----

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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

**QUARTERLY      REPORT**

**PURSUANT      TO SECTION 13 OR 15(d) OF**

**THE      SECURITIES EXCHANGE ACT OF 1934**

**For      the quarterly period ended August 31, 2007**

**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**

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

**      **
**YES**

**NO**

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

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

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

**      **
**YES**

**NO**

**As      of October 2, 2007, 18,985,098 shares of the Company’s common stock, without par      value, were outstanding.**

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**CHATTEM,      INC.**

**INDEX**

**PART      I.  FINANCIAL INFORMATION**

|                                                                                                                     |  PAGE                NO. |
|--------------------------------------------------------------------------------------------------------------------------|-------------------------------|
|   Item                1.  Financial Statements                                                       |                          |
|                                                                                                                     |                          |
|     Consolidated                Balance Sheets as of August 31, 2007 and                             |                          |
|       November                30, 2006                                                     | 3                             |
|                                                                                                                     |                          |
|     Consolidated                Statements of Income for the Three and Nine                          |                          |
|       Months                Ended August 31, 2007 and August 31, 2006                      | 5                             |
|                                                                                                                     |                          |
|     Consolidated                Statements of Cash Flows for the Nine Months                         |                          |
|       Ended                August 31, 2007 and August 31, 2006                             | 6                             |
|                                                                                                                     |                          |
|     Notes                to Consolidated Financial Statements                                        | 7                             |
|                                                                                                                     |                          |
|   Item                2.  Management's Discussion and Analysis of Financial                Condition |                          |
|     and                Results of Operations                                                         | 28                            |
|                                                                                                                     |                          |
|   Item                3.  Quantitative and Qualitative Disclosures About Market                Risk  | 38                            |
|                                                                                                                     |                          |
|   Item                4.  Controls and Procedures                                                    | 39                            |
|                                                                                                                     |                          |
| **PART                II.  OTHER INFORMATION**                                                                 |                          |
|                                                                                                                     |                          |
|   Item                1. Legal Proceedings                                                                     | 40                            |
|                                                                                                                     |                          |
|   Item                1A. Risk Factors                                                                         | 40                            |
|                                                                                                                     |                          |
|   Item                2. Unregistered Sales of Equity Securities and Use of                Proceeds            | 40                            |
|                                                                                                                     |                          |
|   Item                3. Defaults Upon Senior Securities                                                       | 40                            |
|                                                                                                                     |                          |
|   Item                4. Submission of Matters to a Vote of Security Holders                                   | 40                            |
|                                                                                                                     |                          |
|   Item                5. Other Information                                                                     | 40                            |
|                                                                                                                     |                          |
|   Item                6. Exhibits                                                                              | 40                            |
|                                                                                                                     |                          |
| **SIGNATURES**                                                                                                           | 41                            |
|                                                                                                                     |                          |
|                                                                                                                     |                          |

----

**PART      1. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|  ASSETS                                                                                                                           |   | August                31,                  2007  |    |   | NOVEMBER                30, 2006  |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|---------|--------|---------------------------------------------|--------|
|                                                                                                                                   |   | (Unaudited)                                                     |    |   |                                        |   |
|                                                                                                                                   |   |                                                            |    |   |                                        |   |
| CURRENT                ASSETS:                                                                                                         |   |                                                            |    |   |                                        |   |
| Cash                and cash equivalents                                                                                               |   | $                                                               | 13,069  |   |                                        | $      | 90,527 |   |
| Accounts                receivable, less allowances of $13,899 at August                31, 2007 and $10,907 at November 30, 2006 |   |                                                            | 42,755  |   |                                        |   | 29,852 |   |
| Inventories                                                                                                                            |   |                                                            | 35,270  |   |                                        |   | 31,389 |   |
| Deferred                income taxes                                                                                                   |   |                                                            | 4,496   |   |                                        |   | 4,341 |   |
| Prepaid                expenses and other current assets                                                                               |   |                                                            | 4,002   |   |                                        |   | 5,857 |   |
| Total                current assets                                                                                                    |   |                                                            | 99,592  |   |                                        |   | 161,966 |   |
|                                                                                                                                   |   |                                                            |    |   |                                        |   |   |   |
| PROPERTY,                PLANT AND EQUIPMENT, NET                                                                                      |   |                                                            | 31,222  |   |                                        |   | 30,353 |   |
|                                                                                                                                   |   |                                                            |    |   |                                        |   |   |   |
| OTHER                NONCURRENT ASSETS:                                                                                                |   |                                                            |    |   |                                        |   |   |   |
| Patents,                trademarks and other purchased product rights, net                                                             |   |                                                            | 617,541 |   |                                        |   | 206,149 |   |
| Debt                issuance costs, net                                                                                                |   |                                                            | 16,145  |   |                                        |   | 11,399 |   |
| Other                                                                                                                                  |   |                                                            | 4,912   |   |                                        |   | 5,446 |   |
| Total                other noncurrent assets                                                                                           |   |                                                            | 638,598 |   |                                        |   | 222,994 |   |
|                                                                                                                                   |   |                                                            |    |   |                                        |   |   |   |
| TOTAL                ASSETS                                                                                                            |   | $                                                               | 769,412 |   |                                        | $      | 415,313 |   |
|                                                                                                                                   |   |                                                            |    |   |                                        |   |   |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|  LIABILITIES                AND SHAREHOLDERS’ EQUITY                                                                                                                               |   | AUGUST                31, 2007  |    |   | NOVEMBER                30, 2006 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|--------|---------------------------------------|--------|
|                                                                                                                                                                                          |   | (Unaudited)                               |    |   |                                  |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |
| CURRENT                LIABILITIES:                                                                                                                                                           |   |                                      |    |   |                                  |   |
| Current                maturities of long-term debt                                                                                                                                           |   | $                                         | 3,000   |   |                                  | $      | — |   |
| Accounts                payable and other                                                                                                                                                     |   |                                      | 15,240  |   |                                  |   | 9,948 |   |
| Bank                overdraft                                                                                                                                                                 |   |                                      | 9,660   |   |                                  |   | 5,824 |   |
| Accrued                liabilities                                                                                                                                                            |   |                                      | 22,391  |   |                                  |   | 11,805 |   |
| Total                current liabilities                                                                                                                                                      |   |                                      | 50,291  |   |                                  |   | 27,577 |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |
| LONG-TERM                DEBT, less current maturities                                                                                                                                        |   |                                      | 520,750 |   |                                  |   | 232,500 |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |
| DEFERRED                INCOME TAXES                                                                                                                                                          |   |                                      | 17,997  |   |                                  |   | 17,668 |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |
| OTHER                NONCURRENT LIABILITIES                                                                                                                                                   |   |                                      | 1,747   |   |                                  |   | 1,987 |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |
| COMMITMENTS                AND CONTINGENCIES (Note 19)                                                                                                                                        |   |                                      |    |   |                                  |   |   |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |
| SHAREHOLDERS’                EQUITY:                                                                                                                                                    |   |                                      |    |   |                                  |   |   |   |
| Preferred                shares, without par value, authorized 1,000, none                issued                                                                                              |   |                                      | — |   |                                  |   | — |   |
| Common                shares, without par value, authorized 100,000, issued                and outstanding 18,908 at August 31, 2007 and 18,669                at November 30, 2006 |   |                                      | 27,820  |   |                                  |   | 30,452 |   |
| Retained                earnings                                                                                                                                                              |   |                                      | 150,835 |   |                                  |   | 105,965 |   |
|                                                                                                                                                                                          |   |                                      | 178,655 |   |                                  |   | 136,417 |   |
| Cumulative                other comprehensive income, net of tax:                                                                                                                             |   |                                      |    |   |                                  |   |   |   |
| Interest                rate hedge adjustment                                                                                                                                                 |   |                                      | (347    | )      |                                  |   | (597 | ) |
| Foreign                currency translation adjustment                                                                                                                                        |   |                                      | 319     |   |                                  |   | (239 | ) |
| Total                shareholders’ equity                                                                                                                                               |   |                                      | 178,627 |   |                                  |   | 135,581 |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                          |   | $                                         | 769,412 |   |                                  | $      | 415,313 |   |
|                                                                                                                                                                                          |   |                                      |    |   |                                  |   |   |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

|                                                                           |   | FOR                THE THREE MONTHS ENDED                AUGUST 31, |    |   | FOR                THE NINE MONTHS ENDED                AUGUST 31, |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|---------|--------|-------------------------------------------------------------------------|--------|
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |
|                                                                           |   | 2007                                                                     |    |   | 2006                                                                    |   |   |  2007 |   |   | 2006 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |
| REVENUES:                                                                      |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |
|   Net                Sales                                           |   | $                                                                        | 108,880 |   |                                                                    | $      | 71,947 |   |   | $ | 322,574 |   |   | $ | 235,276 |   |
|   Royalties                                                          |   |                                                                     | 85      |   |                                                                    |   | 58 |   |   |   | 186 |   |   |   | 164 |   |
|     Total                Revenues                          |   |                                                                     | 108,965 |   |                                                                    |   | 72,005 |   |   |   | 322,760 |   |   |   | 235,440 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| COSTS                AND EXPENSES:                                             |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
|   Cost                of sales                                       |   |                                                                     | 32,793  |   |                                                                    |   | 22,238 |   |   |   | 98,868 |   |   |   | 73,312 |   |
|   Advertising                and promotion                           |   |                                                                     | 27,760  |   |                                                                    |   | 23,607 |   |   |   | 86,211 |   |   |   | 75,575 |   |
|   Selling,                general and administrative                 |   |                                                                     | 15,619  |   |                                                                    |   | 10,855 |   |   |   | 42,516 |   |   |   | 33,974 |   |
|   Acquisition                expenses                                |   |                                                                     | — |   |                                                                    |   | — |   |   |   | 2,057 |   |   |   | — |   |
|   Litigation                settlement                               |   |                                                                     | — |   |                                                                    |   | (10,800 | ) |   |   | — |   |   |   | (19,305 | ) |
|     Total                costs and expenses                |   |                                                                     | 76,172  |   |                                                                    |   | 45,900 |   |   |   | 229,652 |   |   |   | 163,556 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| INCOME                FROM OPERATIONS                                          |   |                                                                     | 32,793  |   |                                                                    |   | 26,105 |   |   |   | 93,108 |   |   |   | 71,884 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                                         |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
|   Interest                expense                                    |   |                                                                     | (7,147  | )      |                                                                    |   | (3,018 | ) |   |   | (22,702 | ) |   |   | (8,318 | ) |
|   Investment                and other income, net                    |   |                                                                     | 199     |   |                                                                    |   | 188 |   |   |   | 1,258 |   |   |   | 616 |   |
|   Loss                on early extinguishment of debt                |   |                                                                     | (414    | )      |                                                                    |   | — |   |   |   | (2,633 | ) |   |   | (2,805 | ) |
|     Total                other income (expense)            |   |                                                                     | (7,362  | )      |                                                                    |   | (2,830 | ) |   |   | (24,077 | ) |   |   | (10,507 | ) |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| INCOME                BEFORE INCOME TAXES                                      |   |                                                                     | 25,431  |   |                                                                    |   | 23,275 |   |   |   | 69,031 |   |   |   | 61,377 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| PROVISION                FOR INCOME TAXES                                      |   |                                                                     | 9,119   |   |                                                                    |   | 8,046 |   |   |   | 24,161 |   |   |   | 21,175 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| NET                INCOME                                                      |   | $                                                                        | 16,312  |   |                                                                    | $      | 15,229 |   |   | $ | 44,870 |   |   | $ | 40,202 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| NUMBER                OF COMMON SHARES:                                        |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
|   Weighted                average outstanding-basic                  |   |                                                                     | 19,026  |   |                                                                    |   | 18,749 |   |   |   | 18,903 |   |   |   | 19,195 |   |
|   Weighted                average and potential dilutive outstanding |   |                                                                     | 19,409  |   |                                                                    |   | 18,912 |   |   |   | 19,273 |   |   |   | 19,468 |   |
|                                                                           |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| NET                INCOME PER COMMON SHARE:                                    |   |                                                                     |    |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
|     Basic                                                  |   | $                                                                        | .86     |   |                                                                    | $      | .81 |   |   | $ |                   2.37 |   |   | $ |                   2.09 |   |
|     Diluted                                                |   | $                                                                        | .84     |   |                                                                    | $      | .81 |   |   | $ |                   2.33 |   |   | $ |                   2.07 |   |

----

**CHATTEM,      INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|                                                                                                                                               |   | AUGUST                31, 2007 |     |   | AUGUST                31,2006 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|----------|--------|-------------------------------|--------|
|  OPERATING                ACTIVITIES:                                                                                                         |   |                                |     |   |                          |   |
|   Net                income                                                                                                              |   | $                                   | 44,870   |   |                          | $      | 40,202 |   |
|   Adjustments                to reconcile net income to net cash provided by    operating                activities: |   |                                |     |   |                          |   |   |   |
|       Depreciation                and amortization                                                                   |   |                                | 6,461    |   |                          |   | 4,339 |   |
|       Deferred                income taxes                                                                           |   |                                | 11,126   |   |                          |   | 3,554 |   |
|       Tax                benefit realized from stock options exercised                                               |   |                                | (4,747   | )      |                          |   | (744 | ) |
|       Stock-based                compensation                                                                        |   |                                | 4,122    |   |                          |   | 3,322 |   |
|       Loss                on early extinguishment of debt                                                            |   |                                | 2,633    |   |                          |   | 2,805 |   |
|       Other,                net                                                                                      |   |                                | 13       |   |                          |   | 255 |   |
|       Changes                in operating assets and liabilities, net of effects from                acquisitions:   |   |                                |     |   |                          |   |   |   |
|         Accounts                receivable                                                                 |   |                                | (12,903  | )      |                          |   | 13,483 |   |
|         Inventories                                                                                        |   |                                | 2,172    |   |                          |   | (5,099 | ) |
|         Refundable                income taxes                                                             |   |                                | —  |   |                          |   | 1,951 |   |
|         Prepaid                expenses and other current assets                                           |   |                                | 833      |   |                          |   | (1,125 | ) |
|         Accounts                payable and accrued liabilities                                            |   |                                | 18,741   |   |                          |   | (11,244 | ) |
|            Net                cash provided by operating activities                         |   |                                | 73,321   |   |                          |   | 51,699 |   |
|                                                                                                                                               |   |                                |     |   |                          |   |   |   |
| INVESTING                ACTIVITIES:                                                                                                               |   |                                |     |   |                          |   |   |   |
|   Purchases                of property, plant and equipment                                                                              |   |                                | (3,793   | )      |                          |   | (3,557 | ) |
|   Acquisition                of brands                                                                                                   |   |                                | (416,184 | )      |                          |   | — |   |
|                  Decrease (increase) in other assets, net                                                                                     |   |                                | 1,796    |   |                          |   | (2,078 | ) |
|            Net                cash used in investing activities                             |   |                                | (418,181 | )      |                          |   | (5,635 | ) |
|                                                                                                                                               |   |                                |     |   |                          |   |   |   |
| FINANCING                ACTIVITIES:                                                                                                               |   |                                |     |   |                          |   |   |   |
|   Repayment                of long-term debt                                                                                             |   |                                | (153,750 | )      |                          |   | (75,000 | ) |
|   Proceeds                from long-term debt                                                                                            |   |                                | 400,000  |   |                          |   | — |   |
|   Proceeds                from borrowings under revolving credit facility                                                                |   |                                | 147,500  |   |                          |   | 75,500 |   |
|   Repayments                of revolving credit facility                                                                                 |   |                                | (102,500 | )      |                          |   | (22,000 | ) |
|   Proceeds                from exercise of stock options                                                                                 |   |                                | 11,130   |   |                          |   | 911 |   |
|   Change                in bank overdraft                                                                                                |   |                                | 3,836    |   |                          |   | 2,140 |   |
|   Repurchase                of common shares                                                                                             |   |                                | (22,260  | )      |                          |   | (39,332 | ) |
|   Purchase                of note hedge                                                                                                  |   |                                | (29,500  | )      |                          |   | — |   |
|   Proceeds                from issuance of warrant                                                                                       |   |                                | 17,430   |   |                          |   | — |   |
|   Increase                in debt issuance costs                                                                                         |   |                                | (9,374   | )      |                          |   | (5,634 | ) |
|   Debt                retirement costs                                                                                                   |   |                                | —  |   |                          |   | (1,501 | ) |
|   Tax                benefit realized from stock options exercised                                                                       |   |                                | 4,747    |   |                          |   | 744 |   |
|           Net                cash provided by (used in) financing activities                     |   |                                | 267,259  |   |                          |   | (64,172 | ) |
|                                                                                                                                               |   |                                |     |   |                          |   |   |   |
| EFFECT                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                                                        |   |                                | 143      |   |                          |   | (176 | ) |
|                                                                                                                                               |   |                                |     |   |                          |   |   |   |
| CASH                AND CASH EQUIVALENTS:                                                                                                          |   |                                |     |   |                          |   |   |   |
|   Decrease                for the period                                                                                                 |   |                                | (77,458  | )      |                          |   | (18,284 | ) |
|   At                beginning of period                                                                                                  |   |                                | 90,527   |   |                          |   | 47,327 |   |
|   At                end of period                                                                                                        |   | $                                   | 13,069   |   |                          | $      | 29,043 |   |
|                                                                                                                                               |   |                                |     |   |                          |   |   |   |
| PAYMENTS                FOR:                                                                                                                       |   |                                |     |   |                          |   |   |   |
|   Interest                                                                                                                               |   | $                                   | 16,678   |   |                          | $      | 6,452 |   |
|   Taxes                                                                                                                                  |   | $                                   | 6,680    |   |                          | $      | 14,706 |   |

----

**CHATTEM,      INC.  AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

| **1.** | **BASIS                OF PRESENTATION** |
|--------|------------------------------------------|

| **2.** | **CASH                AND CASH EQUIVALENTS** |
|--------|----------------------------------------------|

| **3.** | **RECLASSIFICATIONS** |
|--------|-----------------------|

| **4.** |   | **RECENT                ACCOUNTING                PRONOUNCEMENTS** |
|--------|--------|--------------------------------------------------------------------|

----

| **5.** | **STOCK-BASED                COMPENSATION** |
|--------|---------------------------------------------|

|                                   |   | Nine                Months Ended August                31, |   |
|----------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                   |   | 2007                                                            |   |   | 2006 |   |
| Expected                life           |   | 6.0                years                                        |   |   | 6.0                years |   |
| Volatility                             |   |                                                            | 34     | % |   |   | 43 | % |
| Risk-free                interest rate |   |                                                            | 4.47   | % |   |   | 4.48 | % |
| Dividend                yield          |   |                                                            | 0      | % |   |   | 0 | % |
| Forfeitures                            |   |                                                            | 1.2    | % |   |   | 0.9 | % |

----

|                                               |   | For                the Nine Months Ended August 31, 2007 |   |
|----------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                               |   | Shares                Under Option                  |   |   | Weighted                Average  Exercise Price |   | WeightedAverageRemainingContractual       Life       |   | AggregateIntrinsic                Value |   |
| Outstanding                at December 1, 2006     |   |                                                     | 1,936  |   |   | $ | 27.63 |   |   |   |   |   |
|     Granted                    |   |                                                     | 414    |   |   |   | 59.75 |   |   |   |   |   |
|     Exercised                  |   |                                                     | (619   | ) |   |   | 18.00 |   |   |   |   |   |
|     Cancelled                  |   |                                                     | (30    | ) |   |   | 36.74 |   |   |   |   |   |
|                                               |   |                                                     |   |   |   |   |   |   |   |   |   |   |
| Outstanding                at August 31, 2007 |   |                                                     | 1,701  |   |   | $ | 38.78 |   | 5.3                years |   | $ | 37,901 |   |
|                                               |   |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable                at August 31, 2007 |   |                                                     | 872    |   |   | $ | 30.38 |   | 5.1                years |   | $ | 26,764 |   |

|                                         |   | Number                of Shares |    |   | Weighted                Average Grant Date Fair Value |   |
|----------------------------------------------|--------|--------------------------------------|---------|--------|------------------------------------------------------------|--------|
| Nonvested                at December 1, 2006 |   |                                 | 37      |   |                                                       | $      | 26.45 |   |
|    Granted                    |   |                                 | — |   |                                                       |   | — |   |
|    Vested                     |   |                                 | (21     | )      |                                                       | $      | 22.19 |   |
|    Forfeited                  |   |                                 | (1      | )      |                                                       | $      | 35.37 |   |
| Nonvested                at August 31, 2007  |   |                                 | 15      |   |                                                       | $      | 31.62 |   |

----

| **6.** | **EARNINGS                PER SHARE** |
|--------|---------------------------------------|

|                                                                             |   | For                the Three Months                  Ended August 31, |   |   | For                the Nine Months Ended                August 31, |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------|--------|
|                                                                             |   | 2007                                                                            |   |   | 2006                                                                    |   |   | 2007 |   |   | 2006 |   |
|                                                                             |   |                                                                            |   |   |                                                                    |   |   |   |   |   |   |   |
| NET                INCOME                                                        |   | $                                                                               | 16,312 |   |                                                                    | $      | 15,229 |   |   | $ | 44,870 |   |   | $ | 40,202 |   |
|                                                                             |   |                                                                            |   |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| NUMBER                OF COMMON SHARES:                                          |   |                                                                            |   |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average outstanding                                      |   |                                                                            | 19,026 |   |                                                                    |   | 18,749 |   |   |   | 18,903 |   |   |   | 19,195 |   |
| Issued                upon assumed exercise of outstanding stock options    |   |                                                                            | 283    |   |                                                                    |   | 126 |   |   |   | 359 |   |   |   | 237 |   |
| Issued                upon assumed conversion of convertible notes          |   |                                                                            | 87     |   |                                                                    |   | — |   |   |   | — |   |   |   | — |   |
| Effect                of issuance of restricted common shares               |   |                                                                            | 13     |   |                                                                    |   | 37 |   |   |   | 11 |   |   |   | 36 |   |
| Weighted                average and potential dilutive outstanding (1) |   |                                                                            | 19,409 |   |                                                                    |   | 18,912 |   |   |   | 19,273 |   |   |   | 19,468 |   |
| NET                INCOME PER COMMON SHARE:                                 |   |                                                                            |   |   |                                                                    |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                            |   | $                                                                               | .86    |   |                                                                    | $      | .81 |   |   | $ | 2.37 |   |   | $ | 2.09 |   |
| Diluted                                                                          |   | $                                                                               | .84    |   |                                                                    | $      | .81 |   |   | $ | 2.33 |   |   | $ | 2.07 |   |

| **7.** | **LONG-TERM                DEBT** |
|--------|-----------------------------------|

|                                                                                                                                                                                                          |   | 2007   |    |   | 2006   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Revolving                Credit Facility due 2010 at a variable rate of 7.04% and                8.25% as of August 31, 2007 and November                30, 2006, respectively |   | $      | 45,000  |   |   | $      | — |   |
| 2.0%                Convertible Senior Notes due 2013                                                                                                                                                         |   |   | 125,000 |   |   |   | 125,000 |   |
| 1.625%                Convertible Senior Notes due 2014                                                                                                                                                       |   |   | 100,000 |   |   |   | — |   |
| Term                Loan due 2013 at a variable rate of 7.11% as of August 31,                2007                                                                                                       |   |   | 146,250 |   |   |   | — |   |
| 7.0%                Senior Subordinated Notes due 2014                                                                                                                                                        |   |   | 107,500 |   |   |   | 107,500 |   |
| Total                long-term debt                                                                                                                                                                           |   |   | 523,750 |   |   |   | 232,500 |   |
| Less:  current                maturities                                                                                                                                                            |   |   | (3,000  | )      |   |   | — |   |
| Total                long-term debt, net of current maturities                                                                                                                                                |   | $      | 520,750 |   |   | $      | 232,500 |   |

----

----

----

*“*

----

| 2007       |   | $      | 750     |   |
|------------|--------|--------|---------|--------|
| 2008       |   |   | 3,000   |   |
| 2009       |   |   | 3,000   |   |
| 2010       |   |   | 48,000  |   |
| 2011       |   |   | 3,000   |   |
| Thereafter |   |   | 466,000 |   |
|       |   | $      | 523,750 |   |

| **8.** | **ACQUISITION                AND SALES OF BRANDS** |
|--------|----------------------------------------------------|

*ACT*
*Unisom*
*Cortizone-10*
*Kaopectate*
*Balmex*

|                                                    |   | Three                Months Ended |    |   | Nine                Months Ended August 31, |   |
|---------------------------------------------------------|--------|-----------------------------------|---------|--------|---------------------------------------------|--------|
|                                                    |   | August                31,2006     |    |   | 2007                                        |   |   | 2006 |   |
|                                                    |   |                              |    |   |                                        |   |   |   |   |
| Total                revenue                            |   | $                                 | 100,864 |   |                                        | $      | 331,942 |   |   | $ | 326,292 |   |
| Net                income                               |   |                              | 18,750  |   |                                        |   | 45,653 |   |   |   | 50,886 |   |
| Earnings                per share – basic:   |   |                              | 1.00    |   |                                        |   | 2.42 |   |   |   | 2.65 |   |
| Earnings                per share – diluted: |   |                              | 0.99    |   |                                        |   | 2.37 |   |   |   | 2.61 |   |

*ACT*
*ACT*
*ACT*

| **9.** | **ADVERTISING                EXPENSES** |
|--------|-----------------------------------------|

----

| **10.** | **SHIPPING                AND HANDLING** |
|---------|------------------------------------------|

| **11**. | **PATENT,                TRADEMARKS AND OTHER PURCHASED PRODUCT                RIGHTS** |
|---------|-----------------------------------------------------------------------------------------|

| **12**. | **INVENTORIES** |
|---------|-----------------|

|                                                     |   | 2007   |   |   | 2006   |   |
|----------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                     |   |   |   |   |   |   |
| Raw                materials and work in process         |   | $      | 11,554 |   |   | $      | 15,495 |   |
| Finished                goods                            |   |   | 23,716 |   |   |   | 15,894 |   |
|     Total                inventories |   | $      | 35,270 |   |   | $      | 31,389 |   |

| **13**. | **ACCRUED                    LIABILITIES** |
|---------|--------------------------------------------|

|                                                             |   |  2007 |   |   | 2006   |   |
|------------------------------------------------------------------|--------|------------|--------|--------|--------|--------|
|                                                             |   |       |   |   |   |   |
| Interest                                                         |   | $          | 6,869  |   |   | $      | 2,599 |   |
| Salaries,                wages and commissions              |   |       | 4,943  |   |   |   | 3,878 |   |
| Product                advertising and promotion                 |   |       | 2,715  |   |   |   | 1,936 |   |
| Litigation                settlement and legal fees              |   |       | 956    |   |   |   | 1,162 |   |
| Income                taxes payable                              |   |       | 2,001  |   |   |   | 635 |   |
| Transition                services and acquisition costs         |   |       | 2,920  |   |   |   | — |   |
| Other                                                            |   |       | 1,987  |   |   |   | 1,595 |   |
|     Total                accrued liabilities |   | $          | 22,391 |   |   | $      | 11,805 |   |

----

| **14.** | **COMPREHENSIVE                INCOME** |
|---------|-----------------------------------------|

|                                                                             |   | For                the Three Months Ended August 31, |   |   | For                the Nine Months Ended August                31, |   |
|----------------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------|--------|
|                                                                             |   | 2007                                                           |   |   | 2006                                                                    |   |   | 2007 |   |   | 2006 |   |
|                                                                             |   |                                                           |   |   |                                                                    |   |   |   |   |   |   |   |
|   Net                income                                            |   | $                                                              | 16,312 |   |                                                                    | $      | 15,229 |   |   | $ | 44,870 |   |   | $ | 40,202 |   |
|   Other                – interest rate hedge adjustment          |   |                                                           | (832   | )      |                                                                    |   | 122 |   |   |   | 250 |   |   |   | 65 |   |
|   Other                – foreign currency translation adjustment |   |                                                           | 347    |   |                                                                    |   | (151 | ) |   |   | 558 |   |   |   | (140 | ) |
|      Total                                              |   | $                                                              | 15,827 |   |                                                                    | $      | 15,200 |   |   | $ | 45,678 |   |   | $ | 40,127 |   |

| **15.** | **STOCK                REPURCHASE** |
|---------|-------------------------------------|

| **16.** | **RETIREMENT                PLANS AND POSTRETIREMENT HEALTH CARE                BENEFITS** |
|---------|--------------------------------------------------------------------------------------------|

|                                                              |   | For                the Three Months Ended                August 31, |    |   | For                the Nine Months Ended                August 31, |   |
|-------------------------------------------------------------------|--------|---------------------------------------------------------------------|---------|--------|--------------------------------------------------------------------|--------|
|                                                              |   | 2007                                                                |    |   | 2006                                                               |   |   | 2007 |   |   | 2006 |   |
| Service                cost                                       |   | $                                                                   | — |   |                                                               | $      | — |   |   | $ | — |   |   | $ | — |   |
| Interest                cost on projected benefit obligation |   |                                                                | 153     |   |                                                               |   | 156 |   |   |   | 459 |   |   |   | 467 |   |
| Actual                return on plan assets                       |   |                                                                | (220    | )      |                                                               |   | (226 | ) |   |   | (660 | ) |   |   | (677 | ) |
| Net                amortization and deferral                      |   |                                                                | — |   |                                                               |   | — |   |   |   | — |   |   |   | — |   |
| Net                pension benefit                                |   | $                                                                   | (67     | )      |                                                               | $      | (70 | ) |   | $ | (201 | ) |   | $ | (210 | ) |

----

|                                                                               |   | For                the Three Months Ended                August 31, |    |   | For                the Nine Months Ended                August 31, |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|---------|--------|--------------------------------------------------------------------|--------|
|                                                                               |   | 2007                                                                |    |   | 2006                                                               |   |   | 2007 |   |   | 2006 |   |
| Service                cost                                                        |   | $                                                                   | 14      |   |                                                               | $      | 20 |   |   | $ | 42 |   |   | $ | 60 |   |
| Interest                cost on accumulated postretirement benefit obligation |   |                                                                | 18      |   |                                                               |   | 22 |   |   |   | 54 |   |   |   | 66 |   |
| Amortization                of prior service cost                                  |   |                                                                | 4       |   |                                                               |   | 4 |   |   |   | 12 |   |   |   | 11 |   |
| Amortization                of net gain                                            |   |                                                                | (4      | )      |                                                               |   | (4 | ) |   |   | (12 | ) |   |   | (12 | ) |
| Curtailment                gain                                                    |   |                                                                | — |   |                                                               |   | — |   |   |   | — |   |   |   | (496 | ) |
| Net                periodic postretirement benefits cost (benefit)            |   | $                                                                   | 32      |   |                                                               | $      | 42 |   |   | $ | 96 |   |   | $ | (371 | ) |

| **17.** | **INCOME                TAXES** |
|---------|---------------------------------|

| **18.** | **PRODUCT                SEGMENT INFORMATION** |
|---------|------------------------------------------------|

|                                           |   | For                the Three Months Ended                August 31, |    |   | For                the Nine Months Ended                August 31, |   |
|------------------------------------------------|--------|---------------------------------------------------------------------|---------|--------|--------------------------------------------------------------------|--------|
|                                           |   | 2007                                                                |    |   | 2006                                                               |   |   | 2007 |   |   | 2006 |   |
| Topical                pain care               |   | $                                                                   | 23,548  |   |                                                               | $      | 21,767 |   |   | $ | 75,700 |   |   | $ | 82,605 |   |
| Medicated                skin care             |   |                                                                | 32,678  |   |                                                               |   | 17,340 |   |   |   | 92,105 |   |   |   | 49,620 |   |
| Oral                care                       |   |                                                                | 13,042  |   |                                                               |   | 1,601 |   |   |   | 35,260 |   |   |   | 4,919 |   |
| Internal                OTC                    |   |                                                                | 12,967  |   |                                                               |   | 3,550 |   |   |   | 33,430 |   |   |   | 9,143 |   |
| Dietary                supplements             |   |                                                                | 6,710   |   |                                                               |   | 9,934 |   |   |   | 21,564 |   |   |   | 27,696 |   |
| Medicated                dandruff shampoos     |   |                                                                | 8,770   |   |                                                               |   | 7,798 |   |   |   | 27,406 |   |   |   | 28,075 |   |
| Other                OTC and toiletry products |   |                                                                | 3,046   |   |                                                               |   | 4,321 |   |   |   | 16,136 |   |   |   | 14,849 |   |
|   Total                              |   | $                                                                   | 100,761 |   |                                                               | $      | 66,311 |   |   | $ | 301,601 |   |   | $ | 216,907 |   |

----

| **19.** | **COMMITMENT                  AND                  CONTINGENCIES** |
|---------|--------------------------------------------------------------------|

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

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

*Dexatrim*

*Dexatrim*
*Dexatrim*
*Dexatrim*

*Dexatrim*
*Dexatrim*

*Dexatrim*

*Dexatrim*
*Dexatrim*

----

*Garlique*

*Dexatrim*
*Dexatrim*

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

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

----

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

*Pamprin*

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

*BullFrog*

*Bullfrog*

----

| **20.** | **CONOLIDATING                  FINANCIAL                  STATEMENTS** |
|---------|-------------------------------------------------------------------------|

----

|   | **CHATTEM,                INC. AND SUBSIDIARIES** |
|--------|---------------------------------------------------|

|   | **CONSOLIDATING                BALANCE SHEETS** |
|--------|-------------------------------------------------|

| AUGUST                31, 2007 |
|--------------------------------|

| (Unaudited                and in thousands) |
|---------------------------------------------|

|                                                                                                                              |   | CHATTEM |     |   | GUARANTOR                 SUBSIDIARY  COMPANIES |   |    | NON-GUARANTOR                 SUBSIDIARY COMPANIES |   |   | ELIMINATIONS |   |   | CONSOLIDATED |     |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------|----------|--------|-----------------------------------------------------------|--------|---------|--------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|----------|
| ASSETS                                                                                                                            |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |
| CURRENT                ASSETS:                                                                                                    |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |
|   Cash                and cash equivalents                                                                              |   | $       | 3,354    |   |                                                      | $      | 519     |                                                         |   | $      | 9,196        |   |   | $            | —  |   |   | $ | 13,069 |   |
|   Accounts                receivable, less allowances of $13,899                                                   |   |    | 36,732   |   |                                                      |   | 16,176  |                                                         |   |   | 6,023        |   |   |         | (16,176  | ) |   |   | 42,755 |   |
|   Interest                receivable                                                                                    |   |    | 50       |   |                                                      |   | 653     |                                                         |   |   | 294          |   |   |         | (997     | ) |   |   | — |   |
|   Inventories                                                                                                           |   |    | 28,584   |   |                                                      |   | 3,885   |                                                         |   |   | 2,801        |   |   |         | —  |   |   |   | 35,270 |   |
|   Refundable                income taxes                                                                                |   |    | —  |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | — |   |
|   Deferred                income taxes                                                                                  |   |    | 4,459    |   |                                                      |   | — |                                                         |   |   | 37           |   |   |         | —  |   |   |   | 4,496 |   |
|   Prepaid                expenses and other current assets                                                              |   |    | 2,842    |   |                                                      |   | — |                                                         |   |   | 1,400        |   |   |         | (240     | ) |   |   | 4,002 |   |
|     Total                current assets                                                                       |   |    | 76,021   |   |                                                      |   | 21,233  |                                                         |   |   | 19,751       |   |   |         | (17,413  | ) |   |   | 99,592 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| PROPERTY,                PLANT AND EQUIPMENT, NET                                                                                 |   |    | 29,805   |   |                                                      |   | 775     |                                                         |   |   | 642          |   |   |         | —  |   |   |   | 31,222 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| OTHER                NONCURRENT ASSETS:                                                                                           |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|   Patents,                trademarks and other purchased product rights, net                                       |   |    | 3,462    |   |                                                      |   | 674,805 |                                                         |   |   | 1,564        |   |   |         | (62,290  | ) |   |   | 617,541 |   |
|   Debt                issuance costs, net                                                                               |   |    | 16,145   |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | 16,145 |   |
|   Investment                in subsidiaries                                                                             |   |    | 349,825  |   |                                                      |   | 33,000  |                                                         |   |   | 66,860       |   |   |         | (449,685 | ) |   |   | — |   |
|   Note                receivable                                                                                        |   |    | —  |   |                                                      |   | 33,000  |                                                         |   |   | —      |   |   |         | (33,000  | ) |   |   | — |   |
|   Other                                                                                                                 |   |    | 4,407    |   |                                                      |   | — |                                                         |   |   | 505          |   |   |         | —  |   |   |   | 4,912 |   |
|     Total                other noncurrent assets                                                              |   |    | 373,839  |   |                                                      |   | 740,805 |                                                         |   |   | 68,929       |   |   |         | (544,975 | ) |   |   | 638,598 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| TOTAL                ASSETS                                                                                                       |   | $       | 479,665  |   |                                                      | $      | 762,813 |                                                         |   | $      | 89,322       |   |   | $            | (562,388 | ) |   | $ | 769,412 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| LIABILITIES                AND SHAREHOLDERS’ EQUITY                                                                         |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| CURRENT                LIABILITIES:                                                                                               |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|   Current                maturities of long-term debt                                                                   |   | $       | 3,000    |   |                                                      | $      | — |                                                         |   | $      | —      |   |   | $            | —  |   |   | $ | 3,000 |   |
|   Accounts                payable and other                                                                             |   |    | 13,862   |   |                                                      |   | — |                                                         |   |   | 1,378        |   |   |         | —  |   |   |   | 15,240 |   |
|   Bank                overdraft                                                                                         |   |    | 9,660    |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | 9,660 |   |
|   Accrued                liabilities                                                                                    |   |    | 35,262   |   |                                                      |   | 1,046   |                                                         |   |   | 3,496        |   |   |         | (17,413  | ) |   |   | 22,391 |   |
|     Total                current liabilities                                                                  |   |    | 61,784   |   |                                                      |   | 1,046   |                                                         |   |   | 4,874        |   |   |         | (17,413  | ) |   |   | 50,291 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| LONG-TERM                DEBT, less current maturities                                                                            |   |    | 527,150  |   |                                                      |   | (1,200  | )                                                            |   |   | 27,800       |   |   |         | (33,000  | ) |   |   | 520,750 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| DEFERRED                INCOME TAXES                                                                                              |   |    | (21,792  | )      |                                                      |   | 39,789  |                                                         |   |   | —      |   |   |         | —  |   |   |   | 17,997 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| OTHER                NONCURRENT LIABILITIES                                                                                       |   |    | 1,747    |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | 1,747 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| INTERCOMPANY                ACCOUNTS                                                                                              |   |    | (267,851 | )      |                                                      |   | 260,143 |                                                         |   |   | 7,708        |   |   |         | —  |   |   |   | — |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| SHAREHOLDERS’                EQUITY:                                                                                        |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|                   Preferred shares, without par value, authorized 1,000, none                issued                |   |    | —  |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | — |   |
|   Common                shares, without par value, authorized 50,000, issued and outstanding                18,908 |   |    | 27,820   |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | 27,820 |   |
|   Shares                of subsidiaries                                                                                 |   |    | —  |   |                                                      |   | 329,705 |                                                         |   |   | 39,803       |   |   |         | (369,508 | ) |   |   | — |   |
|   Retained                earnings                                                                                      |   |    | 150,835  |   |                                                      |   | 133,330 |                                                         |   |   | 8,336        |   |   |         | (141,666 | ) |   |   | 150,835 |   |
|     Total                                                                                                     |   |    | 178,655  |   |                                                      |   | 463,035 |                                                         |   |   | 48,139       |   |   |         | (511,174 | ) |   |   | 178,655 |   |
|   Unamortized                value of restricted common shares issued                                              |   |    | —  |   |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | — |   |
|   Cumulative                other comprehensive income, net of tax:                                                |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|       Interest                rate cap adjustment                                                   |   |    | (347     | )      |                                                      |   | — |                                                         |   |   | —      |   |   |         | —  |   |   |   | (347 | ) |
|       Foreign                currency translation adjustment                                        |   |    | 319      |   |                                                      |   | — |                                                         |   |   | 801          |   |   |         | (801     | ) |   |   | 319 |   |
|         Total                shareholders’ equity                                   |   |    | 178,627  |   |                                                      |   | 463,035 |                                                         |   |   | 48,940       |   |   |         | (511,975 | ) |   |   | 178,627 |   |
|                                                                                                                              |   |    |     |   |                                                      |   |    |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                   |   | $       | 479,665  |   |                                                      | $      | 762,813 |                                                         |   | $      | 89,322       |   |   | $            | (562,388 | ) |   | $ | 769,412 |   |

----

|   | **CHATTEM,                INC. AND SUBSIDIARIES** |
|--------|---------------------------------------------------|

|   | **CONSOLIDATING                BALANCE SHEETS** |
|--------|-------------------------------------------------|

| NOVEMBER                30, 2006 |
|----------------------------------|

| (In                thousands) |
|-------------------------------|

|                                                                                                               |   | CHATTEM |    |   | GUARANTOR                SUBSIDIARY  COMPANIES |   |     | NON-GUARANTOR                 SUBSIDIARY COMPANIES |   |   | ELIMINATIONS |   |   | CONSOLIDATED |     |
|--------------------------------------------------------------------------------------------------------------------|--------|---------|---------|--------|-----------------------------------------------------|--------|----------|--------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|----------|
| ASSETS                                                                                                             |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |
| CURRENT                ASSETS:                                                                                     |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |
|   Cash                and cash equivalents                                                               |   | $       | 80,198  |   |                                                | $      | 1,967    |                                                         |   | $      | 8,362        |   |   | $            | —  |   |   | $ | 90,527 |   |
|   Accounts                receivable, less allowances of $10,907                                         |   |    | 25,203  |   |                                                |   | 9,407    |                                                         |   |   | 4,649        |   |   |         | (9,407   | ) |   |   | 29,852 |   |
|   Interest                receivable                                                                     |   |    | 17      |   |                                                |   | 625      |                                                         |   |   | —      |   |   |         | (642     | ) |   |   | — |   |
|   Inventories                                                                                            |   |    | 24,444  |   |                                                |   | 4,160    |                                                         |   |   | 2,785        |   |   |         | —  |   |   |   | 31,389 |   |
|   Deferred                income taxes                                                                   |   |    | 4,304   |   |                                                |   | —  |                                                         |   |   | 37           |   |   |         | —  |   |   |   | 4,341 |   |
|   Prepaid                expenses and other current assets                                               |   |    | 3,666   |   |                                                |   | —  |                                                         |   |   | 2,191        |   |   |         | —  |   |   |   | 5,857 |   |
|     Total                current assets                                                        |   |    | 137,832 |   |                                                |   | 16,159   |                                                         |   |   | 18,024       |   |   |         | (10,049  | ) |   |   | 161,966 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| PROPERTY,                PLANT AND EQUIPMENT, NET                                                                  |   |    | 28,985  |   |                                                |   | 775      |                                                         |   |   | 593          |   |   |         | —  |   |   |   | 30,353 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| OTHER                NONCURRENT ASSETS:                                                                            |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|   Patents,                trademarks and other purchased product rights, net                        |   |    | 166     |   |                                                |   | 268,273  |                                                         |   |   | —      |   |   |         | (62,290  | ) |   |   | 206,149 |   |
|   Debt                issuance costs, net                                                                |   |    | 11,399  |   |                                                |   | —  |                                                         |   |   | —      |   |   |         | —  |   |   |   | 11,399 |   |
|   Investment                in subsidiaries                                                              |   |    | 313,922 |   |                                                |   | 33,000   |                                                         |   |   | 66,860       |   |   |         | (413,782 | ) |   |   | — |   |
|   Note                receivable                                                                         |   |    | — |   |                                                |   | 33,000   |                                                         |   |   | —      |   |   |         | (33,000  | ) |   |   | — |   |
|   Other                                                                                                  |   |    | 4,978   |   |                                                |   | 468      |                                                         |   |   | —      |   |   |         | —  |   |   |   | 5,446 |   |
|     Total                other noncurrent assets                                               |   |    | 330,465 |   |                                                |   | 334,741  |                                                         |   |   | 66,860       |   |   |         | (509,072 | ) |   |   | 222,994 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| TOTAL                ASSETS                                                                                        |   | $       | 497,282 |   |                                                | $      | 351,675  |                                                         |   | $      | 85,477       |   |   | $            | (519,121 | ) |   | $ | 415,313 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| LIABILITIES                AND SHAREHOLDERS’ EQUITY                                                          |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| CURRENT                LIABILITIES:                                                                                |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|   Accounts                payable and other                                                              |   | $       | 10,473  |   |                                                | $      | —  |                                                         |   | $      | 1,580        |   |   | $            | (2,105   | ) |   | $ | 9,948 |   |
|   Bank                overdraft                                                                          |   |    | 5,824   |   |                                                |   | —  |                                                         |   |   | —      |   |   |         | —  |   |   |   | 5,824 |   |
|   Accrued                liabilities                                                                     |   |    | 17,869  |   |                                                |   | 1,132    |                                                         |   |   | 748          |   |   |         | (7,944   | ) |   |   | 11,805 |   |
|     Total                current liabilities                                                   |   |    | 34,166  |   |                                                |   | 1,132    |                                                         |   |   | 2,328        |   |   |         | (10,049  | ) |   |   | 27,577 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| LONG-TERM                DEBT, less current maturities                                                             |   |    | 232,500 |   |                                                |   | —  |                                                         |   |   | 33,000       |   |   |         | (33,000  | ) |   |   | 232,500 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| DEFERRED                INCOME TAXES                                                                               |   |    | (16,517 | )      |                                                |   | 34,185   |                                                         |   |   | —      |   |   |         | —  |   |   |   | 17,668 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| OTHER                NONCURRENT LIABILITIES                                                                        |   |    | 1,987   |   |                                                |   | —  |                                                         |   |   | —      |   |   |         | —  |   |   |   | 1,987 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| INTERCOMPANY                ACCOUNTS                                                                               |   |    | 109,564 |   |                                                |   | (114,014 | )                                                            |   |   | 4,450        |   |   |         | —  |   |   |   | — |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| SHAREHOLDERS’                EQUITY:                                                                         |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|                   Preferred shares, without par value, authorized 1,000, none                issued |   |    | — |   |                                                |   | —  |                                                         |   |   | —      |   |   |         | —  |   |   |   | — |   |
|   Common                shares, without par value, authorized 100,000, issued                18,669 |   |    | 30,452  |   |                                                |   | —  |                                                         |   |   | —      |   |   |         | —  |   |   |   | 30,452 |   |
|   Share                capital of subsidiaries                                                           |   |    | — |   |                                                |   | 329,705  |                                                         |   |   | 39,803       |   |   |         | (369,508 | ) |   |   | — |   |
|   Retained                earnings                                                                       |   |    | 105,965 |   |                                                |   | 100,667  |                                                         |   |   | 5,679        |   |   |         | (106,346 | ) |   |   | 105,965 |   |
|     Total                                                                                      |   |    | 136,417 |   |                                                |   | 430,372  |                                                         |   |   | 45,482       |   |   |         | (475,854 | ) |   |   | 136,417 |   |
|   Cumulative                other comprehensive income, net of    taxes:             |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
|     Interest                rate swap/cap adjustment                                           |   |    | (597    | )      |                                                |   | —  |                                                         |   |   | —      |   |   |         | —  |   |   |   | (597 | ) |
|     Foreign                currency translation adjustment                                     |   |    | (238    | )      |                                                |   | —  |                                                         |   |   | 217          |   |   |         | (218     | ) |   |   | (239 | ) |
|     Total                shareholders’ equity                                            |   |    | 135,582 |   |                                                |   | 430,372  |                                                         |   |   | 45,699       |   |   |         | (476,072 | ) |   |   | 135,581 |   |
|                                                                                                               |   |    |    |   |                                                |   |     |                                                         |   |   |         |   |   |         |     |   |   |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS’ EQUITY                                                    |   | $       | 497,282 |   |                                                | $      | 351,675  |                                                         |   | $      | 85,477       |   |   | $            | (519,121 | ) |   | $ | 415,313 |   |

----

|   | **CHATTEM,                INC. AND SUBSIDIARIES** |
|--------|---------------------------------------------------|

|   | **CONSOLIDATING                STATEMENTS OF INCOME** |
|--------|-------------------------------------------------------|

|   | FOR                THE NINE MONTHS ENDED AUGUST 31,                2007 |
|--------|-------------------------------------------------------------------------|

|   | (Unaudited                and in thousands) |
|--------|---------------------------------------------|

|                                                                      |   | CHATTEM |    |   | GUARANTOR                SUBSIDIARY  COMPANIES |   |    | NON-GUARANTOR SUBSIDIARY                  COMPANIES |   |   | ELIMINATIONS |   |   | CONSOLIDATED |    |
|---------------------------------------------------------------------------|--------|---------|---------|--------|-----------------------------------------------------|--------|---------|--------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |
| TOTAL                REVENUES                                             |   | $       | 286,359 |   |                                                | $      | 70,374  |                                                               |   | $      | 16,727       |   |   | $            | (50,700 | ) |   | $ | 322,760 |   |
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| COSTS                AND EXPENSES:                                        |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   Cost                of sales                                  |   |    | 87,617  |   |                                                |   | 5,724   |                                                               |   |   | 7,758        |   |   |         | (2,231  | ) |   |   | 98,868 |   |
|   Advertising                and promotion                      |   |    | 73,748  |   |                                                |   | 8,194   |                                                               |   |   | 4,269        |   |   |         | — |   |   |   | 86,211 |   |
|   Selling,                general and administrative            |   |    | 41,535  |   |                                                |   | (220    | )                                                                  |   |   | 1,201        |   |   |         | — |   |   |   | 42,516 |   |
|   Acquisition                expenses                           |   |    | 2,057   |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 2,057 |   |
|   Equity                in subsidiary income                    |   |    | (35,319 | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | 35,319  |   |   |   | — |   |
|     Total                costs and expenses           |   |    | 169,638 |   |                                                |   | 13,698  |                                                               |   |   | 13,228       |   |   |         | 33,088  |   |   |   | 229,652 |   |
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| INCOME                FROM OPERATIONS                                     |   |    | 116,721 |   |                                                |   | 56,676  |                                                               |   |   | 3,499        |   |   |         | (83,788 | ) |   |   | 93,108 |   |
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                                    |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   Interest                expense                               |   |    | (22,923 | )      |                                                |   | — |                                                               |   |   | (1,989       | )      |   |         | 2,210   |   |   |   | (22,702 | ) |
|   Investment                and other income, net               |   |    | 795     |   |                                                |   | 1,923   |                                                               |   |   | 2,626        |   |   |         | (4,086  | ) |   |   | 1,258 |   |
|   Loss                on early extinguishment of debt           |   |    | (2,633  | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (2,633 | ) |
|   Royalties                                                     |   |    | (44,983 | )      |                                                |   | (3,486  | )                                                                  |   |   | —      |   |   |         | 48,469  |   |   |   | — |   |
|   Corporate                allocations                          |   |    | 2,026   |   |                                                |   | (1,978  | )                                                                  |   |   | (48          | )      |   |         | — |   |   |   | — |   |
|      Total                other income (expense) |   |    | (67,718 | )      |                                                |   | (3,541  | )                                                                  |   |   | 589          |   |   |         | 46,593  |   |   |   | (24,077 | ) |
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| INCOME                BEFORE INCOME TAXES                            |   |    | 49,003  |   |                                                |   | 53,135  |                                                               |   |   | 4,088        |   |   |         | (37,195 | ) |   |   | 69,031 |   |
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| PROVISION                FOR INCOME TAXES                            |   |    | 4,133   |   |                                                |   | 18,597  |                                                               |   |   | 1,431        |   |   |         | — |   |   |   | 24,161 |   |
|                                                                      |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| NET                INCOME                                                 |   | $       | 44,870  |   |                                                | $      | 34,538  |                                                               |   | $      | 2,657        |   |   | $            | (37,195 | ) |   | $ | 44,870 |   |

----

|   | **CHATTEM,                INC. AND SUBSIDIARIES**  |
|--------|---------------------------------------------------------|
|   | **CONSOLIDATING                STATEMENTS OF INCOME** |
|--------|-------------------------------------------------------|

|   | FOR                THE NINE MONTHS ENDED AUGUST 31,                2006 |
|--------|-------------------------------------------------------------------------|

|   | (Unaudited                and in thousands) |
|--------|---------------------------------------------|

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

----

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

|   | FOR              THE NINE MONTHS ENDED AUGUST 31, 2007  |
|--------|--------------------------------------------------------------|
|   | (Unaudited                and in thousands) |
|--------|---------------------------------------------|

|                                                                                                                                                         |   | CHATTEM |     |   | GUARANTOR                SUBSIDIARY  COMPANIES |   |     | NON-GUARANTOR SUBSIDIARY                  COMPANIES |   |   | ELIMINATIONS |   |   | CONSOLIDATED |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|----------|--------|-----------------------------------------------------|--------|----------|--------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |
| OPERATING                ACTIVITIES:                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |
|   Net                income                                                                                                                        |   | $       | 44,870   |   |                                                | $      | 34,538   |                                                               |   | $      | 2,657        |   |   | $            | (37,195 | ) |   | $ | 44,870 |   |
|   Adjustments                to reconcile net income to net cash    provided                by (used in) operating activities: |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|       Depreciation                and amortization                                                                             |   |    | 6,307    |   |                                                |   | —  |                                                               |   |   | 154          |   |   |         | — |   |   |   | 6,461 |   |
|       Deferred                income taxes                                                                                     |   |    | 5,524    |   |                                                |   | 5,603    |                                                               |   |   | (1           | )      |   |         | — |   |   |   | 11,126 |   |
|       Tax                benefit realized from stock options exercised                                                         |   |    | (4,747   | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | (4,747 | ) |
|       Stock-based                compensation                                                                                  |   |    | 4,122    |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 4,122 |   |
|       Loss                on early extinguishment of debt                                                                      |   |    | 2,633    |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 2,633 |   |
|       Other,                net                                                                                                |   |    | 156      |   |                                                |   | —  |                                                               |   |   | (143         | )      |   |         | — |   |   |   | 13 |   |
|       Equity                in subsidiary income                                                                               |   |    | (37,195  | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | 37,195  |   |   |   | — |   |
|       Changes                in operating assets and liabilities, net of effects from                acquisitions:        |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|         Accounts                receivable and other                                                                 |   |    | (11,528  | )      |                                                |   | (6,770   | )                                                                  |   |   | (1,375       | )      |   |         | 6,770   |   |   |   | (12,903 | ) |
|         Accounts                receivable                                                                           |   |    | (33      | )      |                                                |   | (27      | )                                                                  |   |   | (295         | )      |   |         | 355     |   |   |   | — |   |
|         Inventories                                                                                                  |   |    | 1,912    |   |                                                |   | 275      |                                                               |   |   | (15          | )      |   |         | — |   |   |   | 2,172 |   |
|         Prepaid                expenses and other current assets                                                     |   |    | 825      |   |                                                |   | —  |                                                               |   |   | (232         | )      |   |         | 240     |   |   |   | 833 |   |
|         Accounts                payable and accrued liabilities                                                      |   |    | 23,644   |   |                                                |   | (85      | )                                                                  |   |   | 2,547        |   |   |         | (7,365  | ) |   |   | 18,741 |   |
|           Net                cash provided by operating activities                                         |   |    | 36,490   |   |                                                |   | 33,534   |                                                               |   |   | 3,297        |   |   |         | — |   |   |   | 73,321 |   |
|                                                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| INVESTING                ACTIVITIES:                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   Purchases                of property, plant and equipment                                                                                        |   |    | (3,590   | )      |                                                |   | —  |                                                               |   |   | (203         | )      |   |         | — |   |   |   | (3,793 | ) |
|   Acquisition                of brands                                                                                                             |   |    | (8,091   | )      |                                                |   | (406,531 | )                                                                  |   |   | (1,562       | )      |   |         | — |   |   |   | (416,184 | ) |
|   Decrease                in other assets, net                                                                                                     |   |    | 229      |   |                                                |   | 467      |                                                               |   |   | 1,100        |   |   |         | — |   |   |   | 1,796 |   |
|         Net                cash used in investing activities                                                    |   |    | (11,452  | )      |                                                |   | (406,064 | )                                                                  |   |   | (665         | )      |   |         | — |   |   |   | (418,181 | ) |
|                                                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| FINANCING                ACTIVITIES:                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   Repayment                of long-term debt                                                                                                       |   |    | (153,750 | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | (153,750 | ) |
|   Intercompany                debt proceeds (payments)                                                                                             |   |    | 6,400    |   |                                                |   | (1,200   | )                                                                  |   |   | (5,200       | )      |   |         | — |   |   |   | — |   |
|   Proceeds                from long-term debt                                                                                                      |   |    | 400,000  |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 400,000 |   |
|   Proceeds                from borrowings under revolving credit facility                                                                          |   |    | 147,500  |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 147,500 |   |
|   Repayments                of revolving credit facility                                                                                           |   |    | (102,500 | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | (102,500 | ) |
|   Proceeds                from exercise of stock options                                                                                           |   |    | 11,130   |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 11,130 |   |
|   Change                in bank overdraft                                                                                                          |   |    | 3,836    |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 3,836 |   |
|   Repurchase                of common shares                                                                                                       |   |    | (22,260  | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | (22,260 | ) |
|   Purchase                of note hedge                                                                                                            |   |    | (29,500  | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | (29,500 | ) |
|   Proceeds                from issuance of warrant                                                                                                 |   |    | 17,430   |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 17,430 |   |
|   Increase                in debt issuance costs                                                                                                   |   |    | (9,374   | )      |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | (9,374 | ) |
|   Debt                retirement costs                                                                                                             |   |    | —  |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | — |   |
|   Tax                benefit realized from stock options exercised                                                                                 |   |    | 4,747    |   |                                                |   | —  |                                                               |   |   | —      |   |   |         | — |   |   |   | 4,747 |   |
|   Changes                in intercompany accounts                                                                                                  |   |    | (375,541 | )      |                                                |   | 374,157  |                                                               |   |   | 1,384        |   |   |         | — |   |   |   | — |   |
|   Dividends                paid                                                                                                                    |   |    | —  |   |                                                |   | (1,875   | )                                                                  |   |   | 1,875        |   |   |         | — |   |   |   | — |   |
|         Net                cash (used in) provided by financing activities                                           |   |    | (101,882 | )      |                                                |   | 371,082  |                                                               |   |   | (1,941       | )      |   |         | — |   |   |   | 267,259 |   |
|                                                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| EFFECT                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                                                             |   |    | —  |   |                                                |   | —  |                                                               |   |   | 143          |   |   |         | — |   |   |   | 143 |   |
|                                                                                                                                                         |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| CASH                AND CASH EQUIVALENTS:                                                                                                                    |   |    |     |   |                                                |   |     |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   (Decrease)                increase for the period                                                                                                |   |    | (76,844  | )      |                                                |   | (1,448   | )                                                                  |   |   | 834          |   |   |         | — |   |   |   | (77,458 | ) |
|   At                beginning of period                                                                                                            |   |    | 80,198   |   |                                                |   | 1,967    |                                                               |   |   | 8,362        |   |   |         | — |   |   |   | 90,527 |   |
|   At                end of period                                                                                                                  |   | $       | 3,354    |   |                                                | $      | 519      |                                                               |   | $      | 9,196        |   |   | $            | — |   |   | $ | 13,069 |   |

----

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

|   | FOR              THE NINE MONTHS ENDED AUGUST 31, 2006  |
|--------|--------------------------------------------------------------|
|   | (Unaudited                and in thousands) |
|--------|---------------------------------------------|

|                                                                                                                                                         |   | CHATTEM |    |   | GUARANTOR                SUBSIDIARY  COMPANIES |   |    | NON-GUARANTOR SUBSIDIARY                  COMPANIES |   |   | ELIMINATIONS |   |   | CONSOLIDATED |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|--------|-----------------------------------------------------|--------|---------|--------------------------------------------------------------------|--------|--------|--------------|--------|--------|--------------|---------|
|                                                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |
| OPERATING                ACTIVITIES:                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |
|   Net                income                                                                                                                        |   | $       | 40,202  |   |                                                | $      | 27,473  |                                                               |   | $      | 2,613        |   |   | $            | (30,086 | ) |   | $ | 40,202 |   |
|   Adjustments                to reconcile net income to net cash    provided                by (used in) operating activities: |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|       Depreciation                and amortization                                                                             |   |    | 4,124   |   |                                                |   | — |                                                               |   |   | 215          |   |   |         | — |   |   |   | 4,339 |   |
|       Deferred                income taxes                                                                                     |   |    | (2,064  | )      |                                                |   | 5,653   |                                                               |   |   | (35          | )      |   |         | — |   |   |   | 3,554 |   |
|       Tax                benefit realized from stock options exercised                                                         |   |    | (744    | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (744 | ) |
|       Stock-based                compensation                                                                                  |   |    | 3,322   |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 3,322 |   |
|       Loss                on early extinguishment of debt                                                                      |   |    | 2,805   |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 2,805 |   |
|       Other,                net                                                                                                |   |    | 78      |   |                                                |   | — |                                                               |   |   | 177          |   |   |         | — |   |   |   | 255 |   |
|       Equity                in subsidiary income                                                                               |   |    | (30,086 | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | 30,086  |   |   |   | — |   |
|       Changes                in operating assets and liabilities:                                                              |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|         Accounts                receivable                                                                           |   |    | 14,093  |   |                                                |   | 235     |                                                               |   |   | (610         | )      |   |         | (235    | ) |   |   | 13,483 |   |
|         Inventories                                                                                                  |   |    | (4,826  | )      |                                                |   | (447    | )                                                                  |   |   | 174          |   |   |         | — |   |   |   | (5,099 | ) |
|         Refundable                income taxes                                                                       |   |    | 1,951   |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 1,951 |   |
|         Prepaid                expenses and other current assets                                                     |   |    | 23      |   |                                                |   | — |                                                               |   |   | 403          |   |   |         | (1,551  | ) |   |   | (1,125 | ) |
|         Accounts                payable and accrued liabilities                                                      |   |    | (9,589  | )      |                                                |   | 621     |                                                               |   |   | (4,062       | )      |   |         | 1,786   |   |   |   | (11,244 | ) |
|           Net                cash provided by (used in) operating activities                               |   |    | 19,289  |   |                                                |   | 33,535  |                                                               |   |   | (1,125       | )      |   |         | — |   |   |   | 51,699 |   |
|                                                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| INVESTING                ACTIVITIES:                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   Purchases                of property, plant and equipment                                                                                        |   |    | (3,350  | )      |                                                |   | — |                                                               |   |   | (207         | )      |   |         | — |   |   |   | (3,557 | ) |
|   Increase                in other assets, net                                                                                                     |   |    | (949    | )      |                                                |   | — |                                                               |   |   | (1,129       | )      |   |         | — |   |   |   | (2,078 | ) |
|         Net                cash used in investing activities                                                    |   |    | (4,299  | )      |                                                |   | — |                                                               |   |   | (1,336       | )      |   |         | — |   |   |   | (5,635 | ) |
|                                                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| FINANCING                ACTIVITIES:                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   Repayment                of long-term debt                                                                                                       |   |    | (75,000 | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (75,000 | ) |
|   Proceeds                from borrowings under revolving credit facility                                                                          |   |    | 75,500  |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 75,500 |   |
|   Repayments                of revolving credit facility                                                                                           |   |    | (22,000 | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (22,000 | ) |
|   Proceeds                from exercise of stock options                                                                                           |   |    | 911     |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 911 |   |
|   Change                in bank overdraft                                                                                                          |   |    | 2,140   |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 2,140 |   |
|   Repurchase                of common shares                                                                                                       |   |    | (39,332 | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (39,332 | ) |
|   Increase                in debt issuance costs                                                                                                   |   |    | (5,634  | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (5,634 | ) |
|   Debt                retirement costs                                                                                                             |   |    | (1,501  | )      |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | (1,501 | ) |
|   Tax                benefit realized from stock options exercised                                                                                 |   |    | 744     |   |                                                |   | — |                                                               |   |   | —      |   |   |         | — |   |   |   | 744 |   |
|   Changes                in intercompany accounts                                                                                                  |   |    | 31,859  |   |                                                |   | (31,658 | )                                                                  |   |   | (201         | )      |   |         | — |   |   |   | — |   |
|   Dividends                paid                                                                                                                    |   |    | — |   |                                                |   | (1,875  | )                                                                  |   |   | 1,875        |   |   |         | — |   |   |   | — |   |
|         Net                cash (used in) provided by financing activities                                           |   |    | (32,313 | )      |                                                |   | (33,533 | )                                                                  |   |   | 1,674        |   |   |         | — |   |   |   | (64,172 | ) |
|                                                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| EFFECT                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                                                             |   |    | — |   |                                                |   | — |                                                               |   |   | (176         | )      |   |         | — |   |   |   | (176 | ) |
|                                                                                                                                                         |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
| CASH                AND CASH EQUIVALENTS:                                                                                                                    |   |    |    |   |                                                |   |    |                                                               |   |   |         |   |   |         |    |   |   |   |   |   |
|   (Decrease)                increase for the period                                                                                                |   |    | (17,323 | )      |                                                |   | 2       |                                                               |   |   | (963         | )      |   |         | — |   |   |   | (18,284 | ) |
|   At                beginning of period                                                                                                            |   |    | 36,647  |   |                                                |   | 1,982   |                                                               |   |   | 8,698        |   |   |         | — |   |   |   | 47,327 |   |
|   At                end of period                                                                                                                  |   | $       | 19,324  |   |                                                | $      | 1,984   |                                                               |   | $      | 7,735        |   |   | $            | — |   |   | $ | 29,043 |   |

----

**Item      2. Management’s Discussion and Analysis of Financial Condition      and**

**Results      of Operations**

***Overview***

|   | • | *Icy                Hot, Capzasin* and *Aspercreme*– topical pain                care; |
|--------|---------|----------------------------------------------------------------------------------------------|

|   | • | *Gold                Bond, Balmex*and *Cortizone-10*– medicated skin                care; |
|--------|---------|-------------------------------------------------------------------------------------------------|

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

|   | • | *ACT*                and *Herpecin-L*– oral                care; |
|--------|---------|------------------------------------------------------------------------|

|   | • | *Unisom,**Pamprin*                and *Kaopectate  *– internal                OTC; |
|--------|---------|----------------------------------------------------------------------------------------------------|

|   | • | *Dexatrim*,                *Garlique* and *New Phase  *– dietary supplements;                and |
|--------|---------|------------------------------------------------------------------------------------------------------------------|

|   | • | *Bullfrog*,                *Ultraswim* and *Sun-In** *– other OTC and                toiletry products. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------|

*Gold Bond*

***Developments      During Fiscal 2007***

***Acquisition      of Brands***

*ACT*
*Unisom*
*Cortizone-10*
*Kaopectate*
*Balmex*

----

*ACT*
*ACT*
*ACT*

***Products***

*Icy Hot *
*Icy Hot *
*Capzasin*
*Bullfrog *
*Selsun*
* Dexatrim*

***Debt***

***Stock      Repurchase***

----

***Results      of Operations***

|                                                                      |   | For                the Three Months Ended |    |   | For                the Nine Months Ended |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|---------|--------|-----------------------------------------------|--------|
|                                                                      |   | August                31, 2007            |    |   | August                31, 2006                |   |   | August                31, 2007 |   |   | August                31, 2006 |   |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |
| TOTAL                REVENUES                                             |   |                                      | 100.0   | %      |                                          |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| COSTS                AND EXPENSES:                                        |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|   Cost                of sales                                  |   |                                      | 30.1    |   |                                          |   | 30.9 |   |   |   | 30.6 |   |   |   | 31.2 |   |
|   Advertising                and promotion                      |   |                                      | 25.5    |   |                                          |   | 32.8 |   |   |   | 26.7 |   |   |   | 32.1 |   |
|   Selling,                general and administrative            |   |                                      | 14.3    |   |                                          |   | 15.1 |   |   |   | 13.3 |   |   |   | 14.4 |   |
|   Acquisition                expenses                           |   |                                      | — |   |                                          |   | — |   |   |   | 0.6 |   |   |   | — |   |
|   Litigation                settlement                          |   |                                      | — |   |                                          |   | (15.0 | ) |   |   | — |   |   |   | (8.2 | ) |
|     Total                costs and expenses           |   |                                      | 69.9    |   |                                          |   | 63.8 |   |   |   | 71.2 |   |   |   | 69.5 |   |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| INCOME                FROM OPERATIONS                                     |   |                                      | 30.1    |   |                                          |   | 36.2 |   |   |   | 28.8 |   |   |   | 30.5 |   |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                                    |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
|   Interest                expense                               |   |                                      | (6.6    | )      |                                          |   | (4.2 | ) |   |   | (7.0 | ) |   |   | (3.5 | ) |
|   Investment                and other income, net               |   |                                      | 0.2     |   |                                          |   | 0.3 |   |   |   | 0.4 |   |   |   | 0.3 |   |
|   Loss                on early extinguishment of debt           |   |                                      | (0.4    | )      |                                          |   | — |   |   |   | (0.8 | ) |   |   | (1.2 | ) |
|      Total                other income (expense) |   |                                      | (6.8    | )      |                                          |   | (3.9 | ) |   |   | (7.4 | ) |   |   | (4.4 | ) |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| INCOME                BEFORE INCOME TAXES                                 |   |                                      | 23.3    |   |                                          |   | 32.3 |   |   |   | 21.4 |   |   |   | 26.1 |   |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| PROVISION                FOR INCOME TAXES                                 |   |                                      | 8.4     |   |                                          |   | 11.2 |   |   |   | 7.5 |   |   |   | 9.0 |   |
|                                                                      |   |                                      |    |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| NET                INCOME                                                 |   |                                      | 14.9    | %      |                                          |   | 21.1 | % |   |   | 13.9 | % |   |   | 17.1 | % |

***Critical      Accounting Policies***

***Allowance      for Doubtful Accounts***

***Revenue      Recognition***

----

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

***Income      Taxes***

----

***Comparison      of Three Months Ended August 31, 2007 and 2006***

|                                                        |   |                                  |    |   |   |   |    | Increase                (Decrease) |   |
|-------------------------------------------------------------|--------|---------------------------------------|---------|--------|--------|--------|---------|------------------------------------|--------|
|                                                        |   | 2007                                  |    |   | 2006   |   |    | Amount                             |   |   | Percentage |   |
|                                                        |   | (dollars                in thousands) |    |
| Domestic                net sales                           |   | $                                     | 100,761 |   |   | $      | 66,311  |                               |   | $ | 34,450 |   |   |   | 52.0 | % |
| International                revenues (including royalties) |   |                                  | 8,204   |   |   |   | 5,694   |                               |   |   | 2,510 |   |   |   | 44.1 |   |
| Total                revenues                               |   |                                  | 108,965 |   |   |   | 72,005  |                               |   |   | 36,960 |   |   |   | 51.3 |   |
| Cost                of sales                                |   |                                  | 32,793  |   |   |   | 22,238  |                               |   |   | 10,555 |   |   |   | 47.5 |   |
| Advertising                and promotion expense            |   |                                  | 27,760  |   |   |   | 23,607  |                               |   |   | 4,153 |   |   |   | 17.6 |   |
| Selling,                general and administrative expense  |   |                                  | 15,619  |   |   |   | 10,855  |                               |   |   | 4,764 |   |   |   | 43.9 |   |
| Litigation                settlement                        |   |                                  | — |   |   |   | (10,800 | )                                  |   |   | 10,800 |   |   |   | 100.0 |   |
| Interest                expense                             |   |                                  | 7,147   |   |   |   | 3,018   |                               |   |   | 4,129 |   |   |   | 136.8 |   |
| Loss                on early extinguishment of debt         |   |                                  | 414     |   |   |   | — |                               |   |   | 414 |   |   |   | 100.0 |   |
| Net  income                                       |   |                                  | 16,312  |   |   |   | 15,229  |                               |   |   | 1,083 |   |   |   | 7.1 |   |

**Domestic      Net Sales**

|                                           |   |                                  |    |
|------------------------------------------------|--------|---------------------------------------|---------|
|                                           |   |                                  |    |   |   |   |   | Increase                (Decrease) |   |
|                                           |   | 2007                                  |    |   | 2006 |   |   | Amount |   |   | Percentage |   |
|                                           |   | (dollars                in thousands) |    |
| Topical                pain care               |   | $                                     | 23,548  |   |   | $ | 21,767 |   |   | $ | 1,781 |   |   |   | 8.2 | % |
| Medicated                skin care             |   |                                  | 32,678  |   |   |   | 17,340 |   |   |   | 15,338 |   |   |   | 88.5 |   |
| Oral                care                       |   |                                  | 13,042  |   |   |   | 1,601 |   |   |   | 11,441 |   |   |   | 714.6 |   |
| Internal                OTC                    |   |                                  | 12,967  |   |   |   | 3,550 |   |   |   | 9,417 |   |   |   | 265.3 |   |
| Dietary                supplements             |   |                                  | 6,710   |   |   |   | 9,934 |   |   |   | (3,224 | ) |   |   | (32.5 | ) |
| Medicated                dandruff shampoos     |   |                                  | 8,770   |   |   |   | 7,798 |   |   |   | 972 |   |   |   | 12.5 |   |
| Other                OTC and toiletry products |   |                                  | 3,046   |   |   |   | 4,321 |   |   |   | (1,275 | ) |   |   | (29.5 | ) |
|   Total                              |   | $                                     | 100,761 |   |   | $ | 66,311 |   |   | $ | 34,450 |   |   |   | 52.0 |   |

*Icy Hot*
*Icy Hot*

*Cortizone-10*
*Balmex*
*Gold Bond*
*Gold Bond*
*Gold Bond*

*ACT*

----

*Unisom*
*Kaopectate*

*Dexatrim*
*Dexatrim Max2o*
*Dexatrim Max*

*.*
*Selsun Naturals*

*Bullfrog *

**International      Revenues**

*ACT*

**Cost      of Sales**

*Icy Hot Pro-Therapy*

**Advertising      and Promotion Expense**

*Icy Hot Pro-Therapy*

**Selling,      General and Administrative Expense**

**Litigation      Settlement**

*Dexatrim*
*Dexatrim*

**Interest      Expense**

----

**Loss      on Early Extinguishment of Debt**

**Comparison      of Nine Months Ended August 31, 2007 and 2006**

|                                                        |   |                                  |    |   |   |   |    | Increase                (Decrease) |   |
|-------------------------------------------------------------|--------|---------------------------------------|---------|--------|--------|--------|---------|------------------------------------|--------|
|                                                        |   | 2007                                  |    |   | 2006   |   |    | Amount                             |   |   | Percentage |   |
|                                                        |   | (dollars                in thousands) |    |
| Domestic                net sales                           |   | $                                     | 301,601 |   |   | $      | 216,907 |                               |   | $ | 84,694 |   |   |   | 39.0 | % |
| International                revenues (including royalties) |   |                                  | 21,159  |   |   |   | 18,533  |                               |   |   | 2,626 |   |   |   | 14.2 |   |
| Total                revenues                               |   |                                  | 322,760 |   |   |   | 235,440 |                               |   |   | 87,320 |   |   |   | 37.1 |   |
| Cost                of sales                                |   |                                  | 98,868  |   |   |   | 73,312  |                               |   |   | 25,556 |   |   |   | 34.9 |   |
| Advertising                and promotion expense            |   |                                  | 86,211  |   |   |   | 75,575  |                               |   |   | 10,636 |   |   |   | 14.1 |   |
| Selling,                general and administrative expense  |   |                                  | 42,516  |   |   |   | 33,974  |                               |   |   | 8,542 |   |   |   | 25.1 |   |
| Acquisition                expenses                         |   |                                  | 2,057   |   |   |   | — |                               |   |   | 2,057 |   |   |   | 100.0 |   |
| Litigation                settlement                        |   |                                  | — |   |   |   | (19,305 | )                                  |   |   | 19,305 |   |   |   | 100.0 |   |
| Interest                expense                             |   |                                  | 22,702  |   |   |   | 8,318   |                               |   |   | 14,384 |   |   |   | 172.9 |   |
| Loss                on early extinguishment of debt         |   |                                  | 2,633   |   |   |   | 2,805   |                               |   |   | (172 | ) |   |   | (6.1 | ) |
| Net                income                                   |   |                                  | 44,870  |   |   |   | 40,202  |                               |   |   | 4,668 |   |   |   | 11.6 |   |

**Domestic      Net Sales**

|                                           |   |                                  |    |
|------------------------------------------------|--------|---------------------------------------|---------|
|                                           |   |                                  |    |   |   |   |   |  Increase                (Decrease) |   |
|                                           |   | 2007                                  |    |   | 2006 |   |   | Amount |   |   | Percentage |   |
|                                           |   | (dollars                in thousands) |    |
| Topical                pain care               |   | $                                     | 75,700  |   |   | $ | 82,605 |   |   | $ | (6,905 | ) |   |   | (8.4 | )% |
| Medicated                skin care             |   |                                  | 92,105  |   |   |   | 49,620 |   |   |   | 42,485 |   |   |   | 85.6 |   |
| Oral                care                       |   |                                  | 35,260  |   |   |   | 4,919 |   |   |   | 30,341 |   |   |   | 616.8 |   |
| Internal                OTC                    |   |                                  | 33,430  |   |   |   | 9,143 |   |   |   | 24,287 |   |   |   | 265.6 |   |
| Dietary                supplements             |   |                                  | 21,564  |   |   |   | 27,696 |   |   |   | (6,132 | ) |   |   | (22.1 | ) |
| Medicated                dandruff shampoos     |   |                                  | 27,406  |   |   |   | 28,075 |   |   |   | (669 | ) |   |   | (2.4 | ) |
| Other                OTC and toiletry products |   |                                  | 16,136  |   |   |   | 14,849 |   |   |   | 1,287 |   |   |   | 8.7 |   |
|   Total                              |   | $                                     | 301,601 |   |   | $ | 216,907 |   |   | $ | 84,694 |   |   |   | 39.0 |   |

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

*Cortizone-10*
*Balmex*
*Gold Bond*
*Gold Bond*

*ACT*

----

*Unisom*
*Kaopectate*

*Dexatrim*
*Dexatrim Max2o*
*Garlique*
*Garlique *

*Selsun Salon*
*Selsun      Naturals*

*Bullfrog Marathon      Mist*

**International      Revenues**

*ACT*

**Cost      of Sales**

*Icy Hot Pro-Therapy*

**Advertising      and Promotion Expense**

*Icy Hot      Pro-Therapy*
*Selsun Salon *

**Selling,      General and Administrative Expense**

**Litigation      Settlement**

*Dexatrim*
*Dexatrim*

**Interest      Expense**

----

**Loss      on Early Extinguishment of Debt**

***Liquidity      and Capital Resources***

*ACT*

***Foreign      Operations***

***Recent      Accounting Pronouncements***

----

***Forward      Looking Statements***

| ·   | we                may not be able to successfully integrate the five brands acquired                from                Johnson & Johnson on January 2, 2007 into our portfolio of consumer                brands or achieve other synergies associated with the                acquisition; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                have a significant amount of debt that could adversely affect our                business                and growth prospects; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                face significant competition in the OTC healthcare, toiletries and                dietary                supplements markets; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | we                may face additional lawsuits alleging injury from the use of                *Dexatrim* products containing ephedrine, which we discontinued                manufacturing and shipping in September 2002, or from other products                that                we currently produce or may produce in the                future; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                product liability insurance coverage may be insufficient to cover                existing                or future liability claims; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                acquisition strategy is subject to risk and may not be                successful; |
|--------------------|------------------------------------------------------------------------------------------------------|

| ·   | our                business is regulated by numerous federal, state and foreign governmental                authorities, which subjects us to elevated compliance costs and risks                of                non-compliance; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                success depends on our ability to anticipate and respond in a timely                manner to changing consumer                preferences; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                rely on a few large customers, particularly Wal-Mart Stores, Inc.,                for a                significant portion of our sales; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                may be adversely affected by fluctuations in buying decisions of                mass                merchandise, drug and food trade buyers and the trend toward retail                trade                consolidation; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                rely on third party manufacturers for a portion of our product portfolio,                including products under our *Gold Bond, Icy Hot, Selsun*,                *Dexatrim, ACT, Unisom*and *Cortizone-10*brands; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                dietary supplement business could suffer as a result of injuries                caused by                dietary supplements in general, unfavorable scientific studies or                negative                press; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                business could be adversely affected if we are unable to successfully                protect our intellectual property; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | because                most of our operations are located in Chattanooga, Tennessee, we                are                subject to regional and local                risks; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                depend on sole source suppliers for three active ingredients used                in our                *Pamprin*and *Prēmsyn PMS* products and a limited source of                supply for selenium sulfide, the active ingredient in *Selsun                Blue*, and if we are unable to buy these ingredients, we will not                be                able to manufacture these products; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                are subject to the risks of doing business                internationally; |
|--------------------|----------------------------------------------------------------------------------------------|

| ·   | the                terms of our outstanding debt obligations limit certain of our                activities; |
|--------------------|--------------------------------------------------------------------------------------------------------------|

| ·   | our                operations are subject to significant environmental laws and                regulations; |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | we                are dependent on certain key executives, the loss of whom could have                a                material adverse effect on our                business; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                shareholder rights plan and restated charter contain provisions that                may                delay or prevent a merger, tender offer or other change of control                of                us; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                trading price of our common stock may be                volatile; |
|--------------------|--------------------------------------------------------------------------------------|

| ·   | to                service our indebtedness, we will require a significant amount of                cash;                and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------|

| ·   | other                risks described in our Securities and Exchange Commission                filings. |
|--------------------|--------------------------------------------------------------------------------------------------------|

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

----

**Item      4. Controls and Procedures**

----

**PART      II.  OTHER INFORMATION**

**Item      1.  Legal Proceedings**

**Item      1A.  Risk Factors**

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

|                     Period                       |   | Total                Number of Shares Purchased |    |   | Average                Price Paid Per Share (1) |   |    | Total                Number of Shares Purchased as Part of Publicly Announced Plans or                 Programs (2) |   |   | Approximate                Dollar Value that may yet be Purchased under the Plans or                 Programs (2) |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|---------|--------|-------------------------------------------------|--------|---------|--------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                               |   |                                            |    |   |                                            |   |    |                                                                                                                     |   |   |                                                                                                                        |   |
| June                1– June 30                                                                                                                                                                                                                               |   |                                            | — |   |                                            | $      | — |                                                                                                                     |   |   | —                                                                                                                     |   |   | $ | 88,147,224 |   |
| July                1 – July 31                                                                                                                                                                                                                              |   |                                            | 250,000 |   |                                            | $      | 59.29   |                                                                                                                     |   |   | 250,000                                                                                                                     |   |   | $ | 73,325,939 |   |
| August                1 – August 31                                                                                                                                                                                                                          |   |                                            | 130,129 |   |                                            | $      | 57.17   |                                                                                                                     |   |   | 130,129                                                                                                                     |   |   | $ | 65,887,142 |   |
|   Total                Third Quarter                                                                                                                                                                                                                     |   |                                            | 380,129 |   |                                            | $      | 58.56   |                                                                                                                     |   |   | 380,129                                                                                                                     |   |   | $ | 65,887,142 |   |

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

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

**Item      3.  Defaults Upon Senior Securities**

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

**Item      5.  Other Information**

**Item      6. Exhibits**

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

----

**CHATTEM,      INC.**

**SIGNATURES**

|                                        | **CHATTEM,                INC.**(Registrant) |                                                                 |
|---------------------------------------------|----------------------------------------------|----------------------------------------------------------------------|
|                                        |                                         |                                                                 |   |
| Dated:                October 9, 2007  |                                         | /s/ Zan              Guerry                                |   |
|                                        |                                         | Zan              Guerry                                         |   |
|                                        |                                         | Chairman              and Chief Executive              Officer  |   |
|                                        |                                         |                                                                 |   |

|                                          |   |                                                        |
|-----------------------------------------------|--------|-------------------------------------------------------------|
|                                          |   |                                                        |   |
| Dated:                  October 9, 2007  |   | /s/ Robert                B. Long                      |   |
|                                          |   | Robert                B. Long                               |   |
|                                          |   | Vice                President,                Finance  |   |
|                                          |   |                                                        |   |

----

**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  |

----