in net sales in the medicated skin care products category was
due to a decline in sales of GOLD BOND and PHISODERM. GOLD BOND net sales
declined 4% as stronger adult powder sales, led by GOLD BOND Ultimate Comfort
Powder, and foot product sales were offset by lost sales from discontinued first
aid and antifungal foot swab products. In addition, GOLD BOND sales were
negatively impacted by the timing of display activity at a major retailer.
PHISODERM net sales declined 32%, primarily reflecting a decrease in sales in
the base acne and skin care business offset by the continued benefits from the
new PH2O product line.

     Net sales for the dietary supplements category was led by a 12% increase in
net sales of DEXATRIM, reflecting the strong performance of the new DEXATRIM MAX
diet pill, partially offset by continued declining sales of the DEXATRIM ALL IN
ONE BAR. Net sales of GARLIQUE increased 24% due to an effective new advertising
campaign.

     Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased 18%
compared to the same period of fiscal 2004 as a result of the continued growth
in SELSUN BLUE users as well as reduced consumer promotion spending.

     The increase in net sales for the other OTC and toiletry products category
was due primarily to the strength of our seasonal products, BULLFROG, SUN-IN and
ULTRASWIM. BULLFROG sales increased 25% due to improved distribution and strong
sales of the new Kids UV Defender product line.

                                       32
<PAGE>

     Domestic sales variances were principally the result of changes in unit
sales volumes with the exception of certain selected products, for which we
implemented a unit sales price increase.

     INTERNATIONAL REVENUES

     For the third quarter of fiscal 2005, international revenues increased $0.1
million, or 2.1%, as compared to the third quarter of fiscal 2004 principally
due to the introduction of ICY HOT in Canada and strengthening distributor sales
of SELSUN in certain European and Middle Eastern countries offset by sales
declines in the UK and certain Latin American markets. Sales variances for
international operations were principally the result of changes in unit sales
volumes.

     COST OF SALES

     Cost of sales as a percentage of total revenues was 27.2% for the third
quarter of fiscal 2005 as compared to 28.9% for the third quarter of fiscal
2004. Gross margin of 72.8% was attributable to favorable product mix and price
increases for several products, offset by increases in raw materials and
transportation costs.

     ADVERTISING AND PROMOTION EXPENSE

     Advertising and promotion expenses in the third quarter of fiscal 2005
decreased $1.0 million, or 5.4%, as compared to the same quarter of fiscal 2004
due primarily to the timing of new product launches.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expenses increased $0.6 million, or
5.2%, as compared to the same quarter of fiscal 2004. Selling, general and
administrative expenses were 17.8% and 17.4% of total revenues for the third
quarter of fiscal 2005 and 2004, respectively. An increase in sales was
primarily responsible for the increase in selling expense. The increase in
general and administrative expenses was largely a result of an increase in new
product development expenses and compensation expense related to employee
incentive plans offset by decreased insurance costs.

     EXECUTIVE SEVERANCE CHARGES

     During the third quarter of fiscal 2005, we incurred a $2.3 million
executive severance charge expense related to a separation agreement entered
into with our former president and chief operating officer. The $2.3 million
severance charge consists of a $0.9 million lump-sum cash payment and a $1.4
million non-cash charge as a result of accelerating the vesting of restricted
stock.

     LITIGATION SETTLEMENT ITEMS

     Litigation settlement items decreased $0.4 million as compared to the same
quarter of fiscal 2004. The litigation settlement charge in the third quarter of
fiscal 2005 represents legal expenses related to the settlement of DEXATRIM
litigation.

     INTEREST EXPENSE

     Interest expense remained essentially flat compared to the same quarter of
fiscal 2004. The interest savings from the reduction of our outstanding debt as
a result of the repurchase of $17.5 million of our 7.0% Subordinated Notes in
the second quarter of fiscal 2005 was offset by higher interest rates on the
Floating Rate Notes compared to the same quarter of fiscal 2004. Unless and
until our indebtedness is reduced substantially, interest expense will continue
to represent a significant percentage of our total revenues.

                                       33
<PAGE>

COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2005 AND 2004
--------------------------------------------------------

     To facilitate discussion of our operating results for the nine months ended
August 31, 2005 and 2004, we have included the following selected data from our
Condensed Consolidated Statements of Income:
<TABLE><CAPTION>
                                                                            Increase (Decrease)
                                                                         -----------------------
                                                  2005        2004         Amount     Percentage
                                               ----------   ----------   ----------   ----------
                                                             (dollars in thousands)
<S>                                            <C>          <C>          <C>          <C>
Domestic net sales                             $  196,039   $  179,130   $   16,909         9.4%
International revenues (including royalties)       19,394       18,334        1,060         5.8
Total revenues                                    215,433      197,464       17,969         9.1
Cost of sales                                      59,951       56,643        3,308         5.8
Advertising and promotion expense                  58,739       56,278        2,461         4.4
Selling, general and administrative expense        36,341       32,831        3,510        10.7
Executive severance charges                         2,269          --         2,269       100.0
Litigation settlement                              (2,401)       4,491       (6,892)     (153.5)
Interest expense                                   10,285       11,678       (1,393)      (11.9)
Loss on early extinguishment of debt                  744       12,958      (12,214)      (94.3)
Net income                                         33,621       15,269       18,352       120.2
</TABLE>

     DOMESTIC NET SALES

     Domestic net sales for the nine months ended August 31, 2005 increased
$16.9 million, or 9.4%, as compared to the corresponding period of 2004. A
comparison of domestic net sales for the categories of products included in our
portfolio of OTC healthcare products is as follows:
<TABLE><CAPTION>
                                                                            Increase (Decrease)
                                                                         -----------------------
                                                  2005        2004         Amount     Percentage
                                               ----------   ----------   ----------   ----------
                                                            (dollars in thousands)
<S>                                            <C>          <C>          <C>              <C>
Topical analgesics                             $   67,415   $   53,964   $   13,451       24.9%
Medicated skin care products                       49,232       47,920        1,312       2.7
Dietary supplements                                27,467       26,654          813       3.1
Medicated dandruff shampoos and conditioner        25,341       23,107        2,234       9.7
Other OTC and toiletry products                    26,584       27,485         (901)     (3.3)
                                               ----------   ----------   ----------
  Total                                        $  196,039   $  179,130   $   16,909       9.4
                                               ==========   ==========   ==========
</TABLE>

     Net sales growth in the topical analgesic category was led by 56% and 21%
increases in sales of ASPERCREME and ICY HOT, respectively. ASPERCREME's sales
increase was driven by the launch of the Odor-Free Therapy Back and Body Patch.
ICY HOT continued to benefit from the strength of the ICY HOT Medicated Sleeve
and the Back Patch and the advertising campaign featuring Shaquille O'Neal. Net
sales growth in this category also resulted from 19%, 16% and 10% sales
increases in CAPZASIN, SPORTSCREME and FLEXALL, respectively.

     Net sales growth in the medicated skin care products category resulted from
a 7% increase in the GOLD BOND franchise. GOLD BOND sales growth primarily was
attributable to 29%, 7% and 7% increases from the lotion, foot care and powder
product lines, respectively, offset by lost sales from discontinued first aid
and antifungal foot swab products. The increase in sales from the GOLD BOND
lotion line of products was attributable to increased sales of GOLD BOND
ULTIMATE Healing Skin Therapy Lotion. The increase in net sales of GOLD BOND
foot care products resulted from increased distribution, and GOLD BOND powder
sales were driven by the launch of GOLD BOND ULTIMATE Comfort Powder. Although
PHISODERM benefited from the launch of the new PH2O line, this was more than
offset by weakness in sales and lost distribution from its acne and base skin
care business.

     Net sales growth in the dietary supplements category was led by 19% and 13%
increases in net sales of NEW PHASE and GARLIQUE, respectively, offset by a 4%
decrease in DEXATRIM. Net sales of GARLIQUE increased due to effective new
advertising, and net sales of NEW PHASE increased due to the introduction of NEW
PHASE Extra Strength in the first quarter of fiscal 2005. The decrease in net
sales of DEXATRIM resulted from declining sales of the DEXATRIM ALL IN ONE BAR
partially offset by sales of the new DEXATRIM MAX diet pill.

     Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased 10%
reflecting continued growth in SELSUN BLUE users and an effective advertising
campaign.

                                       34
<PAGE>

     The decrease in net sales for the other OTC and toiletry products category
was due primarily to sales declines of PAMPRIN and PREMSYN, which both lost
distribution at a major retailer. The decrease was partially offset by an
increase in net sales of SUN-IN and ULTRASWIM as a result of expanded
distribution.

     Domestic sales variances were principally the result of changes in unit
sales volumes with the exception of certain selected products, for which we
implemented a unit sales price increase.

     INTERNATIONAL REVENUES

     For the nine months ended August 31, 2005, international revenues increased
$1.1 million, or 5.8%, as compared to the same period in fiscal 2004 principally
due to the introduction of ICY HOT in Canada and strengthening distributor sales
of SELSUN in certain European and Middle Eastern countries offset by sales
declines in the UK and certain Latin American markets. Sales variances for
international operations were principally the result of changes in unit sales
volumes.

     COST OF SALES

     Cost of sales as a percentage of total revenues was 27.8% for the nine
months ended August 31, 2005 as compared to 28.7% for the comparable period of
fiscal 2004. Gross margin of 72.2% was attributable to favorable product mix and
price increases for several products, offset by increases in raw materials and
transportation costs.

     ADVERTISING AND PROMOTION EXPENSE

     Advertising and promotion expenses in the nine months ended August 31, 2005
increased $2.5 million, or 4.4%, as compared to the same period in fiscal 2004
and were 27.3% of total revenues for the nine months ended August 31, 2005
compared to 28.5% for the comparable period of fiscal 2004. The decrease in
advertising and promotion expense as a percentage of revenue represents a more
effective use of advertising to generate sales. Support for new product
introductions drove an increase in advertising and promotion expenditures in the
current nine month period for PHISODERM, ASPERCREME, GOLD BOND powder, BULLFROG
and NEW PHASE.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expenses increased $3.5 million, or
10.7%, as compared to the same period of fiscal 2004. Selling, general and
administrative expenses were 16.9% and 16.6% of total revenues for the nine
months ended August 31, 2005 and 2004, respectively. An increase in sales was
primarily responsible for the increase in selling expense. In addition, freight
expenses increased due to an increase in fuel costs. The increase in general and
administrative expenses was largely a result of increases in new product
development expenses, compensation expense and insurance expense.

     EXECUTIVE SEVERANCE CHARGES

     During the third quarter of fiscal 2005, we incurred a $2.3 million
executive severance charge related to a separation agreement entered into with
our former president and chief operating officer. The $2.3 million severance
charge consists of a $0.9 million lump-sum cash payment and a $1.4 million
non-cash charge as a result of accelerating the vesting of restricted stock.

     LITIGATION SETTLEMENT ITEMS

     Litigation settlement items decreased $6.9 million as compared to the same
period of fiscal 2004 due to a change in estimate of $6.0 million related to the
DEXATRIM litigation recorded in the second quarter of fiscal 2005. In the nine
months ended August 31, 2005, legal expenses and ephedrine-related claims of
$4.1 million related to the settlement of DEXATRIM litigation were offset by a
$0.5 million reimbursement from the settlement trust for previously incurred
administrative costs as compared to charges of $4.5 million in the prior year
period relating to legal and administrative costs and settlement costs relating
to a settlement with one of our insurance providers.

     INTEREST EXPENSE

     Interest expense decreased $1.4 million, or 11.9%, in the nine months ended
August 31, 2005 as compared to the same period in fiscal 2004. The decrease was
largely the result of lower interest rates and a reduction in outstanding debt
as a result of our debt refinancing completed during the first quarter of fiscal
2004. Unless and until our indebtedness is reduced substantially, interest
expense will continue to represent a significant percentage of our total
revenues.

                                       35
<PAGE>

     LOSS ON EARLY EXTINGUISHMENT OF DEBT

     During the second quarter of fiscal 2005, we repurchased $17.5 million of
our 7.0% Subordinated Notes, which resulted in a loss on early extinguishment of
debt of $0.7 million.

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

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

     Net cash provided by operating activities increased to $37.9 million for
the nine months ended August 31, 2005 from $29.3 million for the same period of
2004. The increase in cash provided by operating activities for the nine months
ended August 31, 2005 was due primarily to the loss on early extinguishment of
debt of $13.0 million incurred in the prior year compared to $0.7 million
incurred in the current year. Increased refundable income taxes and a smaller
decrease in accounts receivable for the nine months ended August 31, 2005
compared to the prior year period, also contributed to the increase in cash flow
from operations for the current year over the same prior year period. These
increases were partially offset by a decrease in the tax benefit realized from
stock option exercises, a decrease in prepaid expenses and other current assets,
and a decrease in accounts payable and accrued liabilities for the nine months
ended August 31, 2005 compared to the same prior year period.

     Investing activities provided cash of $0.4 million and used cash of $2.4
million in the nine months ended August 31, 2005 and 2004, respectively. Cash
was provided in the current period primarily due to proceeds received from the
sale of our SELSUN business in certain countries in Africa and Asia.

     Financing activities used cash of $35.2 million and $27.1 million in the
nine months ended August 31, 2005 and 2004, respectively. The increase in cash
used in the current period primarily was attributable to the $21.7 million
repurchase of common stock as compared to the prior period reflecting the
refinancing transaction.

     In January 2005, our board of directors authorized the repurchase of $30.0
million of our common stock under our stock buyback program. 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. During the nine months ended August 31, 2005, we repurchased
547,066 shares at a total cost of $21.7 million pursuant to our buyback
authority. As of August 31, 2005, $23.0 million of the stock buyback authority
was available. We, however, are limited in our ability to repurchase shares due
to restrictions under the terms of our Revolving Credit Facility, Floating Rate
Notes and 7.0% Subordinated Notes. As of September 29, 2005, we have repurchased
335,201 shares of our common stock for $12.4 million subsequent to August 31,
2005.

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

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

     Historically, our primary foreign operations have been conducted through
our Canadian and United Kingdom ("U.K.") subsidiaries. Effective November 1,
2004, we transitioned our European business to Chattem Global Consumer Products
Limited, a wholly-owned subsidiary located in Limerick, Ireland. The functional
currencies of these subsidiaries are Canadian dollars, British pounds and Euros,
respectively. Fluctuations in exchange rates can impact operating results,
including total revenues and expenses, when translations of the subsidiary
financial statements are made in accordance with SFAS No. 52, "Foreign Currency
Translation". For the nine months ended August 31, 2005 and 2004, these
subsidiaries accounted for 7% of total revenues and 6% and 3% of total assets,
respectively. It has not been our practice to hedge our assets and liabilities
in Canada, the U.K. and Ireland or our intercompany transactions due to the
inherent risks associated with foreign currency hedging transactions and the
timing of payments between us and our foreign subsidiaries. Following our
acquisition of SELSUN BLUE, which is sold in approximately 70 foreign countries,
our international business operations have expanded significantly, which has
increased our exposure to fluctuations in foreign exchange rates. During fiscal
2004, a portion of these foreign sales was reflected as royalties, which have
been paid to us in U.S. dollars. In addition, Abbott has continued to supply a
portion of our international product, and beginning April 1, 2004, Abbott began
billing us in local currencies. Historically, gains or losses from foreign
currency transactions have not had a material impact on our operating results.
Gains of $0.1 million and $7,000 for the nine months ended August 31, 2005 and
2004, respectively, resulted from foreign currency transactions and are included
in selling, general and administrative expenses in the Condensed Consolidated
Statements of Income.

                                       36
<PAGE>

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

     In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN
46R"), which supercedes Interpretation No. 46, "Consolidation of Variable
Interest Entities" issued in January 2003. FIN 46R requires a company to
consolidate a variable interest entity ("VIE"), as defined, when the company
will absorb a majority of the VIE's expected losses, receives a majority of the
VIE's expected residual returns or both. FIN 46R also requires consolidation of
existing, non-controlled affiliates if the VIE is unable to finance its
operations without investor support, or where the other investors do not have
exposure to the significant risks and rewards of ownership. FIN 46R applies
immediately to a VIE created or acquired after January 31, 2003. For a VIE
created before February 1, 2003, FIN 46R applies in the first fiscal year or
interim period beginning after March 15, 2004, our third fiscal quarter
beginning June 1, 2004. Application of FIN 46R is also required in financial
statements that have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. The
adoption of FIN 46R did not have an impact on our financial position, results of
operations or cash flows.

     In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS
151"). SFAS 151 amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4, "Inventory Pricing", to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) should
be recognized as current-period charges and requires the allocation of fixed
production overheads to inventory based on normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not
expected to have an impact on our financial position, results of operations or
cash flows.

     In November 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" in Determining Whether to Report Discontinued Operations" ("EITF
03-13"). Under the consensus, the approach for assessing whether cash flows of
the component have been eliminated from the ongoing operations of the entity
focuses on whether continuing cash flows are direct or indirect cash flows. Cash
flows of the component would not be eliminated if the continuing cash flows to
the entity are considered direct cash flows. The consensus should be applied to
a component of an enterprise that is either disposed of or classified as held
for sale in fiscal periods beginning after December 15, 2004. The adoption of
EITF 03-13 did not have an impact on our financial position, results of
operations or cash flows.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS 123R supercedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash
Flows". SFAS 123R focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions and
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Accordingly, the adoption of SFAS 123R's fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. The impact of the adoption of SFAS 123R
cannot be predicted at this time because it will depend on the levels of
share-based payments granted in the future. However, had we adopted SFAS 123R in
prior periods the impact of that standard would have approximated the impact of
SFAS 123 as described in the disclosure of proforma net income and earnings per
share in Note 4 to our condensed consolidated financial statements. SFAS 123R
also requires the benefits of tax deductions in excess of recognized
compensation costs to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. While we cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods
for such excess tax deductions were not material to our consolidated financial
position or results of operations. This statement is effective for our fiscal
year that begins December 1, 2005.

     In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets" ("SFAS 153"). SFAS 153 amends the guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions" to eliminate certain exceptions to the
principle that exchanges of nonmonetary assets be measured based on the fair
value of the assets exchanged. SFAS 153 eliminates the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. This
statement is effective for nonmonetary asset exchanges in fiscal years beginning
after June 15, 2005. The adoption of SFAS 153 is not expected to have an impact
on our financial position, results of operations or cash flows.

     The American Jobs Creation Act of 2004 (the "AJCA") was enacted on October
22, 2004. The AJCA repeals an export incentive, creates a new deduction for
qualified domestic manufacturing activities and includes a special one-time
deduction of 85% of certain foreign earnings repatriated to the U.S.

                                       37
<PAGE>

     The FASB issued Staff Position FAS 109-1, "Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP
FAS 109-1") on December 21, 2004. In accordance with FSP FAS 109-1, we will
treat the deduction for qualified domestic manufacturing activities, which is
effective upon issuance, as a reduction of the income tax provision in future
years as realized.

     In December 2004, the FASB issued Staff Position FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004," allowing companies additional time to
evaluate the effect of the AJCA on plans for reinvestment or repatriation of
foreign earnings. We are in the process of evaluating the effects of the
repatriation provision.

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

     Statements in this Quarterly Report on Form 10-Q which are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve risks, uncertainties and assumptions that could cause actual outcomes
and results to differ materially from those expressed or projected.

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

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

     Our exposure to interest rate risk currently consists of our Floating Rate
Notes and our Revolving Credit Facility. The aggregate balance outstanding under
the Floating Rate Notes as of August 31, 2005, was $75 million. The Floating
Rate Notes bear interest at a three-month LIBOR plus 3.00% per year (6.31% as of
August 31, 2005). Loans under our Revolving Credit Facility bear interest at
LIBOR plus applicable percentages of 1.75% to 2.50% or a base rate (the higher
of the federal funds rate plus 0.5% or the prime rate) plus applicable
percentages of 0.25% to 1.0%. The applicable percentages are calculated based on
our leverage ratio. As of August 31, 2005, no amounts were outstanding under the
Revolving Credit Facility, and the variable rate on the Revolving Credit
Facility was 6.75%. The 7.0% Subordinated Notes are fixed interest rate
obligations. On March 8, 2004, we entered into an interest rate cap agreement
effective June 1, 2004 with decreasing annual notional principal amounts of
$15.0 million beginning March 1, 2006 and cap rates ranging from 4.0% to 5.0%
over the life of the agreement. The amortized value of the premium on the
interest rate cap was compared to its fair value as of August 31, 2005, and a
charge of $0.2 million, net of tax, was recorded to other comprehensive income
during the nine months ended August 31, 2005. The interest rate cap agreement
terminates on March 1, 2010. The impact on our results of operations of a
one-point rate change on the balance currently outstanding of our Floating Rate
Notes for the next twelve months would be approximately $ 0.5 million, net of
tax.

     We are subject to risk from changes in the foreign exchange rates relating
to our Canadian, U.K. and Irish subsidiaries. Assets and liabilities of these
subsidiaries are translated to U.S. dollars at year-end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during
the year. Translation adjustments are accumulated as a separate component of
shareholders' equity. Gains and losses, which result from foreign currency
transactions, are included in the Condensed Consolidated Statements of Income.
In addition, Abbott has continued to supply a portion of our international
product, and beginning April 1, 2004, Abbott began billing us in local
currencies. The potential loss resulting from a hypothetical 10.0% adverse
change in the quoted foreign currency exchange rate amounts to approximately
$1.4 million as of August 31, 2005.

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


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

     (a)  Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such terms are defined in Rules
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of August 31, 2005 of this Form 10-Q (the
"Evaluation Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, our disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to us
(including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.

     (b)  Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in our internal controls over financial
reporting or in other factors that could significantly affect such controls.

                                       38
<PAGE>

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

ITEM 1. LEGAL PROCEEDINGS
-------------------------

     See Note 17 of Notes to Condensed Consolidated Financial Statements
included in Part 1, Item 1 of this Report.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-------------------------------------------------------------------

     (c)  A summary of the common stock repurchase activity for our third
quarter of fiscal 2005 is as follows:
<TABLE><CAPTION>
                                                               Total Number of       Approximate Dollar
                                                              Shares Purchased      Value of shares that
                        Total Number                         as Part of Publicly    may yet be Purchased
                          of Shares       Average Price      Announced Plans or       under the Plans
    Period                Purchased     Paid Per Share(1)       Programs(2)             or Programs
                          ---------     -----------------       -----------             -----------
<S>                       <C>           <C>                     <C>                     <C>
June 1 - June 30            138,900          $  41.44              138,900              $17,562,361
July 1 - July 31              7,500          $  41.63                7,500              $17,250,108
August 1 - August 31        161,366          $  43.38              161,366              $23,000,002
                          ---------                              ---------
  Total Third Quarter       307,766          $  42.46              307,766              $23,000,002
</TABLE>



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

(2)  Our stock buyback program authorizing the purchase of up to $20.0 million
     of our common stock was announced in January 2004. 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. There is no expiration date specified
     for our stock buyback program.


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


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


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


                                       39
<PAGE>

ITEM 6. EXHIBITS
----------------

        Exhibits (numbered in accordance with Item 601 of Regulation S-K):

        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

















                                       40
<PAGE>

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


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


                                              CHATTEM, INC.
                                              (Registrant)





Dated: October 3, 2005                /s/ Robert E. Bosworth
       ------------------             --------------------------
                                      Robert E. Bosworth
                                      President, Chief Operating Officer and
                                      Director (Chief Operating Officer)



Dated: October 3, 2005                /s/ Richard D. Moss
       ------------------             --------------------------
                                      Richard D. Moss
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)



                                       41
<PAGE>

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



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

     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
























                                       42