UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-K




ANNUAL
      REPORT


PURSUANT
      TO SECTION 13 OR 15(D) OF


THE
      SECURITIES EXCHANGE ACT OF 1934




For
      the fiscal year ended November 30, 2007




Commission
      file number 0-5905




CHATTEM,
      INC.


A
      TENNESSEE CORPORATION




IRS
      EMPLOYER IDENTIFICATION NO. 62-0156300




1715
      WEST 38TH STREET


CHATTANOOGA,
      TENNESSEE 37409


TELEPHONE:
      423-821-4571




Securities
      registered pursuant to Section 12(b) of the Act:




Title
                of Each Class
            
            Name
                of Each Exchange on
              Which
                RegisteredNone
            
            None




Securities
      registered pursuant to Section 12(g) of the Act:




Common
      Stock, without par value




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


YES  þ       NO   ̈




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


YES   ̈       NO  þ




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months, and (2) has been subject to such filing requirements for
      the past 90 days.YES  þ       NO   ̈




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein and will not be contained, to the best
      of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.   ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Act).






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 Act).    YES
      NO þ




As
      of May 31, 2007, the aggregate market value of voting and non-voting shares
      held
      by non-affiliates was $1,145,761,897.  For the sole purpose of this
      computation, all executive officers and directors of the registrant have been
      deemed to be affiliates of the registrant.




As
      of January 22, 2008, 19,118,928 shares of common stock were
      outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE:




Portions
      of the registrant’s Proxy Statement for the registrant’s 2008 Annual Meeting of
      Shareholders (the “2008 Proxy Statement”) are incorporated by reference in Part
      III of this Form 10-K to the extent described herein.












CHATTEM,
          INC.
  TABLE
          OF
          CONTENTS
   PART
          I


Item
              
              Page1.
              Business
              31A.
              Risk
                  Factors
              171B.
              Unresolved
                  Staff Comments
              262.
              Properties
              273.
              Legal
                  Proceedings
              274.
              Submission
                  of Matters to a Vote of Securities Holders
              27PART
                  II5.
              Market
                  for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of   Equity Securities
              286.
              Selected
                  Financial Data
              307.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              307A.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              428.
              Financial
                  Statements and Supplementary Data
              439.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              869A.
              Controls
                  and Procedures
              869B.
              Other
                  Information
              87PART
                  III10.
              Directors,
                  Executive Officers and Corporate Governance
              8711.
              Executive
                  Compensation
              8912.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              8913.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              8914.
              Principal
                  Accounting Fees and Services
              89PART
                  IV15.
              Exhibits
                  and Financial Statement Schedules
              89





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          2
          -


PART
      I




Item
      1.
      Business




Except
      as
      otherwise indicated, all references in this Form 10-K to “we”, “us”, “our” or
“Chattem” refer to Chattem, Inc. and our subsidiaries. In addition, in this Form
      10-K, our fiscal years ended November 30, 2005, November 30, 2006 and November
      30, 2007 are referred to as fiscal 2005, fiscal 2006 and fiscal 2007,
      respectively.  Our fiscal year ending on November 30, 2008 is referred
      to as fiscal 2008.  Brand names that are italicized in this Form 10-K
      refer to trademarks that we own or license.




General




Founded
      in 1879, we are a leading marketer and manufacturer of a broad portfolio of
      branded over-the-counter (“OTC”) healthcare products, toiletries and dietary
      supplements in such categories as medicated skin care, topical pain care, oral
      care, internal OTC, medicated dandruff shampoos, dietary supplements and other
      OTC and toiletry products. Our portfolio of products includes well-recognized
      brands such as:




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




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




•
            ACT
                and Herpecin-L - oral
                care;




•
            Unisom,
Pamprin
                and Kaopectate - internal
                OTC;




•
            Selsun
                Blue and Selsun
                BlueNaturals -
                medicated dandruff shampoos;




•
            Dexatrim,
Garlique
                and New Phase - dietary
                supplements; and




•
            Bullfrog,
UltraSwimand
Sun-In
                -other OTC and
                toiletry products.




Our
      products target niche markets that are often outside the focus of larger
      companies where we believe we can achieve and sustain significant market share
      through product innovation and strong advertising and promotion support. Many
      of
      our products are among the U.S. market leaders in their respective categories.
      For example, our portfolio of topical pain care brands, our Cortizone-10 anti-itch
      ointment and our Gold
      Bond medicated body powders have the leading U.S. market share in these
      categories. We support our brands through extensive and cost-effective
      advertising and promotion. We sell our products nationally through mass
      merchandiser, drug and food channels, principally utilizing our own sales
      force.




Our
      experienced management team has grown our business by acquiring brands,
      developing product line extensions and increasing market penetration of our
      existing products.  In January 2007, we acquired the U.S. rights to
      five consumer and OTC brands from Johnson & Johnson (“J&J
      Acquisition”).  The acquired brands are: ACT, an anti-cavity
      mouthwash/mouth rinse; Unisom, an OTC sleep-aid;
      Cortizone-10, a
      hydrocortisone anti-itch product; Kaopectate, an anti-diarrhea
      product; and Balmex, a
      diaper rash product.  We will continue to seek opportunities to
      acquire attractive brands in niche markets.  Recent product line
      extensions include Bullfrog Marathon Mist, Icy
      Hot Heat Therapy, Icy Hot Vanishing
      Scent
      Cream, Capzasin
      No-Mess, Selsun
      Naturals and Dexatrim
      Max Evening Appetite Control.




Competitive
      Strengths




We
      believe that the following key competitive strengths are critical to our
      continuing success:




Diverse
      and broad
      portfolio of well-recognized branded products.  We currently
      market a diverse and broad portfolio of 26 brands in a variety of different
      product categories. Our products are marketed under well-recognized brand names,
      which include lcy Hot,
Gold
      Bond, Selsun Blue, ACT,
      Cortizone-10 and Unisom.  Our
      presence in diverse product categories reduces our exposure to changing consumer
      demand or weakness in any single category.




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          3
          -


Significant
      presence in niche markets.  We acquire and develop brands that
      compete in small to medium sized niche markets where we believe we can achieve
      significant market presence and build brand equity. Our products often face
      less
      competitive pressures because we focus on markets that are frequently outside
      the core product areas of larger consumer products and pharmaceutical companies.
      This focus provides us with the opportunity to develop strong brand equity,
      identify and respond to consumer trends and leverage our strong selling and
      distribution capabilities in these markets.




High
      margins and
      efficient operating structure.  We are able to achieve high
      gross margins as a result of our ability to build and maintain brand equity,
      our
      significant market presence in niche markets and efficiencies in purchasing,
      manufacturing and distribution. In addition, we seek to tightly control our
      expenses, which strengthens our operating margins. Our high margins and
      resulting strong cash flow allow us to withstand temporary fluctuations in
      our
      product markets that could have adverse effects on our business.




Proven
      advertising and promotion strategy.  We aggressively build
      awareness and consumer loyalty of our brands through extensive and
      cost-effective advertising strategies that emphasize the competitive strengths
      of our products. We rely principally on television advertising and to a lesser
      extent, radio and print advertising and promotional programs. We strive to
      achieve cost efficiencies in our advertising by being opportunistic in our
      purchase of media and through control of our production costs. We also maintain
      the flexibility to allocate purchased media time among our key brands to respond
      quickly to changing consumer trends and to support our growing brands. We
      believe our well-developed advertising and promotion platform allows us to
      quickly and efficiently launch and support newly acquired brands and product
      line extensions as well as increase market penetration of existing brands.
      Advertising and promotion expenditures represented approximately 27% of our
      total revenues in fiscal 2007. Given the importance of our products’ brand
      equity we expect to maintain a significant level of spending on advertising
      and
      promotion.




Established
      national sales and distribution network.  We have an
      established national sales and distribution network that sells to mass
      merchandiser, drug and food retailers such as Wal-Mart Stores, Inc., Walgreens
      Co. and The Kroger Co. In fiscal 2007, sales to our top ten customers
      constituted approximately 71% of our total domestic gross sales, which allows
      us
      to target our selling efforts to our key customers and tailor specific programs
      to meet their needs.  Our fiscal 2007 sales to Wal-Mart Stores, Inc.
      accounted for approximately 33% of our total domestic gross sales. Through
      targeted sales and utilization of our established network, including our
      approximately 46 person sales force, we believe we can effectively sell and
      distribute newly acquired brands and product line extensions while maintaining
      tight controls over our selling expenses.




Focused
      new
      product development.  We strive to increase the value of our
      brands while obtaining an increased market presence through product line
      extensions.  In fiscal 2007, our product development expenditures were
      $5.5 million.  During the past several years, we have expanded our
      product development staff and increased research and development
      spending.  We rely on internal market research as well as consultants
      to identify new product formulations and line extensions that we believe appeal
      to the needs of consumers. Recent examples of product line extensions include
      Icy Hot Heat Therapy,
Bullfrog
      Marathon Mist,
Selsun Naturals and
Capzasin
      No-Mess.  In fiscal 2007, we introduced six new product line
      extensions and have ten new product launches scheduled for fiscal
      2008.




Business
      Strategy




Our
      strategy to achieve future growth is to generate new sales through strong
      marketing and promotional programs, new product development and the acquisition
      of new brands.




Brand
      management
      and growth.  We seek to increase market share for our major
      brands through focused marketing of our existing products and product line
      extensions while maintaining market share for our smaller brands. Our marketing
      strategy is to position our products to meet consumer preferences identified
      through extensive use of market and consumer research. We intend to channel
      advertising and promotion resources to those brands that we feel exhibit the
      most potential for growth. We also intend to increase our new product line
      extension activities as evidenced by our increased research and development
      spending and the expansion of our product development staff.  In
      addition, we continually evaluate the profit potential of and markets for our
      brands and, in instances where our objectives are not realized, will dispose
      of
      under-performing brands and redeploy the resulting cash assets. For example,
      in
      fiscal 2005, we sold the pHisoderm line of skin care products, a brand that
      was
      no longer consistent with our brand strategy.




Strategic
      acquisitions.  We intend to identify and acquire brands in
      niche markets where we believe we can achieve a significant market presence
      through our established advertising and promotion platform, sales and
      distribution network and




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          4
          -


research
      and development capabilities. We target brands with sales that are highly
      responsive to increased advertising support, provide an opportunity for product
      line extensions through our research and development efforts and have the
      potential to meet our high gross margin goals.  On January 2, 2007, we
      completed the J&J Acquisition and acquired the U.S. rights to the following
      five OTC brands: ACT,
Unisom,
Cortizone-10,
Kaopectate
      and Balmex.  Also in
      fiscal 2007, we acquired the worldwide trademark and rights to sell and market
      ACT in Western Europe
      from Johnson & Johnson (“ACT
      Acquisition”).  We will continue to seek opportunities to
      acquire attractive brands in niche markets.




Developments
      During Fiscal 2007




Acquisition
      of Brands




In
      January 2007, we completed the J&J Acquisition, acquiring the U.S. rights to
      the following five OTC brands: ACT, Unisom,
Cortizone-10,
Kaopectate
      and Balmex.  The
      purchase price of the J&J Acquisition was $410.0 million plus $1.6 million
      of costs directly related to the acquisition, of which $0.5 million was incurred
      and funded during our fiscal year ended November 30, 2006.  The
      purchase price related to $5.9 million of inventory, $1.8 million of assumed
      liabilities, $0.5 million of equipment, $403.1 million of trademarks, which
      were
      assigned an indefinite life, and $3.9 million of distribution rights, which
      was
      assigned a useful life of five years.  Johnson & Johnson will
      continue to manufacture and supply certain of the products to us for a period
      of
      up to 18 months from the close of the acquisition, or such earlier date as
      we
      are able to move production to our facilities.  The price we pay
      Johnson & Johnson for the manufactured products is equivalent to the
      manufacturing cost, which includes all costs associated with the manufacturing
      and delivery of the product.  Certain of the products are manufactured
      and supplied under assumed agreements with third party
      manufacturers.  During fiscal 2007, manufacturing of certain of the
      acquired products was transferred to our facilities.




In
      May
      2007, we acquired the worldwide trademark and rights to sell and market ACT in Western Europe
      from
      Johnson & Johnson (“ACT Acquisition”) for $4.1 million in cash plus certain
      assumed liabilities.  The ACT Acquisition was
      funded
      with existing cash.




Products




In
      fiscal
      2007, we introduced the following product line extensions: Icy Hot Heat Therapy, Icy
      Hot Vanishing Scent
      Cream, Capzasin
      No-Mess, Bullfrog
      Marathon Mist, Selsun
      Naturals and Dexatrim
      Max Evening Appetite Control.




Debt




In
      January 2007, we completed an amendment to our Amended Revolving Credit Facility
      providing for up to a $100.0 million revolving credit facility and a $300.0
      million term loan (the “Credit Facility”).  The proceeds from the term
      loan under the Credit Facility were used to finance in part the J&J
      Acquisition.  The Credit Facility includes “accordion” features that
      permit us under certain circumstances to increase our borrowings under the
      revolving credit facility by $50.0 million and to borrow an additional $50.0
      million as a term loan, subject to successful syndication.  In April
      2007, we entered into an amendment to our Credit Facility that, among other
      things, permitted the sale of the 1.625% Convertible Senior Notes due 2014
      (the
“1.625% Convertible Notes”) and reduced the applicable interest rates on the
      revolving credit facility portion of our Credit Facility.





In
      April
      2007, we completed a private offering of $100.0 million of the 1.625%
      Convertible Notes.  The 1.625% Convertible Notes bear interest at an
      annual rate of 1.625%, payable semi-annually in May and November of each year,
      with the first interest payment due November 2007.  Concurrently with
      the sale of the 1.625% Convertible Notes, we purchased a note hedge for $29.5
      million and issued warrants for proceeds of $17.4 million with an affiliate
      of
      Merrill Lynch (the “Counterparty”).  The note hedge and warrants are
      separate and legally distinct instruments that bind us and the Counterparty
      and
      have no binding effect on the holders of the 1.625% Convertible
      Notes.





In
      April
      2007, we utilized the net proceeds from the 1.625% Convertible Notes and
      borrowings under the revolving credit facility portion of our Credit Facility
      to
      repay $128.0 million of the term loan under the Credit Facility.  In
      July 2007, we utilized borrowings under the revolving credit facility portion
      of
      our Credit Facility to repay an additional $25.0 million of the term loan under
      the Credit Facility.  In connection with the term loan repayments
      during April 2007 and July 2007, we retired a proportional share of the term
      loan debt issuance costs and recorded the resulting loss on early extinguishment
      of debt of $2.6 million for fiscal 2007.





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          5
          -


Recent
      Developments





In
      January 2008, we utilized additional borrowings under the revolving credit
      facility portion of our Credit Facility to repay an additional $35.0 million
      of
      the term loan under the Credit Facility.  In connection with the term
      loan repayment, we retired a proportional share of the term loan debt issuance
      costs and recorded the resulting loss on early extinguishment of debt of $0.5
      million in fiscal 2008.





Stock
      Repurchase




During
      fiscal 2007, we repurchased 0.4 million shares of our common stock under our
      stock repurchase program for $23.6 million at an average price per share of
      $58.98.




Products




We
      currently market a diverse and broad portfolio of branded OTC healthcare
      products, toiletries and dietary supplements in such categories as medicated
      skin care, topical pain care, oral care, internal OTC, medicated dandruff
      shampoos, dietary supplements and other OTC and toiletry products. Our branded
      products by category consist of:




Category
                  and
                  Brands
              Product
                  DescriptionMedicated
                  Skin CareGold
                  Bond
              Medicated
                  powder, cream, lotion, first aid and foot care productsCortizone-10
              Hydrocortisone
                  anti-itchBalmex
              Diaper
                  rashTopical
                  Pain CareIcy
                  Hot
              Dual
                  action muscular and arthritis pain relieverAspercreme
              Odor-free
                  arthritis pain relieverFlexall
              Aloe-vera
                  based pain relieverCapzasin
              Deep
                  penetrating, odor-free arthritis pain relieverSportscreme
              Odor-free
                  muscular pain relieverArthritis
                  Hot
              Value-priced
                  arthritis pain relieverOral
                  CareACT
              Anti-cavity
                  mouthwash/mouth rinseHerpecin-L
              Cold
                  sore lip treatmentBenzodent
              Denture
                  pain relief creamInternal
                  OTCPamprin
              Menstrual
                  pain relieverPrēmsyn
                  PMS
              Premenstrual
                  pain relieverUnisom
              OTC
                  sleep-aidKaopectate
              Anti-diarrheal
                  remedyMedicated
                  Dandruff ShampoosSelsun
                  Blue
              Medicated
                  dandruff shampoosDietary
                  SupplementsDexatrim
              Diet
                  pillsGarlique
              Cholesterol
                  health supplementMelatonex
              Sleep
                  aidNew
                  Phase
              Menopausal
                  supplementOmnigest
                  EZ
              Digestive
                  aidOther
                  OTC and Toiletry ProductsBullfrog
              Sunscreens
  -
            6
            -
 Sun-In
              Spray-on
                  hair lightenerUltraSwim
              Chlorine-removing
                  shampoo and conditionerMudd
              Facial
                  masque




Medicated
      Skin Care




The
Gold
      Bond brand competes in
      numerous product categories with specially formulated products for both adults
      and babies, including body powder, therapeutic hand and body lotions, foot
      care
      and first aid.  Gold
      Bond has long been the number one selling brand of medicated body powder
      domestically, and its strong brand equity among consumers has allowed us to
      successfully launch new line extensions, most recently under the Gold Bond Ultimate
      line.




Initially
      launched in fiscal 2003, Gold
      Bond Ultimate Healing Skin Therapy Lotion helps to heal and nurture
      extremely dry, cracked and irritated skin with seven intensive moisturizers
      plus
      vitamins A, C and E. The Gold
      Bond Ultimate line expanded into the everyday bath powder category with
      the introduction of Gold
      Bond Ultimate Comfort Body Powder during the first quarter of fiscal
      2005. Gold Bond
      Ultimate Comfort Body Powder is a talc-free powder that provides freshness,
      odor
      protection and moisture control and features the signature Ultimate
      fragrance.  In the fourth quarter of fiscal 2006, we introduced Gold Bond Ultimate Softening
      Lotion.  The new Ultimate Softening lotion is specially formulated to
      soften rough dry skin.




As
      part
      of the J&J Acquisition, we have added two new brands to the medicated skin
      care category:  Cortizone-10 and Balmex.  Cortizone-10
      is the leading
      brand in the anti-itch category.  Cortizone-10 helps to relieve
      itching associated with various skin irritations including rashes, dry skin,
      eczema, poison ivy and insect bites.  All Cortizone-10 products contain
      1% hydrocortisone and are available in four forms.  The Cortizone-10 brand provides
      an occlusive barrier which helps keep moisture in and germs out.  The
Cortizone-10 crème with
      aloe and Crème Plus with 10 moisturizers are designed to relieve itch fast and
      contain ingredients to soothe skin.  Cortizone-10 Intensive
      Healing Formula, to be launched in January 2008, contains moisturizers,
      anti-oxidant vitamins, and chamomile to moisturize for 24 hours and to help
      heal
      itchy skin.




Balmexis
      a line of diaper
      rash products available in two formulas.  The primary formula contains
      zinc oxide to treat and prevent diaper rash.  The second formula is a
      petrolatum based product for treatment and prevention of diaper rash and for
      treatment of other skin irritations.




Topical
      Pain Care




Our
      topical pain care portfolio features six distinctly positioned brands. Our
      flagship brand, Icy
      Hot, is a leader in the external analgesic category and receives heavy
      media support and strong advertising featuring NBA super-star Shaquille O’Neal.  In
      fiscal 2007, we launched Icy
      Hot Heat Therapy, an air-activated, self heating pain
      reliever.  In fiscal 2008, we plan to extend the Icy Hot brand with two new
      products – Icy Hot PM
      Lotion and Icy Hot PM
      Patch – specifically designed to help relieve arthritis sufferers’ nighttime
      pain.




Aspercreme
      provides odor-free
      pain relief for sufferers of arthritis and other joint and muscle pain. In
      fiscal 2008, this brand will be extended with two new product
      introductions:  Aspercreme Nighttime Lotion
      offers maximum nighttime pain relief, and Aspercreme Heat Gel delivers
      fast-acting pain relief with a heat sensation in a no-mess gel.  Capzasin is an arthritis
      pain
      reliever that contains capsaicin.   Sportscreme is targeted at
      serious athletes as well as “weekend warriors”.  Flexall is marketed toward
      those who seek a menthol and aloe vera based pain reliever for conditions such
      as back pain or muscle strain.  Arthritis Hot rounds out the
      portfolio and competes against private label products at a value
      price.




Oral
      Care




Our
      oral
      care brands include Herpecin-L, a lip care
      product that treats cold sores and protects lips from the harmful rays of the
      sun, and Benzodent, a
      dental analgesic cream for pain related to dentures.  With the J&J
      Acquisition, we added ACT, a line of anti-cavity mouthwash and mouth
      rinses.  ACT
      is available in three flavors of anti-cavity fluoride rinse and in the new
      ACT
      Restoring line with four flavors and several package sizes.  The ACT Restoring line introduces
      the following consumer benefits: restores minerals to soft spots; strengthens
      enamel to prevent tooth decay; and kills bad breath germs.




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          7
          -


Internal
      OTC’s




We
      compete in the menstrual analgesic category with two brands, Pamprin and Prēmsyn
      PMS.  Pamprin, featuring
      four
      distinct formulas, seeks to provide complete relief of a woman’s menstrual
      symptoms, while Prēmsyn
      PMS has one formula designed to address specific symptoms of premenstrual
      syndrome.  Pamprin is available in
      four
      formulas: Multi-Symptom, Cramp, All Day, and Max.




In
      connection with the J&J Acquisition we also added the Unisom and Kaopectate
      brands.  Unisom is the leading single
      ingredient brand in the OTC sleep aid category. Unisom is available in
      two
      product forms: SleepTabs with the active ingredient diphenhydramine and
      SleepGels which contains the active ingredient doxylamine. Unisom was supported with
      new
      consumer advertising soon after the acquisition in 2007 and this effort was
      successful in returning the brand to growth.  Kaopectate is a well
      established anti-diarrheal remedy.  Kaopectate is available in
      Regular and Extra Strength and three flavors: regular, Peppermint and
      Cherry.  In addition, Kaopectate offers a stool softener under its
      brand banner.




Medicated
      Dandruff Shampoos




The
      Selsun Blue line of
      product consists of three distinct product offerings, each using a different
      active medication and different shampoo ingredients to provide unique formulas
      for the various consumer segments in the marketplace.




The
SelsunBlue
      base formula
      contains the active ingredient selenium sulfide and is comprised of four
      shampoos: Medicated, with a cooling clean feel; Moisturizing, with aloe and
      moisturizers; 2-in-1, with a patented conditioning system; and Daily for more
      sensitive scalp treatment.




Selsun
      Salon, launched in
      2005, contains the active ingredient, pyrithione zinc, plus moisturizers and
      nutrients for enhanced hair care.  All Selsun Salon products are
      formulated with a blend of salon quality moisturizers, vitamins and nutrients
      to
      provide great looking hair.




Selsun
      Blue Naturals,
      launched in fiscal 2007, contains the active ingredient salicylic
      acid.  The two shampoos (Artic Energy and Island Breeze) have a
      clear-looking formula with moisturizers, botanicals and vitamins to provide
      gentler care of the hair and scalp and help restore hair to its natural, healthy
      state.




Dietary
      Supplements




Dexatrim
      is a leading brand
      in the diet pill category that include such products as Dexatrim Max, Dexatrim
      Max2O,
Dexatrim
      Max Evening Appetite
      Control and Dexatrim
      Natural.   Dexatrim Max was introduced
      in fiscal 2005 and contains Vitamin B complex, ginseng, chromium and ECGC from
      green tea.  In fiscal 2006, we launched a new diet product, Dexatrim Max2O.  Dexatrim
      Max2O,
      an
      effervescent tablet that dissolves in water, contains a Vitamin B complex and
      ECGC from green tea and is available in four flavors.  In fiscal 2007,
Dexatrim Max Evening
      Appetite Control was added to the line; it is a caffeine-free diet pill intended
      for night time use.  Dexatrim Natural, a drug
      free, all-natural dietary supplement, is available in green tea, caffeine-free
      and extra energy versions.  In 2008 we plan to introduce Dexatrim Max Daytime Appetite
      Control formula with new extended release technology for all-day diet
      control.  In addition we intend to introduce new Dexatrim packaging in
      2008.




We
      compete in the dietary supplements category with our Sunsource line of products.
      We focus the marketing of our Sunsource dietary supplements on cardiovascular
      health. Known for its support of cardiovascular health, Garlique leads the garlic
      supplement category and is positioned as an odor-free, one-per-day supplement
      that helps maintain cholesterol levels already within a healthy
      range.  All Sunsource products are specially formulated to provide
      consumers with an all-natural, drug-free way to support their specific health
      care goals.




Other
      OTC and Toiletry Products




The
      majority of sales of our seasonal brands, Bullfrog, Sun-In
      and UltraSwim, typically occur
      during the first three quarters of our fiscal year.  Bullfrog is a line of high
      quality, high SPF waterproof sunblocks targeted to outdoor active children
      and
      adults.  In fiscal 2006, we launched Bullfrog Mosquito Coast,
      which combines SPF 30 sunblock with a DEET-free insect repellent in a convenient
      spray form.  In 2007, we launched Bullfrog Marathon
      Mist.  This new product available in an adult and




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children’s
      version combines quick-drying SPF 30 sunblock in a continuous spray
      format.  In 2008 we plan to enhance our Quik Gel and Quik Gel Sports
      Spray products with “UV Extender”, which provides broader UVB and UVA
      protection.




Sun-In,
      a hair lightener, is
      available in two varieties of spray-on and a highlighting gel.  UltraSwim is our niche line
      of swimmers’ shampoos and conditioner.  Our other brands include Mudd, a line of specialty
      masque products, and a variety of other smaller brands.




International
      Business




Our
      international business, which represented approximately 7% of our total revenues
      in fiscal 2007, has been concentrated in Canada, an export market driven from
      our operations in Ireland and the United Kingdom (“U.K.”) and in international
      countries in which Selsun,
      ACT and certain of our other products are sold.




Canada




Chattem
      Canada, a wholly-owned subsidiary based in Mississauga, Ontario, Canada, markets
      and distributes certain of our consumer products throughout Canada. The
      manufacturing of these products is principally done in our facilities in
      Chattanooga, Tennessee, while some packaging is done in Mississauga. Chattem
      Canada utilizes a national broker for its sales efforts. Brands marketed and
      sold in Canada include Icy
      Hot, Selsun,
Gold
      Bond, Pamprin, Sun-In,
UltraSwim
      and Aspercreme.




Europe




Our
      European business is conducted through Chattem Global Consumer Products Limited
      (“Chattem Global”), our Irish subsidiary, located in Limerick, Ireland; Chattem
      (U.K.) Limited (“Chattem (U.K.)”), a wholly-owned subsidiary located in
      Basingstoke, Hampshire, England; and Chattem Greece, a wholly-owned subsidiary
      located in Alimos Attica, Greece.  Packaging and distribution
      operations are conducted principally in Ireland with certain products sourced
      from our U.S. operations. Chattem uses a national broker in the U.K., while
      distributors are used to market and sell our products on the European continent
      and elsewhere. Our products sold in Europe include Selsun, ACT,
      Sun-In, and Mudd.
      Cornsilk® is sold by
      Chattem (U.K.) under a licensing arrangement with the owner of its registered
      trademark, Coty, Inc. Spray Blond Spray-In Hair lightener is marketed only
      on
      the European continent.  Certain of our OTC health care products are
      sold by Chattem Global to customers in parts of Central Europe and the Middle
      East.




United
      States Export




Our
      United States export division services various distributors primarily located
      in
      the Caribbean and Latin America. We distribute Selsun, ACT,Gold
      Bond, Dexatrim, Icy
      Hot, Aspercreme, Capzasin
      and Sportscreme into these
      markets.




Selsun
      International




We
      plan
      to focus our efforts on expanding Selsun’s international
      presence in existing key markets, such as Canada, Mexico, Brazil, the U.K.
      and
      Australia.  In certain international markets, we sell Selsun through distributors
      and receive a royalty based on a percentage of distributor sales.  We
      have entered into distributor agreements with third party distributors for
Selsun in various
      international markets other than Canada and the U.K., where we engage national
      brokers.




Marketing,
      Sales and Distribution




Advertising
      and Promotion




We
      aggressively seek to build brand awareness and product usage through extensive
      and cost effective advertising strategies that emphasize the competitive
      strengths of our products. We allocate a significant portion of our revenues
      to
      the advertising and promotion of our products. Expenditures for these purposes
      were approximately 27% of total revenues in fiscal 2007.




We
      seek
      to increase market share for our major brands through focused marketing of
      our
      existing products and product line extensions while maintaining market share
      for
      our smaller brands. Our marketing strategy is to position our products




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to
      meet
      consumer preferences identified through extensive use of market and consumer
      research. We intend to channel advertising and promotion resources to those
      brands that we feel exhibit the most potential for growth. We rely principally
      on television advertising and to a lesser extent, radio and print advertising
      and promotional programs. We strive to achieve cost efficiencies in our
      advertising by being opportunistic in our purchase of media and controlling
      our
      production costs. We also maintain the flexibility to allocate purchased media
      time among our key brands to respond quickly to changing consumer trends and
      to
      support our growing brands. We believe our well-developed advertising and
      promotion platform allows us quickly and efficiently to launch and support
      newly
      acquired brands and product line extensions as well as increase market
      penetration of existing brands.




We
      work
      directly with retailers to develop promotional calendars and campaigns for
      each
      brand, customizing the promotion to the particular requirements of the
      individual retailer. These programs, which include cooperative advertising,
      temporary price reductions, in-store displays and special events, are designed
      to obtain or enhance distribution at the retail level and to reach the ultimate
      consumers of the product. We also utilize consumer promotions such as coupons,
      samples and trial sizes to increase the trial and consumption of the
      products.




Customers




Our
      customers consist of mass merchandisers such as Wal-Mart Stores, Inc., drug
      retailers such as Walgreens Co. and food retailers such as The Kroger Co. In
      fiscal 2007, our ten largest customers represented approximately 71% of total
      domestic gross sales, and our 20 largest customers represented approximately
      83%
      of total domestic gross sales, which allows us to target our selling efforts
      to
      our key customers and customize programs to meet their needs.  Our
      fiscal 2007 sales to Wal-Mart Stores, Inc. accounted for approximately 33%
      of
      total domestic gross sales. No other customer accounts for more than 10% of
      our
      total domestic gross sales.  Shoppers Drug Mart, a Canadian retailer,
      accounted for more than 10% of our total international gross sales in fiscal
      2007.  Consistent with industry practice, we do not operate under a
      long-term written supply contract with any of our customers.




Sales
      and Distribution




We
      have
      an established national sales and distribution sales organization that sells
      to
      mass merchandiser, drug and food retailers. We utilize our national sales
      network, consisting primarily of our own sales force, to sell and distribute
      newly acquired brands and product line extensions while maintaining tight
      controls over our selling expenses. Our experienced sales force of approximately
      46 people serves all direct buying accounts on an individual
      basis.  For the more fragmented food channel and for the smaller
      individual stores, we rely on a national network of regional brokers to provide
      retail support. In excess of 93% of our domestic orders are received
      electronically through our electronic data interchange, or EDI, system, and
      accuracy for our order fulfillment has been consistently high. Our sales
      department performs significant analysis helping both our sales personnel and
      customers understand sales patterns and create appropriate promotions and
      merchandising aids for our products. Although not contractually obligated to
      do
      so, in certain circumstances, we allow our customers to return unsold
      merchandise, and for seasonal products, we provide extended payment terms to
      our
      customers.




Internationally,
      our products are sold by national brokers in Canada and the U.K. and by
      distributors in Europe and Latin America. We have entered into distribution
      agreements with third party distributors for Selsun in various
      international markets except Canada and the U.K.




Most
      of
      our products, including those manufactured by third party manufacturers, are
      shipped from leased warehouses located in Chattanooga, Tennessee. We also use
      a
      third party logistics service located in California to warehouse and distribute
      our products to the west coast area of the United States. We use third party
      common carriers to transport our products. We do not generally experience wide
      variances in the amount of inventory we maintain. At present, we have no
      significant backlog of customer orders and are promptly meeting customer
      requirements.




Manufacturing
      and Quality Control




During
      fiscal 2007, we manufactured products representing approximately 47% of our
      domestic sales volume at our two Chattanooga, Tennessee, facilities. The balance
      of our products are manufactured by third party contract manufacturers including
      our Gold Bond medicated
      powders, Icy Hot
      patches and sleeves, ACT, Herpecin-L,
      and our dietary
      supplements, including Dexatrim products. Newly
      acquired products that are similar to our currently manufactured products
      generally can be manufactured by us with the adaptation of existing equipment
      and facilities or the addition of new equipment at relatively low




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cost.  We
      contract with third party manufacturers to manufacture products that are not
      compatible with our existing manufacturing facilities or which can be more
      cost-effectively manufactured by others. In many cases, third party
      manufacturers are not obligated under contracts that fix the term of their
      commitment. We believe we have adequate capacity to meet anticipated demand
      for
      our products through our own manufacturing facilities and third party
      manufacturers.




To
      monitor the quality of our products, we maintain an internal quality control
      system supported by onsite microbiology and analytical laboratories. We have
      trained quality control technicians who test our products and processes and
      guide the products through the manufacturing cycle. Consultants also are
      employed from time to time to test our quality control procedures and the
      compliance of our manufacturing operations with the United States Food and
      Drug
      Administration (“FDA”) regulations. We audit our third party manufacturers to
      monitor compliance with applicable current good manufacturing practices (“GMPs”)
      as defined by FDA regulations.




We
      purchase raw materials and packaging materials from a number of third party
      suppliers primarily on a purchase order basis. Except for a select few active
      ingredients used in our Pamprin and Prēmsyn
      PMS products, we are not limited to a single source of supply for the
      ingredients used in the manufacture of our products.  Sales of our
Pamprin and Prēmsyn
      PMS products represented approximately 3% of our consolidated total
      revenues in fiscal 2007.  In addition, we have a limited source of
      supply for selenium sulfide, the active ingredient in Selsun Blue.  As a
      result of the limited supply and increase in worldwide demand for selenium
      metal, a major component in the manufacture of selenium sulfide, prices have
      been and are expected to be volatile.  We believe that our current and
      potential alternative sources of supply will be adequate to meet future product
      demands.  Sales of our Selsun Blue products
      represented approximately 12% of our consolidated total revenues in fiscal
      2007.




Research
      and Development




We
      strive
      to increase the value of our base brands and obtain an increased market presence
      through product line extensions. We rely on internal market research as well
      as
      consultants to identify new product formulations and line extensions that we
      believe appeal to the needs of consumers. Our growth strategy includes an
      emphasis on new product development as evidenced by our increased research
      and
      development spending and the expansion of our product development
      staff.  We currently employ approximately 32 persons in our research
      and development department and also engage consultants from time to time to
      provide expertise or research in a particular product area. Our product
      development expenditures were $5.5 million in fiscal 2007 and $4.2 million
      in
      fiscal 2006.




Competition




We
      compete in the OTC health care, toiletries and dietary supplements markets.
      These markets are highly competitive and are characterized by the frequent
      introduction of new products, including the migration of prescription drugs
      to
      the OTC market, often accompanied by major advertising and promotional support.
      Our competitors include large pharmaceutical companies such as Johnson &
Johnson, consumer products companies such as Procter & Gamble Co., and
      dietary supplements companies such as GlaxoSmithKline and Nature’s Bounty, Inc.,
      many of which have considerably greater financial and other resources and are
      not as highly leveraged as we are. Our competitors may be better positioned
      to
      spend more on research and development, employ more aggressive pricing
      strategies, utilize greater purchasing power, build stronger vendor
      relationships and develop broader distribution channels than us. In addition,
      our competitors have often been willing to use aggressive spending on trade
      promotions and advertising as a strategy for building market share at the
      expense of their competitors, including us. The private label or generic
      category has also become increasingly more competitive in certain of our product
      markets. Our products continue to compete for shelf space among retailers who
      are increasingly consolidating.




Trademarks
      and Patents




Our
      trademarks are of material importance to our business and among our most
      important assets. We own all of our trademarks associated with brands that
      we
      currently market. In fiscal 2007, substantially all of our total revenues were
      from products bearing proprietary or licensed brand names. Accordingly, our
      future success may depend in part upon the goodwill associated with our brand
      names, particularly Gold
      Bond, Selsun
      Blue, Icy
      Hot,ACT, Unisom
      and Cortizone-10.




Our
      principal brand names are registered trademarks in the United States and certain
      foreign countries. We maintain or have applied for patent and copyright
      protection in the United States relating to certain of our existing and proposed
      products and processes.  We also license from third parties other
      intellectual property that is used in certain of our products. The sale of
      these
      products relies on our ability to maintain and extend our supply and licensing
      agreements with these third parties.




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Government
      Regulation




The
      U.S.
      manufacturing, distribution, processing, formulation, packaging, labeling and
      advertising of our products are subject to regulation by federal agencies,
      including, but not limited to:




•   the
                Food & Drug Administration (the “FDA”);


•   the
                Federal Trade Commission (the “FTC”);


•   the
                Drug Enforcement Administration (the “DEA”);


•   the
                Consumer Product Safety Commission (the “CPSC”);


•   the
                United States Postal Service;


•   the
                Environmental Protection Agency (“EPA”); and


•   the
                Occupational Safety and Health Administration (“OSHA”).




These
      activities are also regulated by various agencies of the states, localities
      and
      foreign countries in which our products are sold. In particular, the FDA
      regulates the safety, manufacturing, labeling and distribution of OTC drugs,
      medical devices, dietary supplements, functional toiletries, and skin care
      products. In addition, the FTC has primary jurisdiction to regulate the
      advertising of OTC drugs, medical devices, dietary supplements, functional
      toiletries and skin care products.  In foreign countries these same
      activities may be regulated by Ministries of Health, or other local regulatory
      agencies.  The manner in which products sold in foreign countries are
      registered, how they are formulated, or what claims may be permitted may differ
      from similar products and practices in the U.S.




Under
      the
      Federal Food, Drug, and Cosmetic Act (“FDC Act”) all “new drugs”, including OTC
      products, are subject to pre-market approval by the FDA under the new drug
      application (“NDA”) process. The FDC Act defines a “new drug” as a drug that is
      not generally recognized among scientifically qualified experts as safe and
      effective for use under the conditions stated in its labeling. A drug might
      also
      be considered new if it has not been used, outside of clinical investigations,
      to a material extent or for a material time under conditions described for
      a
      product. A drug that is generally regarded as safe and effective is not a “new
      drug” and therefore does not require pre-market approval.




The
      FDA
      has adopted an administrative process, the OTC Drug Review, to determine which
      active ingredients and indications are safe and effective for use in OTC
      products. With the aid of independent expert advisory review panels, the FDA
      develops rules, referred to as “monographs”, which define categories of safe and
      effective OTC drugs. These monographs group drug ingredients into therapeutic
      classes such as OTC external analgesics. Products that comply with monograph
      conditions do not require pre-market approval from the FDA.




The
      FDA
      has finalized monographs for certain categories of OTC drugs such as drug
      products for the control of dandruff. If a product is marketed beyond the scope
      of a particular final monograph and without an approved NDA, such as if the
      manufacturer makes a label claim not covered by the monograph, the FDA will
      consider the product to be unapproved and misbranded and can take enforcement
      action against the drug company and product including, but not limited to,
      issuing a warning letter or initiating a product seizure. In order to market
      a
      product whose active ingredients are not permitted by a final monograph, a
      company must submit an NDA to the FDA.




There
      are
      several categories of OTC drugs, such as external analgesics, for which the
      FDA
      has not completed its review. In such cases, the FDA has established tentative
      final monographs. These tentative final monographs are similar to final
      monographs in that they establish conditions under which OTC drugs can be
      marketed for certain uses without FDA pre-marketing approval. The FDA generally
      does not take enforcement action against an OTC drug subject to a tentative
      final monograph unless there is a safety problem or a substantial effectiveness
      question.




The
      majority of our OTC drug products are regulated pursuant to the FDA monograph
      system, among the exceptions are Pamprin All Day, the subject
      of an abbreviated NDA held by The Perrigo Company, and the newly acquired Unisom SleepTabs, the subject
      of an approved NDA that we now hold.  Many of our products are sold
      according to tentative final monographs. Therefore, we face the risk that the
      FDA could take action if there is a safety or efficacy issue with respect to
      one
      of our products or finalize these monographs with revised conditions as to
      which
      of our products do not comply. If any of our products were found not to be
      in
      compliance with the final monograph, we may be forced to reformulate or relabel
      such products, if possible, or submit an NDA or an abbreviated NDA to continue
      to market our existing formulation. The submission of a marketing application
      may require the preparation and submission of clinical tests, which would be
      time consuming and expensive. We may not receive FDA approval of any application
      in a timely manner or at all. If we were not able to reformulate or




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relabel
      our product or obtain FDA approval of an NDA, we would be required to
      discontinue selling the affected product. Changes in monographs could also
      require us to change our product formulation or dosage form, revise our
      labeling, modify our production process or provide additional scientific data,
      any of which would involve additional costs and may be prohibitive. For our
      OTC
      drug products that are sold according to final monographs, we cannot deviate
      from the conditions described in the final monograph, such as changes in
      approved active levels or labeling claims, unless we obtain pre-marketing
      approval from the FDA. In 2004, we launched Pamprin All Day containing
      the menstrual pain reliever naproxen sodium. The Perrigo Company (“Perrigo”)
      manufactures this product for us under its existing abbreviated NDA. Failure
      to
      comply with the conditions in a final monograph or NDA, where applicable, could
      result in an FDA enforcement action.




We
      have
      responded to certain questions received from the FDA with respect to efficacy
      of
      pyrilamine maleate, one of the active ingredients used in certain of
      the  Pamprin  Menstrual
      Pain Relief and Prēmsyn
      PMS  products. While we addressed all of the FDA questions in
      detail, the final monograph for menstrual drug products, which has not yet
      been
      issued, will determine if the FDA considers pyrilamine maleate safe and
      effective for menstrual relief products. If pyrilamine maleate is not included
      in the final monograph, we would be required to reformulate the products to
      continue to provide the consumer with multi-symptom relief benefits. We have
      been actively monitoring the process and do not believe that either Pamprin Menstrual Pain Relief
      or  Prēmsyn
      PMS  will be materially adversely affected by the FDA review.
      We believe that any adverse finding by the FDA would likewise affect our
      principal competitors in the menstrual product category and that finalization
      of
      the menstrual products monograph is not imminent. Moreover, we have formulated
      alternative Pamprin
      products that fully comply with both the internal analgesic and menstrual
      product monographs. Sales of our Pamprin Menstrual Pain Relief
      and Prēmsyn
      PMS products represented approximately 3% of our consolidated total
      revenues in fiscal 2007.




In
      early
      2005, infrequent, but serious, adverse cardiovascular events were reported
      to
      the FDA associated with patients who were prescribed a subclass of COX-2
      inhibitor non-steroidal anti-inflammatory drugs (“NSAID’s”) for long periods to
      relieve pain of chronic diseases such as arthritis. These products include
      Vioxx®, Bextra® and Celebrex®. In February 2005, the FDA held a joint advisory
      committee meeting to seek external counsel on the extent to which manufacturers
      might further warn patients of these cardiovascular risks on prescription
      product labeling, or prohibit sale of these prescription products. As part
      of
      its response on this issue, the FDA has recommended labeling changes for both
      the prescription and OTC NSAID’s. Well-known OTC NSAID’s such as ibuprofen and
      naproxen, which have been sold in vast quantities since the 1970s were affected
      by this regulatory action. Manufacturers of OTC NSAID’s were asked to revise
      their labeling to provide more specific information about the potential
      cardiovascular and gastrointestinal risks recognizing the limited dose and
      duration of treatment of these products. Our  Pamprin All
      Day  product, which contains naproxen sodium, is subject to these new
      labeling requirements. Pamprin All Day is
      manufactured for us by Perrigo, holder of an abbreviated NDA for naproxen
      sodium. As holder of the abbreviated NDA, Perrigo has made the mandated labeling
      changes within the time frame required by the FDA. Product with revised labeling
      compliant with new FDA regulations began shipping in February,
      2006.




We
      are
      also aware of the FDA’s concern about the potential toxicity due to concomitant
      use of OTC and prescription products that contain the analgesic ingredient
      acetaminophen, an ingredient also found in  Pamprin  and  Prēmsyn
      PMS . We are participating in an industry-wide effort to reassure the FDA
      that the current recommended dosing regimen is safe and effective and that
      proper labeling and public education by both OTC and prescription drug companies
      are the best policies to abate the FDA’s concern. The FDA will address this
      issue in its effort to finalize the monograph on internal analgesic products.
      We
      believe the FDA may issue revised labeling requirements within the next year,
      perhaps prior to monograph closure, which will cause the industry to relabel
      its
      analgesic products to better inform consumers of concomitant use.




We
      were
      notified in October, 2000 that the FDA denied a citizen petition submitted
      by
      Thompson Medical Company, Inc., the previous owner of Sportscreme and Aspercreme.  The
      petition sought a determination that 10% trolamine salicylate, the active
      ingredient in Sportscreme and Aspercreme,
      was clinically
      proven to be an effective active ingredient in external analgesic OTC drug
      products and should be included in the FDA’s yet-to-be finalized monograph for
      external analgesics. We have met with the FDA and submitted a proposed protocol
      study to evaluate the efficacy of 10% trolamine salicylate as an active
      ingredient in OTC external analgesic drug products. We are working to develop
      alternate formulations for Sportscreme and Aspercreme
      in the event that
      the FDA does not consider the available clinical data to conclusively
      demonstrate the efficacy of trolamine salicylate when the OTC external analgesic
      monograph is finalized. If 10% trolamine salicylate is not included in the
      final
      monograph, we would likely be required to discontinue these products as
      currently formulated and remove them from the market after expiration of an
      anticipated grace period. If this occurred, we believe we could market related
      products as homeopathic products and could also reformulate them using
      ingredients included in the FDA monograph. We are uncertain as to when the
      monograph is likely to become final. Sales of our Sportscreme and Aspercreme
      products
      represented approximately 5% of our consolidated total revenues in fiscal
      2007.




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Certain
      of our topical analgesic products are currently marketed under an FDA tentative
      final monograph. The FDA has recently proposed that the final monograph exclude
      external analgesic products in patch, plaster or poultice form, unless the
      FDA
      receives additional data supporting the safety and efficacy of these products.
      On October 14, 2003, we submitted to the FDA information regarding the safety
      of
      our Icy Hot patches and
      arguments to support our product’s inclusion in the final monograph. We have
      also participated in an industry-wide effort coordinated by Consumer Healthcare
      Products Association (“CHPA”) to establish with the FDA a protocol of additional
      research that will allow the patches to be marketed under the final monograph
      even if the final monograph does not explicitly allow them. The CHPA submission
      to the FDA was made on October 15, 2003. Thereafter, in April 2004, we launched
      the Icy Hot Sleeve, a
      flexible, non-occlusive fabric patch with 16% menthol. In February 2006, we
      launched the Capzasin
      Back & Body Patch containing 0.025% capsaicin. All of these drug products
      contain levels of active ingredients consistent with the levels permitted in
      the
      OTC monograph. If additional research is required either as a preliminary to
      final FDA monograph approval and/or as a requirement of future individual
      product sale, we may need to invest in a considerable amount of expensive
      testing and data analysis. Any preliminary cost may be shared with other patch
      manufacturers. Because the submissions made into the FDA docket have been
      forwarded from its OTC Division to its Dermatological Division within the Center
      for Drug Evaluation and Research (“CDER”), we believe that the monograph is
      unlikely to become final and take effect before mid-2008 and perhaps thereafter.
      If neither action described above is successful and the final monograph
      summarily excludes such products, we will have to file an NDA in order to
      continue to market the Icy
      Hot and Aspercreme patches,
Icy
      Hot Sleeve, Capzasin Back & Body
      Patch, and/or similar delivery systems under our other topical analgesic brands.
      In such case, we would have to remove the existing products from the market
      likely one year from the effective date of the final monograph, or pending
      FDA
      review and approval of an NDA. The preparation of an NDA would likely take
      us
      six to 18 months and would be expensive. It typically takes the FDA at least
      12
      months to rule on an NDA once it is submitted. Sales of our Icy Hot, Capzasin, and Aspercreme
      patches and Icy Hot Sleeve products
      represented approximately 8% of our consolidated total revenues in fiscal
      2007.




During
      the finalization of the monograph on sunscreen products, the FDA chose to hold
      in abeyance specific requirements relating to the characterization of a
      product’s ability to reduce UVA radiation. In September 2007, the FDA published
      a new proposed rule amending the previously stayed final monograph on sunscreens
      to include new formulation options, labeling requirements and testing standards
      for measuring UVA protection and revised testing for UVB
      protection.  When implemented, the final rule will require all
      sunscreen manufacturers to conduct new testing and revise the labeling of their
      products within eighteen months after issuance of the final rule.  We
      will be required to take such actions for our Bullfrog product
      line.




The
      FDA
      also regulates the research, testing, manufacturing, safety, labeling, storage,
      recordkeeping, pre-market clearance or approval, promotion, distribution and
      production of medical devices in the United States to ensure that medical
      products distributed domestically are safe and effective for their intended
      uses. Under the FDC Act, medical devices are classified into one of three
      classes (Class I, Class II or Class III) depending on the degree of risk
      associated with each medical device and the extent of control needed to ensure
      safety and effectiveness. Our Icy HotHeat
      Therapy, Icy Hot Pro-Therapy Knee and
      Back Brace and the Icy Hot
      Pro-Therapy Disposable Cold and Hot Packs are Class I
      devices.




Class
      I
      devices are subject to the lowest level of regulatory scrutiny because they
      are
      considered low risk devices. FDA requires Class I devices to comply with its
      General Controls, which include compliance with the applicable portions of
      the
      FDA’s Quality System Regulation, or QSR, facility registration and product
      listing, reporting of adverse medical events, and use of appropriate truthful
      and non-misleading labeling, advertising, and promotional materials. Most Class
      I devices are not required to submit 510(k) pre-market notifications (so-called
      “Class I Exempt”), but all are subject to FDA’s general misbranding and
      adulteration prohibitions. Both the Icy Hot Pro-Therapy Back and
      Knee Brace and the Icy Hot
      Pro-Therapy Disposable Cold and Hot Packs, and Icy HotHeat
      Therapy are subject to
      regulations which exempt them from the 510(k) pre-market notification
      requirements. The FDA may disagree with our conclusion that clearances or
      approvals for such devices were not required or may require clearance or
      approval for future modifications of these or other devices. Such submissions
      may be time consuming and costly and may not ultimately be cleared or approved
      by FDA. If the FDA determines that we have failed to comply with applicable
      regulatory requirements, it can impose a variety of enforcement actions which
      could include public warning letters, fines, injunctions, consent decrees,
      civil
      penalties, suspension or delayed issuance of approvals or seizure or recall
      of
      our products. The FDA could also require us to repair, replace, or refund the
      cost of devices that we manufactured or distributed.




The
      Dietary Supplement Health and Education Act of 1994 (“DSHEA”) was enacted on
      October 25, 1994. DSHEA amends the FDC Act by defining dietary supplements,
      which include vitamins, minerals, amino acids, nutritional supplements, herbs
      and botanicals, as a new category of food separate from conventional food.
      DSHEA
      provides a regulatory framework to ensure safe, quality dietary supplements
      and
      to foster the dissemination of accurate information about such products. Under




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DSHEA,
      the FDA is generally prohibited from regulating dietary supplements as food
      additives or as drugs unless product claims, such as claims that a product
      may
      diagnose, mitigate, cure or prevent an illness, disease or malady, permit the
      FDA to attach drug status to a product. In such case, the FDA could require
      pre-market approval to sell the product. Manufacturers are not required to
      obtain prior FDA approval before producing or selling a dietary supplement
      unless the ingredient is considered “new” or was not on the market as of October
      15, 1994.




Dietary
      supplement products may include truthful, non-misleading and substantiated
      statements of nutritional support.  Examples of such claims are
      statements describing general well-being resulting from consumption of a dietary
      ingredient or the role of a nutrient or dietary ingredient in affecting or
      maintaining a structure or function of the body.  These claims are
      also known as “structure/function”
      claims.  FDA requires companies which include structure/function
      claims on their labeling to notify the agency of the claim within 30 days of
      first marketing the dietary supplement with the identified
      claims.  FDA does not typically respond to these notifications, but
      could issue a “courtesy letter” should the agency question some aspect of the
      submission.  A dietary supplement that includes a structure/function
      claim on its labeling is also required to include a disclaimer stating that
      the
      FDA has not evaluated the claim.  FDA distinguishes between
      structure/function claims which do not require FDA pre-approval and
      disease-related health claims which require FDA prior approval or the issuance
      of an authorizing regulation.




A
      product
      marketed as a dietary supplement and subsequently approved for use as a drug
      or
      biologic may continue to be sold and regulated as a dietary supplement unless
      the FDA specifically finds that it is unsafe for use as a dietary supplement.
      A
      substance that has not been marketed as a dietary supplement prior to its
      approval as a drug or biologic, or prior to initiation of substantial clinical
      investigations for such uses, may be sold as a dietary supplement only pursuant
      to an FDA regulation authorizing its use as a dietary supplement.




The
      FDA
      may take enforcement action against a dietary supplement if the FDA believes
      the
      supplement presents a significant or unreasonable risk of illness or injury
      under conditions of use suggested in the labeling or under ordinary conditions
      of use. Under DSHEA, the FDA bears the burden of proof to show that a dietary
      supplement presents a significant or unreasonable risk of illness or injury.
      The
      FDA may also take enforcement action for unlawful promotion of a dietary
      supplement.




The
      FDA
      has finalized some of its regulations to implement DSHEA including those
      relating to nutritional labeling requirements and nutritional support claims.
      The FDA also has under development additional regulations and guidelines to
      implement DSHEA. Newly adopted and future regulations may require expanded
      or
      different labeling for our dietary supplements. We cannot determine what effect
      these regulations, when fully implemented, will have on our business in the
      future. These regulations could require the reformulation or discontinuance
      of
      certain products, additional recordkeeping, warnings, notification procedures
      and expanded documentation of the properties of certain products and scientific
      substantiation regarding ingredients, product claims and safety. Failure to
      comply with applicable FDA requirements can result in sanctions being imposed
      on
      us or the manufacture of our products including, but not limited to, warning
      letters, product recalls and seizures, injunctions or criminal
      prosecution.




The
      FDA
      has promulgated regulations relating to the manufacturing process for drugs,
      which are known as current GMP’s. In June 2007, the FDA published the final
      rule on GMP’s for dietary supplements, with an effective date of June 25, 2008.
      We source all of our dietary supplement products from outside suppliers,
      including Dexatrim,
New
      Phase, Garlique, Melatonex,
      and Omnigest. As part of its
      regulatory authority, the FDA may periodically conduct audits of the physical
      facilities, machinery, processes and procedures that we, or our suppliers,
      use
      to manufacture products. The FDA may perform these audits at any time without
      advanced notice. As a result of these audits, the FDA may order us, or our
      suppliers, to make certain changes in manufacturing facilities and processes.
      We
      may be required to make additional expenditures to comply with these orders
      or
      the new GMP requirements, or possibly discontinue selling certain products
      until
      we, or our suppliers, comply with these orders and requirements. As a result,
      our business could be adversely affected.




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




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or
      ephedrine, may be causally related to these serious adverse events. In
      connection with the RAND Report, HHS sought public comment on whether additional
      measures are required concerning the sale and distribution of dietary
      supplements containing ephedrine alkaloids.




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




The
      FDA
      also regulates some of our products as cosmetics or drug-cosmetics. There are
      fewer regulatory requirements for cosmetics than for drugs or dietary
      supplements. Cosmetics marketed in the United States must comply with the FDC
      Act, the Fair Packaging and Labeling Act and the FDA’s implementing regulations.
      Cosmetics must also comply with quality and labeling requirements proscribed
      by
      the FDA. In addition, several of our products are subject to product packaging
      regulation by the CPSC and the FDA.




Combination
      products can be regulated via a memorandum of understanding between federal
      agencies. In February 2006, we launched Bullfrog Mosquito Coast,
      a
      combination of sunscreen and insect repellent. The sunscreen labeling is
      regulated by the FDA in its sunscreen monograph, but the insect repellent,
      IR-3535, and its labeling, require pre-market safety and efficacy testing and
      approval by the EPA and all 50 states (and U.S. Territories).  Bullfrog Mosquito Coast
      received approval from all states and the EPA prior to launch. Further, the
      FDA
      has announced its intention in its November, 2005 Unified Agenda to regulate,
      under the monograph system, the combination of sunscreens and insect repellents
      in a notice of proposed rulemaking yet to be published. Any final rule making
      is
      years in the future and the FDA might grandfather existing products or otherwise
      allow time for their compliance.




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




Finally,
      the FDA regulates the quality of all finished drug, medical device, and food
      products under GMP’s. As part of its regulatory authority, the FDA may
      periodically conduct audits of the physical facilities, machinery, processes
      and
      procedures that we, or our suppliers, use to manufacture products. The FDA
      may
      perform these audits at any time without advanced notice. In February 2006,
      we
      registered as a medical device manufacturer with the FDA in connection with
      our
      sale of Icy Hot
      Pro-Therapy products. It might be expected that we could be audited as a
      new device manufacturer under medical device GMP’s. Working with consultants we
      have instituted medical device GMP’s pursuant to applicable portions of the
      medical device Quality System Regulation, or QSR. As a result of any audits,
      the
      FDA may order us, or our suppliers, to make certain changes in manufacturing
      facilities and processes. We may be required to make additional expenditures
      to
      comply with these orders, or possibly discontinue selling certain products
      until
      we, or our suppliers, comply with these orders. As a result, our business could
      be adversely affected.  In December 2006, the Dietary Supplement and
      Nonprescription Drug Consumer Protection Act was signed into law with an
      effective date of December 22, 2007.  This new law requires the
      mandatory reporting of serious adverse events and specific record keeping
      requirements for dietary supplements and non-prescription drugs marketed without
      an approved application.




The
      FDA
      has broad regulatory and enforcement powers. If the FDA determines that we
      have
      failed to comply with applicable regulatory requirements, it can impose a
      variety of enforcement actions from public warning letters, fines, injunctions,
      consent decrees and civil penalties to suspension or delayed issuance of
      approvals, seizure or recall of our products, total or




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partial
      shutdown of production, withdrawal of approvals or clearances already granted,
      and criminal prosecution. The FDA can also require us to repair, replace or
      refund the cost of devices that we manufactured or distributed. If any of these
      events were to occur, it could materially adversely affect us.




Environmental
      Matters




We
      continually assess the compliance of our operations with applicable federal,
      state and local environmental laws and regulations. Our policy is to record
      liabilities for environmental matters when loss amounts are probable and
      reasonably determinable. Our manufacturing site utilizes chemicals and other
      potentially hazardous materials and generates both hazardous and non-hazardous
      waste, the transportation, treatment, storage and disposal of which are
      regulated by various governmental agencies. We have engaged environmental
      consultants on a regular basis to assist with our compliance efforts. We believe
      we are currently in compliance with all applicable environmental permits and
      are
      aware of our responsibilities under applicable environmental laws. Any
      expenditure necessitated by changes in law and permitting requirements cannot
      be
      predicted at this time, although such costs are not expected to be material
      to
      our financial position, results of operations or cash flows.




In
      late
      2005, we began the manufacture of Bullfrog Mosquito Coast at
      our Chattanooga, Tennessee plant. Bullfrog Mosquito Coast is
      a
      combination of sunscreen and insect repellent. The EPA has primary jurisdiction
      over insect repellants and combination insect repellant products containing
      sunscreens, such as Bullfrog Mosquito Coast.
      Both
      products and manufacturing establishments must be registered with EPA. The
      FDA
      has published notice that a monograph regulating combination insect repellants
      and sunscreens will be issued during 2008. This new monograph may change the
      regulatory enforcement jurisdiction from the EPA to the FDA.




The
      handling, disposal, and environmental exposure of the insect repellent, IR-3535,
      is strictly regulated by the EPA under the Clean Waters Act.  Any
      failure to comply with applicable regulations with respect to the use of IR-3535
      might result in EPA action against us, including fines or injunctive
      action.




Employees




We
      employ
      approximately 465 persons on a full-time basis and 9 persons on a part-time
      basis in the United States. In addition, we employ approximately 24 persons
      at
      our foreign subsidiaries’ offices. Our employees are not represented by any
      organized labor union, and we consider our labor relations to be
      good.




Market
        Data
  We
        use
        market and industry data throughout this Annual Report on Form 10-K and the
        documents incorporated by reference herein, which we have obtained from market
        research, publicly available information and industry publications. These
        sources generally state that the information that they provide has been obtained
        from sources believed to be reliable, but that the accuracy and completeness
        of
        such information are not guaranteed. The market and industry data is often
        based
        on industry surveys and the preparers’ experience in the industry. Similarly,
        although we believe that the surveys and market research that others have
        performed are reliable, we have not independently verified this information.
        In
        particular, market share information has been coordinated and prepared for
        us by
        A.C. Nielsen at our request based on market segments that we defined and
        for
        which we have paid customary fees. Therefore, such data, including the market
        category delineations that form the basis for such data, are not necessarily
        representative of results that would have been obtained from an independent
        source.


Financial
      Information on Products and Geographical Areas




For
      financial information on our product categories and geographical areas, see
      note
      11 to our consolidated financial statements.




Additional
      Information




Our
      internet website address is www.chattem.com. We make available free of charge
      on
      or through our website our annual reports on Form 10-K, quarterly reports on
      Form 10-Q, current reports on Form 8-K, reports filed pursuant to Section 16,
      and all amendments to those reports as soon as reasonably practicable after
      such
      material is electronically filed with or furnished to the Securities and
      Exchange Commission.  We also make available on our website our Code
      of Business Conduct.  The information found on our website shall not
      be deemed incorporated by reference into this annual report on Form 10-K or
      filed with the Securities and Exchange Commission and does not constitute a
      part
      of this annual report on Form 10-K.




Item
      1A.  Risk
      Factors




Our
      business is subject to a number of risks. Some of the risks associated with
      our
      operations are described in the “Competition,” “Government Regulation,”
“Environmental,” and “Manufacturing and Quality Control” portions of this Form
      10-K. In addition to the other information contained in this Form 10-K, the
      following risk factors should be carefully considered.




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We
      face significant competition in the OTC health care, toiletries and dietary
      supplements markets.




The
      OTC
      health care, toiletries and dietary supplements markets are highly competitive
      and are characterized by the frequent introduction of new products, including
      the migration of prescription drugs to the OTC market, often accompanied by
      major advertising and promotional support. These introductions may adversely
      affect our business especially because we compete in categories in which product
      sales are highly influenced by advertising and promotions. Our competitors
      include large pharmaceutical companies such as Johnson & Johnson, consumer
      products companies such as Procter & Gamble Co., and dietary supplements
      companies such as GlaxoSmithKline and Nature’s Bounty, Inc., many of which have
      considerably greater financial and other resources than we do and are not as
      highly leveraged as we are. These competitors are thus better positioned to
      spend more on research and development, employ more aggressive pricing
      strategies, utilize greater purchasing power, build stronger vendor
      relationships and develop broader distribution channels than us. In addition,
      our competitors have often been willing to use aggressive spending on trade
      promotions and advertising as a strategy for building market share at the
      expense of their competitors including us. The private label or generic category
      has also become increasingly more competitive in certain of our product markets.
      If we are unable to continue to introduce new and innovative products that
      are
      attractive to consumers or are unable to allocate sufficient resources to
      effectively advertise and promote our products so that they achieve wide spread
      market acceptance, we may not be able to compete effectively, and our operating
      results and financial condition may be adversely affected.




Our
      acquisition strategy is subject to risk and may not be successful.




A
      component of our growth strategy depends on our ability to successfully execute
      acquisitions, which involves numerous risks including:




•
            not
                accurately identifying suitable products or brands for
                acquisition;




•
            difficulties
                in integrating the operations, technologies and manufacturing processes
                of
                the acquired products;




•
            the
                diversion of management’s attention from other business concerns;
                and




•
            incurring
                substantial additional
                indebtedness.




Any
      future acquisitions, or potential acquisitions, may result in substantial costs,
      disrupt our operations or materially adversely affect our operating
      results.




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




In
      fiscal
      2007, Wal-Mart Stores, Inc. represented approximately 33% of our total domestic
      gross sales, our ten largest customers represented approximately 71% of our
      total domestic gross sales and our 20 largest customers represented
      approximately 83% of our total domestic gross sales. Consistent with industry
      practice, we do not operate under a long-term written supply contract with
      Wal-Mart Stores, Inc. or any of our other customers. Our business would
      materially suffer if we lost Wal-Mart Stores, Inc. as a continuing major
      customer or if our business with Wal-Mart Stores, Inc. significantly decreases.
      The loss of sales to any other large customer could also materially and
      adversely affect our financial results.




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Litigation
      may adversely affect our business, financial condition and results of
      operations.




Our
      business is subject to the risk of litigation by consumers, employees, suppliers
      or others through private actions, class actions, administrative proceedings,
      regulatory actions or other litigation.  The outcome of litigation,
      particularly class action lawsuits and regulatory actions, is difficult to
      assess or quantify.  Plaintiffs in these types of lawsuits
      may seek recovery of very large or indeterminate amounts, and the magnitude
      of the potential loss relating to such lawsuits may remain unknown for
      substantial periods of time.  The cost to defend current and future
      litigation may be significant.  There may also be adverse publicity
      associated with litigation that could decrease customer acceptance of our
      products, regardless of whether the allegations are valid or whether we are
      ultimately found liable.  As a result, litigation may adversely affect
      our business, financial condition and results of operations.




We
      have a significant amount of debt that could adversely affect our business
      and
      growth prospects.




As
      of
      November 30, 2007, our total long-term debt was $508.0 million.  In
      the future, we may incur significant additional debt. Our debt could have
      significant adverse effects on our business including:




•
            requiring
                us to dedicate a substantial portion of our available cash for interest
                payments and the repayment of
                principal;




•
            limiting
                our ability to capitalize on significant business
                opportunities;




•
            making
                us more vulnerable to economic
                downturns;




•
            limiting
                our ability to withstand competitive pressures;
                and




•
            making
                it more difficult for us to obtain additional financing on favorable
                terms.




If
      we are
      unable to generate sufficient cash flow from operations in the future, we may
      not be able to service our debt and may have to refinance all or a portion
      of
      our debt, obtain additional financing or sell assets to repay such debt. We
      cannot assure you that we will be able to obtain such refinancing, additional
      financing or asset sale on favorable terms or at all.




Our
      product liability insurance coverage may be insufficient to cover existing
      or
      future product liability claims.




An
      inherent risk of our business is exposure to product liability claims by users
      of our products. We have product liability insurance through our captive
      insurance subsidiary and a third party reinsurance policy that provides coverage
      for product liability claims. Our product liability insurance coverage for
      all
      of our products consists of $30.0 million of coverage through our captive
      insurance subsidiary, of which approximately $3.0 million is funded as of
      January 22, 2008, and an additional $25.0 million of excess coverage through
      a
      third party reinsurance policy, which excludes coverage for any future claims
      involving Dexatrim
      products containing ephedrine.




All
      of
      our insurance policies are subject to certain limitations that are generally
      customary for policies of this type such as deductibles and exclusions for
      exemplary and punitive damages. Since plaintiffs in product liability claims
      may
      seek exemplary and punitive damages, if these damages were awarded, some of
      our
      insurance coverage would not cover these amounts, and we may not have sufficient
      resources to pay these damages.  Any amounts paid by our insurance to
      satisfy product liabilities would decrease product liability insurance coverage
      available for any other claims. If our liability for product liability claims
      is
      significant, our existing insurance is likely to be insufficient to cover these
      claims, and we may not have sufficient resources to pay the liabilities in
      excess of our insurance coverage. Furthermore, our product liability insurance
      provided by third parties will expire at the end of each annual policy period,
      currently in May of each year. We may incur significant additional costs to
      obtain insurance coverage upon the expiration of our current policies and may
      not be able to obtain coverage in the future in amounts equal to that which
      we
      currently have or in amounts sufficient to satisfy future claims.




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Our
      business is regulated by numerous federal, state and foreign governmental
      authorities, which subjects us to elevated compliance costs and risks of
      non-compliance.




The
      manufacturing, distributing, processing, formulating, packaging and advertising
      of our products are subject to numerous and complicated federal, state and
      foreign governmental regulations. Compliance with these regulations is difficult
      and expensive. In particular, the FDA regulates the safety, manufacturing,
      labeling and distributing of our OTC products, medical devices, and dietary
      supplements. In addition, the FTC may regulate the promotion and advertising
      of
      our drug products, particularly OTC versions and dietary
      supplements.  The EPA regulates our Bullfrog Mosquito Coast
      insect repellent products.  We are also regulated by various state
      statutes, including the California Safe Drinking Water and Toxic Enforcement
      Act
      of 1986.  If we fail to adhere to the standards required by these
      federal and state regulations, or are alleged to have failed to adhere such
      regulations, our operating results and financial condition may be adversely
      affected.




Our
      success depends on our ability to anticipate and respond in a timely manner
      to
      changing consumer preferences.




Our
      success depends on our products’ appeal to a broad range of consumers whose
      preferences cannot be predicted with certainty and are subject to change. If
      our
      current products do not conform to consumer preferences, our sales may decline.
      In addition, our growth depends upon our ability to develop new products through
      product line extensions and product modifications, which involve numerous risks.
      We may not be able to accurately identify consumer preferences and translate
      our
      knowledge into customer-accepted products or successfully integrate these
      products with our existing product platform or operations. We may also
      experience increased expenses incurred in connection with product development,
      marketing and advertising that are not subsequently supported by a sufficient
      level of sales, which would negatively affect our margins. Furthermore, product
      development may divert management’s attention from other business concerns,
      which could cause sales of our existing products to suffer. We cannot assure
      you
      that newly developed products will contribute favorably to our operating
      results.




We
      may be adversely affected by fluctuations in buying decisions of mass
      merchandiser, drug and food trade buyers and the trend toward retail trade
      consolidation.




We
      sell
      our products to mass merchandiser and food and drug retailers in the United
      States. Consequently, our total revenues are affected by fluctuations in the
      buying patterns of these customers. These fluctuations may result from wholesale
      buying decisions, economic conditions and other factors. In addition, with
      the
      growing trend towards retail consolidation, we are increasingly dependent upon
      a
      few leading retailers, such as Wal-Mart Stores, Inc., whose bargaining strength
      continues to grow due to their size. Such retailers have demanded, and may
      continue to demand, increased service and order accommodations as well as price
      and incremental promotional investment concessions. As a result, we may face
      downward pressure on our prices and increased promotional expenses to meet
      these
      demands, which would reduce our margins. We also may be negatively affected
      by
      changes in the policies of our retail trade customers such as inventory
      destocking, limitations on access to shelf space and other
      conditions.




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 Kaopectate brands.




We
      use
      third party manufacturers to make products representing approximately 53% of
      our
      fiscal 2007 sales volume, including our Gold Bond medicated powders
      and foot spray, the Icy
      Hot patches and sleeves, Herpecin-L, and our
      line of
      dietary supplements including Dexatrim Max and,
      internationally, our line of Selsun medicated dandruff
      shampoos. Pfizer Inc. manufactured our Cortizone-10 products for us
      through September 2007 and will continue to manufacture the Unisom and Kaopectate
      products for us
      during a transition period of up to 18 months from January 2,
      2007.  In the near term, we will also rely on third party
      manufacturers to manufacture the ACT and Balmex
      products lines. In
      many cases, third party manufacturers are not bound by fixed term commitments
      in
      our contracts with them, and they may discontinue production with little or
      no
      advance notice. Manufacturers also may experience problems with product quality
      or timeliness of product delivery. We rely on these manufacturers to comply
      with
      applicable current GMPs. The loss of a contract manufacturer may force us to
      shift production to in-house facilities and possibly cause manufacturing delays,
      disrupt our ability to fill orders or require us to suspend production until
      we
      find another third party manufacturer. We are not able to control the
      manufacturing efforts of these third party manufacturers as closely as we
      control our business. Should any of these manufacturers fail to meet our
      standards, we may face regulatory sanctions, additional product liability claims
      or customer complaints, any of which could harm our reputation and our
      business.




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Our
      dietary supplement business could suffer as a result of injuries caused by
      dietary supplements in general, unfavorable scientific studies or negative
      press.




Our
      dietary supplements consist of Dexatrim and our Sunsource
      product line.  We are highly dependent upon consumers’ perceptions of
      the benefit and integrity of the dietary supplements business as well as the
      safety and quality of products in that industry. Injuries caused by dietary
      supplements or unfavorable scientific studies or news relating to products
      in
      this category, such as the December 30, 2003 consumer alert on the safety of
      dietary supplements containing ephedrine alkaloids issued by the FDA and the
      subsequent FDA rule banning the sale of supplements containing ephedrine
      alkaloids that became effective on April 11, 2004, may negatively affect
      consumers’ overall perceptions of products in this category, including our
      products, which could harm the goodwill of these brands and cause our sales
      to
      decline.




Our
      business could be adversely affected if we are unable to successfully protect
      our intellectual property.




Our
      trademarks are of material importance to our business and are among our most
      important assets. In fiscal 2007, substantially all of our total revenues were
      from products bearing proprietary or licensed brand names. Accordingly, our
      future success may depend in part upon the goodwill associated with our brand
      names, particularly Gold
      Bond, Selsun
      Blue, Icy Hot, ACT,
      Cortizone-10andUnisom.  Although our principal brand names are registered
      trademarks in the United States and certain foreign countries, we cannot assure
      you that the steps we take to protect our proprietary rights in our brand names
      will be adequate to prevent the misappropriation of these registered brand
      names
      in the United States or abroad. In addition, the laws of some foreign countries
      do not protect proprietary rights in brand names to the same extent as do the
      laws of the United States.  We cannot assure you that we will be able
      to successfully protect our trademarks from infringement or otherwise. The
      loss
      or infringement of our trademarks could impair the goodwill associated with
      our
      brands, harm our reputation and materially adversely affect our financial
      results.




We
      license additional intellectual property from third parties that is used in
      certain of our products, and we cannot assure you that these third parties
      can
      successfully maintain their intellectual property rights. In addition, the
      sale
      of these products relies on our ability to maintain and extend our licensing
      agreements with third parties, and we cannot assure you that we will be
      successful in maintaining these licensing agreements. Any significant impairment
      of the intellectual property covered by these licenses, or in our rights to
      use
      this intellectual property, may cause our sales to decline.




In
      addition, our product line extensions are often based on new or unique delivery
      methods for those products like our Icy Hot patches and sleeves.
      These delivery methods may not be protected by intellectual property rights
      that
      we own or license on an exclusive basis or by exclusive manufacturing
      agreements. As a result, we may be unable to prevent any competitor or customer
      from duplicating our delivery methods to compete directly with these product
      line extensions, which could cause sales to suffer.




We
      may
      face litigation in the future, either to protect our intellectual property
      rights or to defend against claims that we have infringed the intellectual
      property rights of others. Intellectual property litigation can be extremely
      expensive, and such expense could materially adversely affect our
      business.




Because
      most of our operations are located in Chattanooga, Tennessee, we are subject
      to
      regional and local risks.




Approximately
      47% of our domestic sales volume in fiscal 2007 was from products manufactured
      in our two plants located in Chattanooga, Tennessee. We store the raw materials
      used in our manufacturing activities in two warehouses that are also located
      in
      Chattanooga. We package and ship most of our products from Chattanooga.
      Additionally, our corporate headquarters are also located in Chattanooga, and
      most of our employees live in the area. Because of this, we are subject to
      regional and local risks, such as:




•
            changes
                in state and local government regulations;




•
            severe
                weather conditions, such as floods, ice storms and tornadoes;




•
            natural
                disasters, such as fires and earthquakes;




•
            power
                outages;




-
          21
          -


•
            nuclear
                facility incidents;




•
            spread
                of infectious diseases;




•
            hazardous
                material incidents; or




•
            any
                other catastrophic events in our area.




If
      our
      region, city or facilities were to suffer a significant disaster, our operations
      are likely to be disrupted and our business would suffer.




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.




Pamabrom,
      pyrilamine maleate and compap, active ingredients used in our Pamprin and Prēmsyn
      PMS products, are purchased from single sources of supply. Pamabrom is
      sold only by Chattem Chemicals, Inc. (an unrelated company), pyrilamine maleate
      is produced only in India and sold only by Lonza, Inc. and compap is sold only
      by Mallinckrodt, Inc.  In addition, we have a limited source of supply
      for selenium sulfide, the active ingredient in Selsun
      Blue.  Financial, regulatory or other difficulties faced by
      these source suppliers or significant changes in demand for these active
      ingredients could limit the availability and increase the price of these active
      ingredients. We may not be able to obtain necessary supplies in a timely manner,
      and we may be required to pay higher than expected prices for these active
      ingredients, which could adversely affect our gross margin from these products.
      Any interruption or significant delay in the supply of these active ingredients
      would impede our ability to manufacture these products, which would cause our
      sales to decline. We would not be able to find an alternative supplier and
      would
      either need to reformulate these products or discontinue their production.
      We
      cannot assure you that we will be able to continue to purchase adequate
      quantities of these active ingredients at acceptable prices in the
      future.




We
      are subject to the risk of doing business internationally.




In
      fiscal
      2007, approximately 7% of our total consolidated revenues were attributable
      to
      our international business.  We operate in regions and countries where
      we have little or no experience, and we may not be able to market our products
      in, or develop new products successfully for, these markets. We may also
      encounter other risks of doing business internationally including:




•
            unexpected
                changes in, or impositions of, legislative or regulatory requirements;




•
            fluctuations
                in foreign exchange rates, which could cause fluctuations in the
                price of
                our products in foreign markets or cause fluctuations in the cost
                of
                certain raw materials purchased by us;




•
            delays
                resulting from difficulty in obtaining export licenses, tariffs and
                other
                barriers and restrictions, potentially longer payment cycles, greater
                difficulty in accounts receivable collection and potentially adverse
                tax
                treatment;




•
            potential
                trade restrictions and exchange controls;




•
            differences
                in protection of our intellectual property rights; and




•
            the
                burden of complying with a variety of foreign laws.




In
      addition, we will be increasingly subject to general geopolitical risks in
      foreign countries where we operate such as political and economic instability
      and changes in diplomatic and trade relationships, which could affect, among
      other things, customers’ inventory levels and consumer purchasing, which could
      cause our results to fluctuate and our sales to decline. It has not been our
      practice to engage in foreign exchange hedging transactions to manage the risk
      of fluctuations in foreign exchange rates because of the limited nature of
      our
      past international operations. Due to the significant expansion of our
      international operations, our exposure to fluctuations in foreign exchange
      rates
      has increased.




-
          22
          -


The
      terms of our outstanding debt obligations limit certain of our
      activities.




The
      terms
      of the indenture under which our 7.0% Subordinated Notes are issued and our
      Credit Facility impose operating and financial restrictions on us including
      restrictions on:




•
            incurrence
                of additional indebtedness;




•
            dividends
                and restricted payments;




•
            investments;




•
            loans
                and guarantees;




•
            creation
                of liens;




•
            transactions
                with affiliates;




•
            use
                of proceeds from sales of assets and subsidiary stock; and




•
            certain
                mergers, consolidations and transfers of assets.




The
      terms
      of our Credit Facility also require us to comply with financial maintenance
      covenants. In the future, we may have other indebtedness with similar or even
      more restrictive covenants. These restrictions may impair our ability to respond
      to changing business and economic conditions or to grow our business. In the
      event that we fail to comply with these covenants, there could be an event
      of
      default under the applicable debt instrument, which in turn could cause a cross
      default to other debt instruments. As a result, all amounts outstanding under
      our various debt instruments may become immediately due and
      payable.




To
      service our indebtedness, we will require a significant amount of
      cash.




Our
      ability to make payments on our
      indebtedness will depend on our ability to generate cash in the
      future.  This, to a certain extent, is subject to general economic,
      financial, competitive, regulatory and other factors that are beyond our
      control.  We cannot assure you that our business will generate
      sufficient cash flow from operations or that future borrowings will be available
      to us under our secured Credit Facility in an amount sufficient to enable us
      to
      pay our indebtedness or to fund our other liquidity needs.  We may
      need to refinance all or a portion of our indebtedness on or before maturity,
      sell assets, reduce or delay capital expenditures or seek additional
      financing.  We may not be able to refinance any of our indebtedness on
      commercially reasonable terms or at all.




Our
      operations are subject to significant environmental laws and
      regulations.




Our
      manufacturing sites use chemicals and other potentially hazardous materials
      and
      generate both hazardous and non-hazardous waste, the transportation, treatment,
      storage and disposal of which are regulated by various governmental agencies
      and
      federal, state and local laws and regulations. Under these laws and regulations,
      we are exposed to liability primarily as an owner or operator of real property,
      and as such, we may be responsible for the clean-up or other remediation of
      contaminated property. Environmental laws and regulations can change rapidly,
      and we may become subject to more stringent environmental laws and regulations
      in the future, which may be retroactively applied to earlier
      events.  Product line extensions, such as Bullfrog Mosquito Coast,
      or
      acquisitions of new products, such as those acquired in the J&J Acquisition,
      may also subject our business to new or additional environmental laws and
      regulations.  In addition, compliance with new or more stringent
      environmental laws and regulations could involve significant costs.




We
      are dependent on certain key executives, the loss of whom could have a material
      adverse effect on our business.




Our
      future performance depends significantly upon the efforts and abilities of
      certain members of senior management, in particular those of Zan Guerry, our
      chairman and chief executive officer, and Robert E. Bosworth, our president
      and
      chief operating officer. If we were to lose any key senior executive, our
      business could be materially adversely affected.




-
          23
          -


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.




Provisions
      of our shareholder rights plan and our restated charter, as well as certain
      provisions of Tennessee corporation law, may deter unfriendly offers or other
      efforts to obtain control over us and could deprive shareholders (including
      holders of the Convertible Notes which may convert into common stock) of their
      ability to receive a premium on their common stock.




Generally,
      if any person attempts to acquire 15% or more of our common stock then
      outstanding without the approval of our independent directors, pursuant to
      our
      shareholder rights plan, our shareholders may purchase a significant amount
      of
      additional shares of our common stock at 50% of the then applicable market
      price. This threat of substantial dilution will discourage takeover attempts
      not
      approved by our board despite significant potential benefits to our
      shareholders.




Our
      restated charter contains the following additional provisions, which may have
      the effect of discouraging takeover attempts:




•
            our
                directors are divided into three classes, with only one class of
                directors
                elected at each annual meeting for a term of three years, making
                it
                difficult for new shareholders to quickly gain control of our board
                of
                directors;




•
            directors
                may be removed only for cause prior to the expiration of their terms;
                and




•
            we
                are prohibited from engaging in certain business combination transactions
                with any interested shareholder unless such transaction is approved
                by the
                affirmative vote of at least 80% of the outstanding shares of our
                common
                stock held by disinterested shareholders, unless disinterested members
                of
                our board of directors approve the transaction or certain fairness
                conditions are satisfied, in which case such transaction may be approved
                by either the affirmative vote of the holders of not less than 75%
                of our
                outstanding shares of common stock and the affirmative vote of the
                holders
                of not less than 66% of the outstanding shares of our common stock
                which
                are not owned by the interested shareholder, or by a majority of
                disinterested members of our board of directors, provided that certain
                quorum requirements are met.




The
      Tennessee Business Combination Act prevents an interested shareholder, which
      is
      defined generally as a person owning 10% or more of our voting stock, from
      engaging in a business combination with us for five years following the date
      such person became an interested shareholder unless before such person became
      an
      interested shareholder, our board of directors approved the transaction in
      which
      the interested shareholder became an interested shareholder or approved the
      business combination, and the proposed business combination satisfied any
      additional applicable requirements imposed by law and by our restated charter
      or
      bylaws. If the requisite approval for the business combination or share
      acquisition has not been obtained, any business combination is prohibited until
      the expiration of five years following the date such person became an interested
      shareholder.




The
      trading price of our common stock may be volatile.




The
      trading price of our common stock could be subject to significant fluctuations
      in response to several factors, some of which are beyond our
      control.  Among the factors that could affect our stock price
      are:




•
            our
                operating and financial performance and prospects;




•
            quarterly
                variations in key financial performance measures, such as earnings
                per
                share, net income and revenue;




•
            changes
                in revenue or earnings estimates or publication of research reports
                by
                financial analysts;




•
            announcements
                of new products by us or our competitors;




•
            speculation
                in the press or investment community;




-
          24
          -


•
            strategic
                actions by us or our competitors, such as acquisitions or restructurings;




•
            our
                  operating and financial performance and prospects;




•
            further
                issuance of convertible securities or common stock by us or sales
                of our
                common stock or other actions by investors with significant shareholdings;




•
            general
                market conditions for companies in our industry; and




•
            domestic
                and international economic, legal, political and regulatory factors
                unrelated to our performance.




The
      stock markets in general have
      experienced substantial volatility that has often been unrelated to the
      operating performance of particular companies.  These broad market
      fluctuations may adversely affect the trading price of our common
      stock.




We
      have no current intention of paying dividends to holders of our common
      stock.




We
      presently intend to retain our earnings, if any, for use in our operations,
      to
      repay our outstanding indebtedness and to repurchase our common stock and have
      no current intention of paying dividends to holders of our common
      stock.




We
      can be affected adversely and unexpectedly by the implementation of new, or
      changes in the interpretation of existing, accounting principles generally
      accepted in the United States of America (“GAAP”).




Our
      financial reporting complies with
      GAAP, and GAAP is subject to change over time.  If new rules or
      interpretations of existing rules require us to change our financial reporting,
      our financial condition and results from operations could be adversely
      affected.




Identification
      of material weakness in internal controls over financial reporting may adversely
      affect our financial results.




We
      are subject to the ongoing internal
      control provisions of Section 404 of the Sarbanes-Oxley Act of
      2002.  Those provisions provide for the identification and reporting
      of material weaknesses in our system of internal controls over financial
      reporting.  If such a material weakness is identified, it could
      indicate a lack of controls adequate to generate accurate financial
      statements.  We routinely assess our internal controls over financial
      reporting, but we cannot assure you that we will be able to timely remediate
      any
      material weaknesses that may be identified in future periods, or maintain all
      of
      the controls necessary for continued compliance.  Likewise, we cannot
      assure you that we will be able to retain sufficient skilled finance and
      accounting personnel, especially in light of the increased demand for such
      personnel among publicly-traded companies.




The
      convertible note hedge and warrant transactions may affect the value of our
      common stock and our convertible notes.




In
      connection with the sale of our
      convertible notes, we entered into separate convertible note hedge
      transactions.  These transactions are expected, but are not
      guaranteed, to eliminate the potential dilution upon conversion of the
      convertible notes.  We also entered into warrant
      transactions.  In connection with hedging these transactions, the
      counterparty:




·
            will
                enter into various over-the-counter derivative transactions with
                respect
                to our common stock, and may have purchased our common stock concurrently
                with and shortly after the pricing of the notes:
                and




·
            may
                have entered into, or may unwind, various over-the-counter derivatives
                and/or purchased or sold our common stock in secondary market transactions
                following the pricing of the notes (including during any conversion
                reference period related to a conversion of our convertible
                notes).




Such
      activities could have the effect of increasing, or preventing a decline in,
      the
      price of our common stock.  Such effect is expected to be greater in
      the event we elect to settle converted convertible notes entirely in
      cash.  The counterparty to these transactions is likely to modify its
      hedge positions from time to time prior to conversion or maturity of the
      convertible notes




-
          25
          -


or
      termination of the transactions by purchasing and selling shares of our common
      stock, other of our securities, or other instruments it may wish to use in
      connection with such hedging.  In particular, such hedging
      modification may occur during any conversion reference period for a conversion
      of convertible notes, which may have a negative effect on the value of the
      consideration received in relation to the conversion of those convertible
      notes.  In addition, we intend to exercise options we hold under the
      convertible note hedge transaction whenever convertible notes are
      converted.  In order to unwind its hedge position with respect to
      those exercised options, the counterparty to these transactions expects to
      sell
      shares of our common stock in secondary market transactions or unwind various
      over-the-counter derivative transactions with respect to our common stock during
      the conversion reference period for the converted convertible
      notes.




Conversion
      of our convertible notes may dilute the ownership interest of existing
      shareholders, including holders who had previously converted their convertible
      notes.




The
      conversion of some or all of the
      convertible notes may dilute the ownership interests of existing
      shareholders.  All or a portion of the amounts payable upon conversion
      of the convertible notes may, at our election, be paid in cash rather than
      in
      the form of shares of common stock.  Any sales in the public market of
      the common stock issued upon such conversion could adversely affect prevailing
      market prices of our common stock.  In addition, the existence of the
      convertible notes may encourage short selling by market participants because
      the
      conversion of the convertible notes could depress the price of our common
      stock.




Virtually
      all of our assets consist of intangibles.




As
      our
      financial statements indicate, a substantial portion of our assets consist
      of
      intangibles, principally the trademarks, trade names and patents that we have
      acquired.  In the event that the value of those assets became impaired
      or our business is materially adversely affected in any way, we would not have
      sufficient tangible assets that could be sold to repay our
      liabilities.  As a result, our creditors and investors may not be able
      to recoup the amount of the indebtedness that they have extended to us or the
      amount they have invested in us.




Item
      1B. Unresolved Staff
      Comments




None




-
          26
          -


Item
      2.
      Properties




Our
      headquarters and administrative offices are located at 1715 West 38th Street,
      Chattanooga, Tennessee. Our primary production facilities are in close proximity
      to our headquarters on land owned by us. We lease our primary warehouse and
      distribution centers in Chattanooga, Tennessee for our domestic consumer
      products. The following table describes in detail the principal properties
      owned
      and leased by us:




Total
                Area
              (Acres)
            
            Total
                Buildings
              (Square
                Feet)
            
            Use
            
            Square
              FeetOwned
                Properties:Chattanooga,
                Tennessee
            12.0
            
            117,600
            
            Manufacturing
              Office
                & Administration
            
            77,000
              40,600Chattanooga,
                Tennessee
            8.3
            
            78,500
            
            Manufacturing
                & Warehousing
              Office
              Product
                Development Center
            
            58,300
              10,200
              10,000Leased
                Properties:Chattanooga,
                Tennessee
            5.1
            
            139,000
            
            Warehousing
            
            139,000Chattanooga,
                Tennessee
            10.0
            
            150,400
            
            Warehousing
            
            150,400Chattanooga,
                Tennessee
            -
            
            23,000
            
            Manufacturing
            
            23,000Mississauga,
                Ontario, Canada
            0.3
            
            15,100
            
            Warehousing
              Office
                & Administration
              Packaging
            
            10,600
              3,000
              1,500Basingstoke,
                Hampshire, England
            0.5
            
            12,300
            
            Warehousing
              Office
                & Administration
            
            9,300
              3,000Limerick,
                Ireland
            -
            
            2,100
            
            Office
                & Administration
            
            2,100Alimos
                Attica, Greece
            -
            
            200
            
            Office
                & Administration
            
            200




We
      are
      currently operating our manufacturing facilities at approximately 70% of total
      capacity. These manufacturing facilities are FDA registered and are capable
      of
      further utilization through the use of a full-time second shift and the addition
      of a third shift.




Item
      3. Legal
      Proceedings




See
      note
      12 of notes to consolidated financial statements included in Item 8 “Financial
      Statements and Supplementary Data”.




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




None




-
          27
          -


Part
      II




Item
      5. Market for the
      Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
      Equity Securities




Market
      Information




Our
      common stock is quoted on the Nasdaq Global Select Market under the symbol
      “CHTT”. The table below sets forth the high and low closing sales prices of our
      common stock as reported on the Nasdaq Global Select Market for the periods
      indicated.




Fiscal
                2007
            High
            LowFirst
                Quarter
            $58.45
            $48.18Second
                Quarter
            64.80
            50.23Third
                Quarter
            66.85
            56.16Fourth
                Quarter
            74.48
            62.17Fiscal
                2006
            High
            LowFirst
                Quarter
            $42.00
            $33.58Second
                Quarter
            39.90
            33.43Third
                Quarter
            35.49
            29.09Fourth
                Quarter
            49.60
            33.37




Holders




As
      of
      January 22, 2008, there were approximately 223 holders of record of our common
      stock. The number of record holders does not include beneficial owners whose
      shares are held in the names of banks, brokers, nominees or other
      fiduciaries.




Dividends




We
      have
      not paid dividends on our common stock during the past two fiscal years. We
      are
      restricted from paying dividends by the terms of the indenture under which
      our
      7.0% Subordinated Notes were issued and by the terms of our Credit
      Facility.




-
          28
          -


Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers




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)
            
            
            Maximum
                Dollar Value
              of
                Shares that may yet
              be
                Purchased under the Plans or
              Programs
                (2)9/1/07-9/30/07
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            65,887,14210/1/07-10/31/07
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            65,887,14211/1/07-11/30/07
            
            
            20,000
            
            
            
            67.03
            
            
            
            20,000
            
            
            
            64,546,467Total
                Fourth Quarter
            
            
            20,000
            
            
            $
            67.03
            
            
            
            20,000
            
            
            
            64,546,467




(1)
            Average
                price paid per share includes broker commissions




(2)
            On
                June 22, 2006, our board of directors increased the total authorization
                to
                repurchase our common stock under our stock buyback program to $100.0
                million. There is no expiration date specified for our stock buyback
                program.




Stock
        Performance Graph


The
      following is a graph comparing the
      cumulative total return to shareholders of the Company, assuming reinvestment
      of
      dividends, for the five-year period ending at the end of fiscal 2007 with the
      return from (i) the S&P 500 Index and (ii) a peer group of public companies
      engaged in either the functional toiletries, cosmetics or non-prescription
      drug
      business, for the same period.  The peer group consists of the
      following selected comparable companies: Alberto-Culver Co., Church &
Dwight, Inc., Prestige Brands Holdings, Inc., Helen of Troy Ltd. and Elizabeth
      Arden, Inc.









2002
            
            
            2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007Chattem,
                Inc.
            
            $
            100.00
            
            
            $
            76.91
            
            
            $
            173.88
            
            
            $
            152.52
            
            
            $
            233.56
            
            
            $
            340.42S&P
                500
            
            $
            100.00
            
            
            $
            115.08
            
            
            $
            129.86
            
            
            $
            140.81
            
            
            $
            160.84
            
            
            $
            173.24Peer
                Group
            
            $
            100.00
            
            
            $
            139.17
            
            
            $
            161.55
            
            
            $
            151.11
            
            
            $
            174.73
            
            
            $
            209.96





-
          29
          -


Item
      6. Selected Financial
      Data




This
      selected financial data should be read in conjunction with Item 7 “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
      our consolidated financial statements and notes thereto included elsewhere
      in
      this Annual Report on Form 10-K.




Year
                  Ended November 30,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(dollars
                  in thousands, except per share amounts)INCOME
                  STATEMENT DATA:Total
                  revenues
              
              $
              423,378
              
              
              $
              300,548
              
              
              $
              279,318
              
              
              $
              258,155
              
              
              $
              233,749Operating
                  costs and expenses
              
              
              301,196
              
              
              
              217,804
              
              
              
              212,830
              
              
              
              228,292
              
              
              
              177,849Income
                  from operations
              
              
              122,182
              
              
              
              82,744
              
              
              
              66,488
              
              
              
              29,863
              
              
              
              55,900Other
                  expense, net
              
              
              (31,103
              )
              
              
              (13,454
              )
              
              
              (13,478
              )
              
              
              (27,709
              )
              
              
              (20,307
              )Income
                  before income taxes
              
              
              91,079
              
              
              
              69,290
              
              
              
              53,010
              
              
              
              2,154
              
              
              
              35,593Provision
                  for income taxes
              
              
              31,389
              
              
              
              24,178
              
              
              
              16,963
              
              
              
              703
              
              
              
              12,246Net
                  income
              
              $
              59,690
              
              
              $
              45,112
              
              
              $
              36,047
              
              
              $
              1,451
              
              
              $
              23,347PER
                  SHARE DATA:Income
                  per diluted share
              
              $
              3.08
              
              
              $
              2.34
              
              
              $
              1.77
              
              
              $
              .07
              
              
              $
              1.19BALANCE
                  SHEET DATA:
                (At
                  end of year)Total
                  assets
              
              $
              780,560
              
              
              $
              415,313
              
              
              $
              367,214
              
              
              $
              372,642
              
              
              $
              364,466Long-term
                  debt, less current maturities
              
              $
              505,000
              
              
              $
              232,500
              
              
              $
              145,500
              
              
              $
              200,000
              
              
              $
              204,676




Item
      7. Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




The
      following discussion and analysis of our financial condition and results of
      operations should be read together with Item 6, “Selected Financial Data”, and
      our consolidated financial statements and notes therein included elsewhere
      in
      this annual report on Form 10-K.




This
      discussion and analysis contains forward-looking statements that involve risks,
      uncertainties and assumptions. The actual results may differ materially from
      those anticipated in these forward-looking statements as a result of a number
      of
      factors, including, but not limited to, those described in our filings with
      the
      Securities and Exchange Commission.




Overview




Founded
      in 1879, we are a leading marketer and manufacturer of a broad portfolio of
      branded over-the-counter (“OTC”) healthcare products, toiletries and dietary
      supplements including such categories as medicated skin care, topical pain
      care,
      oral care, internal OTC, medicated dandruff shampoos, dietary supplements and
      other OTC and toiletry products. Our portfolio of products includes
      well-recognized brands such as:




•
            Gold
                Bond, Balmexand
                Cortizone-10 -
                medicated skin care;




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




•
            ACT
                and Herpecin-L–
oral care;




•
            Unisom,
Pamprin
                and Kaopectate–
internal
                OTC;




•
            Selsun
                Blue and SelsunNaturals
                -
                medicated dandruff shampoos;




•
            Dexatrim,
Garlique
                and New Phase - dietary
                supplements; and




•
            Bullfrog,
UltraSwimand
Sun-In
                -other OTC and
                toiletry products.




-
          30
          -


Our
      products target niche markets that are often outside the focus of larger
      companies where we believe we can achieve and sustain significant market share
      through innovation and strong advertising and promotion support. Many of our
      products are among the U.S. market leaders in their respective categories.
      For
      example, our portfolio of topical pain care brands, our Cortizone-10 anti-itch
      ointment and our Gold
      Bond medicated body powders have the leading U.S. market share in these
      categories. We support our brands through extensive and cost-effective
      advertising and promotion, the expenditures for which represented approximately
      27% of our total revenues in fiscal 2007. We sell our products nationally
      through mass merchandiser, drug and food channels, principally utilizing our
      own
      sales force.




Developments
      During Fiscal 2007




Acquisition
      of Brands




In
      January 2007, we completed the acquisition of the U.S. rights to five consumer
      and OTC brands from Johnson & Johnson (“J&J Acquisition).  The
      acquired brands were: ACT, Unisom,
Cortizone-10,
Kaopectate,
      and Balmex.  The
      purchase price of the J&J Acquisition was $410.0 million plus $1.6 million
      of costs directly related to the acquisition.  Johnson & Johnson
      will continue to manufacture and supply certain of the products to us for a
      period of up to 18 months from the close of the acquisition, or such earlier
      date as we are able to move production to our facilities.  The price
      we pay Johnson & Johnson for the manufactured products is equivalent to the
      manufacturing cost, which includes all costs associated with the manufacturing
      and delivery of the product.  Certain of the products are manufactured
      and supplied under assumed agreements with third party
      manufacturers.  For a period of up to six months from the close of the
      acquisition, Johnson & Johnson provided transition services consisting of
      consumer affairs, distribution and collection services (including related
      financial, accounting and reporting services).  We terminated the
      distribution and collections services effective April 2, 2007 and the consumer
      affairs services effective June 21, 2007.  The costs charged for these
      transition services approximated the actual costs incurred by Johnson &
Johnson.  During fiscal 2007, manufacturing of certain of the acquired
      products was transferred to our facilities.




In
      May
      2007, we acquired the worldwide trademark and rights to sell and market ACT in Western Europe
      from
      Johnson & Johnson (“ACT Acquisition”) for $4.1
      million in cash plus certain assumed liabilities.  The ACT Acquisition was
      funded
      with existing cash.




Products




In
      fiscal
      2007, we introduced the following product line extensions: Icy Hot Heat Therapy, Icy
      Hot Vanishing Scent
      Cream, Capzasin
      No-Mess, Bullfrog
      Marathon Mist, Selsun
      Naturals and Dexatrim
      Max Evening Appetite Control.




Debt




In
      January 2007, we completed an amendment to our Amended Revolving Credit Facility
      providing for up to a $100.0 million revolving credit facility and a $300.0
      million term loan (the “Credit Facility”).  The proceeds from the term
      loan under the Credit Facility were used to finance in part the J&J
      Acquisition.  The Credit Facility includes “accordion” features that
      permit us under certain circumstances to increase our borrowings under the
      revolving credit facility by $50.0 million and to borrow an additional $50.0
      million as a term loan.  Borrowings under the revolving credit
      facility portion of the Credit Facility bear interest at LIBOR plus applicable
      percentages of 0.875% to 1.500% or the higher of the federal funds rate plus
      0.5% or the prime rate (the “Base Rate”).  The term loan under the
      Credit Facility bears interest of either LIBOR plus 1.75% or the Base Rate
      plus
      0.75%.  The term loan borrowings are to be repaid in increments of
      $0.8 million each calendar quarter, with the first principal payment due and
      paid on June 30, 2007.  The principal outstanding after scheduled
      repayment and any unscheduled prepayments is due January 2, 2013.





In
      April
      2007, we entered into an amendment to our Credit Facility that, among other
      things, permitted the sale of the 1.625% Convertible Senior Notes due 2014
      (the
“1.625% Convertible Notes”) and reduced the applicable interest rates on the
      revolving credit facility portion of our Credit Facility.  In April
      2007, we completed a private offering of $100.0 million of the 1.625%
      Convertible Notes.  The 1.625% Convertible Notes bear interest at an
      annual rate of 1.625%, payable semi-annually on May 1 and November 1 of each
      year, with the first interest payment due and paid on November 1,
      2007.  Concurrently with the sale of the 1.625% Convertible Notes, we
      purchased a note hedge for $29.5 million and issued warrants for proceeds of
      $17.4 million with an affiliate of Merrill Lynch (the
“Counterparty”).  The note hedge and warrants are separate and legally
      distinct instruments that bind us and the Counterparty and have no binding
      effect on the holders of the 1.625% Convertible Notes.





-
          31
          -


In
      April
      2007, we utilized the net proceeds from the 1.625% Convertible Notes and
      borrowings under the revolving credit facility portion of our Credit Facility
      to
      repay $128.0 million of the term loan under the Credit Facility.  In
      July 2007, we utilized borrowings under the revolving credit facility portion
      of
      our Credit Facility to repay an additional $25.0 million of the term loan under
      the Credit Facility.  In connection with the term loan repayments
      during April 2007 and July 2007, we retired a proportional share of the term
      loan debt issuance costs and recorded the resulting loss on early extinguishment
      of debt of $2.6 million in fiscal 2007.





Recent
      Developments





In
      January 2008, we utilized additional borrowings under the revolving credit
      facility portion of our Credit Facility to repay an additional $35.0 million
      of
      the term loan under the Credit Facility.  In connection with the term
      loan repayment, we retired a proportional share of the term loan debt issuance
      costs and recorded the resulting loss on early extinguishment of debt of $0.5
      million in fiscal 2008.





Stock
      Repurchase




During
      fiscal 2007, we repurchased 0.4 million shares of our common stock under our
      stock repurchase program for $23.6 million at an average price per share of
      $58.98.




Results
      of Operations




The
      following table sets forth for the periods indicated, certain items from our
      consolidated statements of income expressed as a percentage of total
      revenues:




Year
                Ended November 30,2007
            
            
            2006
            
            
            2005TOTAL
                REVENUES
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %COSTS
                AND EXPENSES:Cost
                of sales
            
            
            30.5
            
            
            
            31.3
            
            
            
            28.6Advertising
                and promotion
            
            
            26.5
            
            
            
            32.0
            
            
            
            27.5Selling,
                general and administrative
            
            
            13.6
            
            
            
            15.6
            
            
            
            16.9Executive
                severance charges
            
            
            —
            
            
            
            —
            
            
            
            0.8Acquisition
                expenses
            
            
            0.5
            
            
            
            —
            
            
            
            —Loss
                on product divesture
            
            
            —
            
            
            
            —
            
            
            
            3.1Litigation
                settlement
            
            
            —
            
            
            
            (6.4
            )
            
            
            (0.7
            )Total
                costs and expenses
            
            
            71.1
            
            
            
            72.5
            
            
            
            76.2INCOME
                FROM OPERATIONS
            
            
            28.9
            
            
            
            27.5
            
            
            
            23.8OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (7.1
            )
            
            
            (3.9
            )
            
            
            (4.9
            )Investment
                and other income, net
            
            
            0.3
            
            
            
            0.4
            
            
            
            0.4Loss
                on early extinguishment of debt
            
            
            (0.6
            )
            
            
            (0.9
            )
            
            
            (0.3
            )Total
                other income (expense)
            
            
            (7.4
            )
            
            
            (4.4
            )
            
            
            (4.8
            )INCOME
                BEFORE INCOME TAXES
            
            
            21.5
            
            
            
            23.1
            
            
            
            19.0PROVISION
                FOR INCOME TAXES
            
            
            7.4
            
            
            
            8.1
            
            
            
            6.1NET
                INCOME
            
            
            14.1
            %
            
            
            15.0
            %
            
            
            12.9
            %




Critical
      Accounting Estimates




The
      preparation of financial statements in accordance with U.S. generally accepted
      accounting principles requires management to use estimates.  Several
      different estimates or methods can be used by management that might yield
      different results.  The following are the significant estimates used
      by management in the preparation of the November 30, 2007 consolidated financial
      statements:




-
          32
          -


Allowance
      for Doubtful Accounts




As
      of
      November 30, 2007, an estimate was made of the collectibility of the outstanding
      accounts receivable balances.   This estimate requires the
      utilization of outside credit services, knowledge about the customer and the
      customer’s industry, new developments in the customer’s industry and operating
      results of the customer as well as general economic conditions and historical
      trends.  When all these facts are compiled, a judgment as to the
      collectibility of the individual account is made.   Many factors
      can impact this estimate, including those noted in this
      paragraph.  The adequacy of the estimated allowance may be impacted by
      the deterioration in the financial condition of a large customer, weakness
      in
      the economic environment resulting in a higher level of customer bankruptcy
      filings or delinquencies and the competitive environment in which the customer
      operates.  During the year ended November 30, 2007, we performed an
      assessment of the collectibility of trade accounts receivable and did not make
      any significant adjustments to our estimate of allowance for doubtful
      accounts.  The balance of allowance for doubtful accounts was $0.4
      million and $0.3 million at November 30, 2007 and 2006,
      respectively.




Revenue
      Recognition




Revenue
      is recognized when our products are shipped and title transfers to our
      customers.  It is generally our policy across all classes of customers
      that all sales are final.  As is common in the consumer products
      industry, customers return products for a variety of reasons including products
      damaged in transit, discontinuance of a particular size or form of product
      and
      shipping errors.  As sales are recorded, we accrue an estimated amount
      for product returns, as a reduction of these sales, based upon our historical
      experience and consideration of discontinued products, product divestitures,
      estimated inventory levels held by our customers and retail point of sale data
      on existing and newly introduced products.  The level of returns may
      fluctuate from our estimates due to several factors including weather
      conditions, customer inventory levels and competitive conditions.  We
      charge the allowance account for product returns when the customer provides
      appropriate supporting documentation that the product is properly destroyed
      or
      upon receipt of the product.




We
      separate returns into the two categories of seasonal and non-seasonal
      products.  We use the historical return detail of seasonal and
      non-seasonal products for at least the most recent three fiscal years on
      generally all products, which is normalized for any specific occurrence that
      is
      not reasonably likely to recur, to determine the amount of product returned
      as a
      percentage of sales, and estimate an allowance for potential returns based
      on
      product sold in the current period.  To consider product sold in
      current and prior periods, an estimate of inventory held by our retail customers
      is calculated based on customer inventory detail.  This estimate of
      inventory held by our customers, along with historical returns as a percentage
      of sales, is used to determine an estimate of potential product
      returns.  This estimate of the allowance for seasonal and non-seasonal
      returns is further analyzed by considering retail customer point of sale
      data.  We also consider specific events, such as discontinued product
      or product divestitures, when determining the adequacy of the
      allowance.




Our
      estimate of product returns for seasonal and non-seasonal products as of
      November 30, 2007 was $1.2 million and $1.3 million, respectively, and $1.2
      million and $1.3 million, respectively, as of November 30,
      2006.  Higher sales volume in fiscal 2007 offset by customers
      returning seasonal product earlier in the season resulted in our estimate of
      returns for seasonal products remaining consistent as compared to fiscal
      2006.  Higher sales volumes in fiscal 2006 caused an increase in our
      estimate of returns for seasonal products by approximately $1.0 million, which
      resulted in a decrease to net sales in our consolidated financial
      statements.  During fiscal 2007, our estimate of non-seasonal returns
      remained consistent as compared to fiscal 2006.  During fiscal 2006,
      as a result of our estimate of customer inventory levels, historical
      non-seasonal product returns and retail point-of-sale data, we increased our
      estimate of non-seasonal returns by approximately $0.7 million, which resulted
      in a decrease to net sales in our consolidated financial
      statements.  Each percentage point change in the seasonal return rate
      would impact net sales by approximately $0.2 million.  Each percentage
      point change in the non-seasonal return rate would impact net sales by
      approximately $0.6 million.




At
      November 30, 2006, based on consideration of the sales of Icy Hot Pro-Therapy
      performing below expectations, review of retail point of sales data throughout
      fiscal 2006 and an estimate of inventory on hand at customers, we estimated
      returns of Icy Hot
      Pro-Therapy as of November 30, 2006 of $3.3 million, which was included
      as a reduction of net sales.  During fiscal 2007, we continued to
      monitor Icy Hot
      Pro-Therapy retail sales and inventory levels on-hand at customers and
      increased the specific reserve for Icy Hot Pro-Therapy by $4.5
      million as of November 30, 2007, which is included as a reduction of net sales
      in our consolidated financial statements.




We
      routinely enter into agreements with customers to participate in promotional
      programs.  The cost of these programs is recorded as either
      advertising and promotion expense or as a reduction of sales as prescribed
      by
      Emerging Issues Task Force




-
          33
          -


01-9,
      “Accounting for Consideration Given by a Vendor to a Customer (Including a
      Reseller of the Vendor’s Products)”.  A significant portion of the
      programs are recorded as a reduction of sales and generally take the form of
      coupons and vendor allowances, which are normally taken via temporary price
      reductions, scan downs, display activity and participations in in-store programs
      provided uniquely by the customer.  We also enter into cooperative
      advertising programs with certain customers, the cost of which is recorded
      as
      advertising and promotion expense.  In order for retailers to receive
      reimbursement under such programs, the retailer must meet specified advertising
      guidelines and provide appropriate documentation of the advertisement being
      run.




We
      analyze promotional programs in two primary categories -- coupons and vendor
      allowances.  Customers normally utilize vendor allowances in the form
      of temporary price reductions, scan downs, display activity and participations
      in in-store programs provided uniquely by the customer.  We estimate
      the accrual for outstanding coupons by utilizing a third-party clearinghouse
      to
      track coupons issued, coupon value, distribution and expiration dates, quantity
      distributed and estimated redemption rates that are provided by
      us.  We estimate the redemption rates based on internal analysis of
      historical coupon redemption rates and expected future retail sales by
      considering recent point of sale data.  The estimate for vendor
      allowances is based on estimated unit sales of a product under a program and
      amounts committed for such programs in each fiscal year.  Estimated
      unit sales are determined by considering customer forecasted sales, point of
      sale data and the nature of the program being offered.  The three most
      recent years of expected program payments versus actual payments made and
      current year retail point of sale trends are analyzed to determine future
      expected payments.  Customer delays in requesting promotional program
      payments due to their audit of program participation and resulting request
      for
      reimbursement is also considered to evaluate the accrual for vendor
      allowances.  The costs of these programs are often variable based on
      the number of units actually sold.  As of November 30, 2007, the
      coupon accrual and reserve for vendor allowances were $1.9 million and $5.5
      million, respectively, and $1.2 million and $3.7 million, respectively, as
      of
      November 30, 2006.  Each percentage point change in promotional
      program participation would impact net sales by $0.2 million and advertising
      and
      promotion expense by an insignificant amount.




Income
      Taxes




We
      account for income taxes using the asset and liability approach as prescribed
      by
      Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for
      Income Taxes” (“SFAS 109”).  This approach requires recognition of
      deferred tax assets and liabilities for the expected future tax consequences
      of
      events that have been included in the consolidated financial statements or
      tax
      returns.  Using the enacted tax rates in effect for the year in which
      the differences are expected to reverse, deferred tax assets and liabilities
      are
      determined based on the differences between the financial reporting and the
      tax
      basis of an asset or liability.  We record income tax expense in our
      consolidated financial statements based on an estimated annual effective income
      tax rate.  Our estimated annual effective income tax rate during
      fiscal 2007 was 34.5%, as compared to 34.9% in fiscal 2006 and 32.0% in fiscal
      2005, as a result of lower deductions for charitable contributions and greater
      apportionment in states with higher statutory tax rates.




For
      additional information regarding our significant accounting policies, see note
      2
      of notes to consolidated financial statements.




Fiscal
      2007 Compared to Fiscal 2006




To
      facilitate discussion of our operating results for the years ended November
      30,
      2007 and 2006, we have included the following selected data from our
      consolidated statements of income:




For
                the Year Ended November
                30,Increase
                (Decrease)2007
            
            
            2006
            
            
            Amount
            
            
            Percentage(dollars
                in thousands)Domestic
                net sales
            
            $
            393,493
            
            
            $
            276,397
            
            
            $
            117,096
            
            
            
            42.4
            %International
                revenues (including royalties)
            
            
            29,885
            
            
            
            24,151
            
            
            
            5,734
            
            
            
            23.7Total
                revenues
            
            
            423,378
            
            
            
            300,548
            
            
            
            122,830
            
            
            
            40.9Cost
                of sales
            
            
            129,055
            
            
            
            94,036
            
            
            
            35,019
            
            
            
            37.2Advertising
                and promotion expense
            
            
            112,206
            
            
            
            96,071
            
            
            
            16,135
            
            
            
            16.8Selling,
                general and administrative expense
            
            
            57,878
            
            
            
            46,989
            
            
            
            10,889
            
            
            
            23.2Acquisition
                expenses
            
            
            2,057
            
            
            
            —
            
            
            
            2,057
            
            
            
            100.0Litigation
                settlement
            
            
            —
            
            
            
            (19,292
            )
            
            
            (19,292
            )
            
            
            (100.0
            )




-
          34
          -


Interest
                expense
            
            
            29,930
            
            
            
            11,725
            
            
            
            18,205
            
            
            
            155.3Loss
                on early extinguishment of debt
            
            
            2,633
            
            
            
            2,805
            
            
            
            (172
            )
            
            
            (6.1
            )Net
                income
            
            
            59,690
            
            
            
            45,112
            
            
            
            14,578
            
            
            
            32.3




Domestic
      Net Sales




Domestic
      net sales for fiscal 2007 increased $117.1 million, or 42.4%, as compared to
      the
      fiscal 2006.   A comparison of domestic net sales for the
      categories of products included in our portfolio of OTC healthcare products
      is
      as follows:




For
                the Year Ended November
                30,Increase
                (Decrease)2007
            
            
            2006
            
            
            Amount
            
            
            Percentage(dollars
                in thousands)Medicated
                skin care
            
            $
            123,456
            
            
            $
            67,238
            
            
            $
            56,218
            
            
            
            83.6
            %Topical
                pain care
            
            
            95,858
            
            
            
            101,396
            
            
            
            (5,538
            )
            
            
            (5.5
            )Oral
                care
            
            
            48,863
            
            
            
            6,773
            
            
            
            42,090
            
            
            
            621.5Internal
                OTC
            
            
            45,043
            
            
            
            11,958
            
            
            
            33,085
            
            
            
            276.7Medicated
                dandruff shampoos
            
            
            36,934
            
            
            
            37,742
            
            
            
            (808
            )
            
            
            (2.1
            )Dietary
                supplements
            
            
            26,121
            
            
            
            35,081
            
            
            
            (8,960
            )
            
            
            (25.5
            )Other
                OTC and toiletry products
            
            
            17,218
            
            
            
            16,209
            
            
            
            1,009
            
            
            
            6.2Total
            
            $
            393,493
            
            
            $
            276,397
            
            
            $
            117,096
            
            
            
            42.4




Net
      sales
      growth in the medicated skin care products category was a result of the
      acquisition of Cortizone-10 and Balmex
      in the first fiscal
      quarter of fiscal 2007 (brands acquired in the J&J Acquisition) and a 20%
      sales increase of the total Gold Bond franchise in fiscal
      2007 as compared to fiscal 2006, led by increases of 35%, 19% and 8% in the
      lotion, foot care and powder lines, respectively.  The increase in the
Gold Bondlotion line
      was led by a full year of sales for Ultimate Softening Lotion, which was
      launched in the fourth quarter of fiscal 2006.




The
      decline in net sales in the topical pain care category was primarily
      attributable to Icy Hot
      Pro-Therapy, which was originally launched in fiscal
      2006.  Contributing to the decrease in net sales was a $4.5 million
      charge for expected returns of Icy Hot Pro-Therapy recorded
      in the fourth quarter of fiscal 2007, which
      resulted in lower net sales and reduced gross
      margins.  Sportscreme and
Aspercreme
      experienced sales
      declines of 31% and 9%, respectively, in fiscal 2007.  This decrease
      was offset in part by the launch of Icy HotHeat Therapy in
      fiscal 2007 and a 7% increase in the base Icy Hot business, led by
      the
      launch in fiscal 2007 of the Icy Hot XL Back Patch and
      Icy Hot Vanishing Scent
      Cream.




The
      net
      sales growth in the oral care category was attributable to ACT, which was acquired
      as
      part of the J&J Acquisition.




The
      net
      sales growth in the internal OTC category was attributable to Unisom and Balmex,
      which were acquired
      as part of the J&J Acquisition.




The
      decline in net sales in the medicated dandruff shampoos category was a result
      of
      lower sales of Selsun
      Salon in fiscal 2007 when compared to fiscal 2006, the product’s first
      full year of sales.  The overall decline was offset in part by a 3%
      increase in Selsun Bluesales, partially
      as a result of the launch of Selsun Blue Naturals in
      fiscal 2007.




The
      decline in net sales in the dietary supplements category in fiscal 2007 was
      a
      result of a 29% sales decrease of Dexatrim, resulting from
      increased competitive pressures in the category and the decline in sales of
      Dexatrim Max2O
      after its
      initial launch in fiscal 2006.  Also contributing to the decline were
      23% lower Garlique
      sales and a 33% decline in New
      Phase sales.




The
      higher net sales in the other OTC and toiletry products category was due
      principally to the introduction of Bullfrog Marathon Mist in
      fiscal 2007.




-
          35
          -


Domestic
      sales variances were principally the result of changes in unit sales
      volumes.




International
      Revenues




For
      fiscal 2007, international revenues increased $5.7 million, or 23.7%, as
      compared to fiscal 2006, primarily due to the brands acquired in the J&J
      Acquisition and the ACT
      Acquisition in fiscal 2007.  Sales variances for international
      operations were principally the result of changes in unit sales
      volumes.




Cost
      of Sales




Cost
      of
      sales in fiscal 2007 increased $35.0 million, or 37.2%, to $129.1 million from
      $94.0 million in fiscal 2006.  Cost of sales as a percentage of total
      revenues was 30.5% for fiscal 2007 as compared to 31.3% for fiscal
      2006.  The decrease in cost of sales as a percentage of total revenues
      was attributable to an increase in sales of products with lower cost of sales
      in
      fiscal 2007 as compared to fiscal 2006, offset by an estimate recorded for
      potentially obsolete inventory related to our Icy Hot Pro-Therapyline of
      products.  Based on our evaluation of the carrying value of Icy Hot Pro-Therapyinventory
      in fiscal 2007 and fiscal 2006, including a review of retail point of sale
      data,
      on hand inventory and purchase commitments, a reserve was recorded for
      potentially obsolete inventory of $2.5 million and $2.0 million during the
      fourth quarter of fiscal 2007 and 2006, respectively, which increased cost
      of
      sales in our consolidated financial statements.




Advertising
      and Promotion Expense




Advertising
      and promotion expenses for fiscal 2007 increased $16.1 million, or 16.8%, as
      compared to the same period in fiscal 2006 and were 26.5% and 32.0% of total
      revenues in fiscal 2007 and 2006, respectively.  The decrease in
      advertising and promotion expense as a percentage of revenue for the current
      period reflected higher advertising and promotion spending, as a percentage
      of
      revenue, for Icy Hot
      Pro-Therapy and Selsun
      Salon during the fiscal 2006 launch period.




Selling,
      General and Administrative Expense




Selling,
      general and administrative expenses for fiscal 2007 increased $10.9 million,
      or
      23.2%, as compared to fiscal 2006 and were 13.6% and 15.6% of total revenues
      fiscal 2007 and 2006, respectively.  The decrease as a percentage of
      revenue was attributable to increased revenue from the brands acquired in fiscal
      2007 without commensurate increases in selling, general and administrative
      expenses.




Acquisition
      Expenses




Acquisition
      expenses for fiscal 2007 reflect the costs incurred for transition services,
      including consumer affairs, distribution and collection services, related to
      the
      J&J Acquisition.  The distribution and collection services were
      terminated in April 2007 and the consumer affairs services were terminated
      in
      June 2007.




Litigation
      Settlement




Litigation
      settlement for fiscal 2006 reflected the $8.8 million recovery from the DELACO
      settlement trust in the first quarter of 2006, the $10.7 million recovery from
      the settlement trust in the third quarter of 2006 in the Dexatrim litigation
      settlement and net legal expenses related to the Dexatrim litigation of $0.2
      million.  No corresponding benefit was recorded in fiscal
      2007.




Interest
      Expense




Interest
      expense increased $18.2 million, or 155.3%, in fiscal 2007 as compared to fiscal
      2006 as a result of additional indebtedness incurred to finance the J&J
      Acquisition.  Until our indebtedness is reduced substantially,
      interest expense will continue to represent a significant percentage of our
      total revenues.




-
          36
          -


Loss
      on Early Extinguishment of Debt




In
      April
      2007, we utilized the net proceeds from the 1.625% Convertible Notes and
      borrowings under the revolving credit facility portion of our Credit Facility
      to
      repay $128.0 million of the term loan under the Credit
      Facility.   In July 2007, we utilized borrowings under the
      revolving credit facility portion of our Credit Facility to repay an additional
      $25.0 million of the term loan under the Credit Facility.  In
      connection with the term loan repayments, we retired a proportional share of
      the
      term loan debt issuance costs and recorded the resulting loss on early
      extinguishment of debt of $2.6 million.  Our $75.0 million of Floating
      Rate Senior Notes were fully redeemed in the first quarter of fiscal 2006,
      resulting in a loss on early extinguishment of debt of $2.8
      million.




Fiscal
      2006 Compared to Fiscal 2005




To
      facilitate discussion of our operating results for the years ended November
      30,
      2006 and 2005, we have included the following selected data from our
      consolidated statements of income:




For
                the Year Ended November
                30,Increase
                ( Decrease)2006
            
            
            2005
            
            
            Amount
            
            
            Percentage(dollars
                in thousands)Domestic
                net sales
            
            $
            276,397
            
            
            $
            252,436
            
            
            $
            23,961
            
            
            
            9.5
            %International
                revenues (including royalties)
            
            
            24,151
            
            
            
            26,882
            
            
            
            (2,731
            )
            
            
            (10.2
            )Total
                revenues
            
            
            300,548
            
            
            
            279,318
            
            
            
            21,230
            
            
            
            7.6Cost
                of sales
            
            
            94,036
            
            
            
            79,884
            
            
            
            14,152
            
            
            
            17.7Advertising
                and promotion expense
            
            
            96,071
            
            
            
            76,763
            
            
            
            19,308
            
            
            
            25.2Selling,
                general and administrative expense
            
            
            46,989
            
            
            
            47,322
            
            
            
            (333
            )
            
            
            (0.7
            )Executive
                severance charges
            
            
            —
            
            
            
            2,269
            
            
            
            (2,269
            )
            
            
            (100.0
            )Loss
                on product divesture
            
            
            —
            
            
            
            8,678
            
            
            
            (8,678
            )
            
            
            (100.0
            )Litigation
                settlement charges
            
            
            (19,292
            )
            
            
            (2,086
            )
            
            
            (17,206
            )
            
            
            (824.8
            )Interest
                expense
            
            
            11,725
            
            
            
            13,814
            
            
            
            (2,089
            )
            
            
            (15.1
            )Loss
                on early extinguishment of debt
            
            
            2,805
            
            
            
            750
            
            
            
            2,055
            
            
            
            274.0Net
                income
            
            
            45,112
            
            
            
            36,047
            
            
            
            9,065
            
            
            
            25.1




Domestic
      Net Sales




Domestic
      net sales for fiscal 2006 increased $24.0 million, or 9.5%, to $276.4 million
      from $252.4 million in fiscal 2005. A comparison of domestic net sales for
      the
      categories of products included in our portfolio of OTC healthcare products
      is
      as follows:




For
                the Year Ended November
                30,Increase
                ( Decrease)2006
            
            
            2005
            
            
            Amount
            
            
            Percentage(dollars
                in thousands)Medicated
                skin care
            
            $
            67,238
            
            
            $
            62,458
            
            
            $
            4,780
            
            
            
            7.7
            %Topical
                pain care
            
            
            101,396
            
            
            
            89,539
            
            
            
            11,857
            
            
            
            13.2Oral
                care
            
            
            6,773
            
            
            
            6,600
            
            
            
            173
            
            
            
            2.6Internal
                OTC
            
            
            11,958
            
            
            
            10,590
            
            
            
            1,368
            
            
            
            12.9Medicated
                dandruff shampoos
            
            
            37,742
            
            
            
            34,880
            
            
            
            2,862
            
            
            
            8.2Dietary
                supplements
            
            
            35,081
            
            
            
            33,828
            
            
            
            1,253
            
            
            
            3.7Other
                OTC and toiletry products
            
            
            16,209
            
            
            
            14,541
            
            
            
            1,668
            
            
            
            11.5Total
            
            $
            276,397
            
            
            $
            252,436
            
            
            $
            23,961
            
            
            
            9.5




Net
      sales
      growth in the medicated skin care products category resulted from a 24% increase
      in the Gold Bond
      franchise.  Gold
      Bond sales growth was attributable to 62%, 5% and 10% increases from the
      lotion, powder and cream lines, respectively, and was partially offset by lost
      sales from our discontinued first aid and antifungal foot swab
      products.  The increase in sales from the Gold Bond lotion line of
      products was attributable to continued sales increases of Gold Bond Ultimate Healing




-
          37
          -


Lotion
      and the introduction of Gold
      Bond Ultimate Softening Lotion in fiscal 2006.  The increase in
      net sales of Gold Bond
      powder was due to continued growth of the medicated powder line.  The
      overall sales growth in this category was offset by the 16% decline in sales
      resulting from the sale of pHisoderm effective November 30, 2005.




Net
      sales
      growth in the topical pain care category was led by the launch of the Icy Hot Pro-Therapy line of
      elastic support braces and pain relieving insert product and an 18% increase
      in
      sales of Capzasin, led
      by the Capzasin Back
& Body Patch.  Excluding sales of
Icy
      Hot Pro-Therapy, the
      category declined 3% compared to fiscal 2005, led by decreased sales of Icy Hot and Flexall.  Icy
      Hot Pro-Therapy performed
      below expectations in fiscal 2006, which resulted in our review of retail point
      of sale data for fiscal 2006 and development of an estimate of inventory on
      hand
      at customers as of November 30, 2006, and the recording of an estimate of
      returns as of November 30, 2006 of $3.3 million.  This reserve reduced
      net sales in our consolidated financial statements.




Domestic
      net sales of our medicated dandruff shampoos increased 8% due to a full years
      sales of Selsun Salon,
      which was launched in the fourth quarter of fiscal 2005.  This sales
      growth was partially offset by a slight reduction in sales of Selsun Blue.




Net
      sales
      for the dietary supplements category improved primarily due to a 28% increase
      in
Dexatrim led by the
      introduction of Dexatrim Max2O
      in fiscal
      2006, which was partially offset by lost sales of the discontinued All-in-One
      Bar.  Net sales of New Phase decreased due to
      the fiscal 2005 introduction of New Phase Extra
      Strength.




The
      increase in net sales for the other OTC and toiletry products category was
      primarily attributable to sales increases of Pamprin and Bullfrog
      of 16% and 17%,
      respectively, led by the introduction of Pamprin MAX and Bullfrog
      Mosquito Coast,
      respectively.  The sales growth was partially offset by sales
      decreases of Mudd,
      Prēmsyn andBenzodent.




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




International
      Revenues




For
      fiscal 2006, international revenues decreased $2.7 million, or 10.2%, to $24.2
      million from $26.9 million in fiscal 2005.  The decrease was primarily
      due to the reduction of sales as a result of the divestiture of pHisoderm at
      the
      end of fiscal 2005 and the suspension of distribution in a single European
      market in 2005, partially offset by a full year sales of Icy Hot in Canada in
      2006.




Cost
      of Sales




Cost
      of
      sales in fiscal 2006 increased $14.2 million, or 17.7%, to $94.0 million from
      $79.9 million in fiscal 2005.  Cost of sales as a percentage of total
      revenues was 31.3% for fiscal 2006 as compared to 28.6% for fiscal
      2005.  The increase in cost of sales as a percentage of total revenues
      was primarily due to the launch of Icy Hot Pro-Therapy which has
      higher product costs than our other products.  Based on Icy Hot Pro-Therapy
      performing below expectations and a review of our on hand inventory and purchase
      commitments outstanding as of November 30, 2006, we recorded an estimate for
      obsolete inventory of $2.0 million, which increased cost of sales in our fiscal
      2006 consolidated financial statements.




Advertising
      and Promotion Expense




Advertising
      and promotion expenses in fiscal 2006 increased $19.3 million, or 25.2%, to
      $96.1 million from $76.8 million in fiscal 2005 and were 32.0% of total revenues
      for fiscal 2006 compared to 27.5% for the comparable period of fiscal
      2005.  Support for new product introductions such as Icy Hot Pro-Therapy, Selsun
      Salon and Bullfrog Mosquito
      Coast
      resulted in an increase in advertising and promotion expenditures in fiscal
      2006.




Selling,
      General and Administrative Expense




Selling,
      general and administrative expenses decreased $0.3 million, or 0.7%, to $47.0
      million from $47.3 million in fiscal 2005.  Selling, general and
      administrative expenses were 15.6% and 16.9% of total revenues for fiscal 2006
      and fiscal 2005, respectively.  The decrease was attributable to lower
      compensation expense in the current year related to payments




-
          38
          -


associated
      with restricted stock grants in the prior year and an executive severance charge
      in fiscal 2005, offset in part by share-based compensation expense under SFAS
      123R in fiscal 2006.




Litigation
      Settlement Charges




Litigation
      settlement for fiscal 2006 reflected the $8.8 million recovery from the DELACO
      settlement trust in the first quarter of 2006, the $10.7 million recovery from
      the settlement trust in the third quarter of 2006 in the Dexatrim litigation
      settlement and net legal expenses related to the Dexatrim litigation of $0.2
      million, compared to the reversal of a charge of $6.0 million related to the
      Dexatrim litigation,
      $0.5 million reimbursement from the settlement trust for previously incurred
      administrative costs for the same period of fiscal 2005, offset by legal
      expenses and ephedrine-related claims of $4.4 million related to the settlement
      of Dexatrim
      litigation.




Interest
      Expense




Interest
      expense in fiscal 2006 decreased $2.1 million, or 15.1%, to $11.7 million from
      $13.8 million in fiscal 2005.  The decrease was largely the result of
      reductions in outstanding debt as a result of the redemption of our $75.0
      million Floating Rate Senior Notes on December 30, 2005.




Loss
      on Early Extinguishment of Debt




Our
      $75.0
      million of Floating Rate Senior Notes were fully redeemed in the first quarter
      of fiscal 2006, which resulted in a loss on early extinguishment of debt of
      $2.8
      million.  During fiscal 2005, we repurchased $17.5 million of our 7.0%
      Subordinated Notes, which resulted in a loss on early extinguishment of debt
      of
      $0.7 million.




Liquidity
      and Capital Resources




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




Cash
      of
      $86.7 million and $54.4 million was provided by operations in fiscal 2007 and
      2006, respectively.  Increases in net income and accounts payable and
      accrued liabilities were offset by increased accounts receivables, due mainly
      to
      the J&J Acquisition.




Investing
      activities used cash of $420.2 million and $6.8 million in fiscal 2007 and
      2006,
      respectively.  The increase in the usage of cash in 2007 was primarily
      related to amounts used to fund the J&J Acquisition and the ACT Acquisition.




Financing
      activities provided cash of $257.9 million and used cash of $4.1 million in
      fiscal 2007 and 2006, respectively.  The increase was primarily
      attributable to amounts borrowed to fund the J&J Acquisition.




As
      of
      November 30, 2007, our total debt was $508.0 million, consisting of the 7.0%
      Subordinated Notes of $107.5 million, the 2.0% Convertible Notes of $125.0
      million, the 1.625% Convertible Notes of $100.0 million, $145.5 million
      outstanding from a term loan under our Credit Facility and $30.0 million
      outstanding under our Amended Revolving Credit Facility.  In November
      2006, we entered into an interest rate swap with decreasing notional principal
      amounts beginning in October 2007 and a swap rate of 4.98% over the life of
      the
      agreement.  In April 2007, we entered into an interest rate cap with
      decreasing notional principal amounts beginning in May 2007 and a cap rate
      of
      5.0% over the life of the agreement.




During
      fiscal 2007, we repurchased 0.4 million shares of our common stock for $23.6
      million.  Our Board of Directors has authorized the repurchase of up
      to an additional $100.0 million of our common stock under the terms of a stock
      repurchase program, and there remains $64.5 million available under such
      authorization to repurchase shares.




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




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          39
          -


obtain
      additional financing.  If additional financing is required, there are
      no assurances that it will be available, or, if available, that it can be
      obtained on terms favorable to us or not dilutive to our
      shareholders.




Contractual
      Obligations




The
      following data summarizes our contractual obligations as of November 30,
      2007.  We had no commercial obligations as of November 30,
      2007.




Payments
                due byContractual
                Obligations:
            
            Total
            
            
            Within
                1 year
            
            
            2-3
                years
            
            
            4-5
                years
            
            
            After
                5 years(dollars
                in thousands)Long-term
                debt
            
            $
            508,000
            
            
            $
            3,000
            
            
            $
            36,000
            
            
            $
            6,000
            
            
            $
            463,000Interest payments
            
            
            111,739
            
            
            
            19,670
            
            
            
            38,060
            
            
            
            37,211
            
            
            
            16,798Operating
                leases
            
            
            1,980
            
            
            
            618
            
            
            
            661
            
            
            
            407
            
            
            
            294Purchase
                commitments
            
            
            8,342
            
            
            
            2,109
            
            
            
            2,840
            
            
            
            2,840
            
            
            
            553Endorsements
            
            
            1,600
            
            
            
            800
            
            
            
            800
            
            
            
            —
            
            
            
            —Total
            
            $
            631,661
            
            
            $
            26,197
            
            
            $
            78,361
            
            
            $
            46,458
            
            
            $
            480,645




Purchase
      orders or contracts for the purchase of inventory and other goods and services
      are not included in the table above.  We are not able to determine the
      aggregate amount of such purchase orders that represent contractual obligations,
      as purchase orders may represent authorizations to purchase rather than binding
      agreements.  Our purchase orders are based on our current distribution
      needs and are fulfilled by our vendors within short time
      horizons.  Other than as presented in the table above, we do not have
      significant agreements for the purchase of inventory or other goods specifying
      minimum quantities or fixed prices that exceed our expected requirements for
      three months. Interest payments consist of interest at the November 30, 2007
      effective rate of 6.97% per annum on the $145.5 million term loan portion of
      our
      Credit Facility due 2013, the 7.0% Subordinated Notes due 2014, the 2.0%
      Convertible Notes due 2013 and the 1.625% Convertible Notes due 2014. Due to
      the
      variable nature of borrowings under the revolving credit facility portion of
      the
      Credit Facility, we did not include an estimate of expected interest payments
      related to the revolving credit facility in the table above. As of November
      30,
      2007, we had $30.0 million outstanding under the revolving credit facility
      at a
      variable rate of 6.19%.




Foreign
      Operations




Historically,
      our primary foreign operations have been conducted through our Canadian and
      United Kingdom (“U.K.”) subsidiaries.  Since November 1, 2004, our
      European business has been conducted through Chattem Global Consumer Products
      Limited, a wholly-owned subsidiary located in Limerick, Ireland.  In
      connection with the ACT
      Acquisition, we have been conducting business in Greece through our newly
      created subsidiary Chattem Greece, a wholly-owned subsidiary located in Alimos
      Attica, Greece.  The functional currencies of these subsidiaries are
      Canadian dollars, British pounds and Euros,
      respectively.  Fluctuations in exchange rates can impact operating
      results, including total revenues and expenses, when translations of the
      subsidiary financial statements are made in accordance with SFAS No. 52,
“Foreign Currency Translation”.  For fiscal 2007 and 2006, these
      subsidiaries accounted for 7% and 8% of total consolidated revenues,
      respectively, and 2% and 4% of total consolidated assets,
      respectively.  It has not been our practice to hedge our assets and
      liabilities in Canada, the U.K. and Ireland or our intercompany transactions
      due
      to the inherent risks associated with foreign currency hedging transactions
      and
      the timing of payments between us and our foreign
      subsidiaries.  Historically, gains or losses from foreign currency
      transactions have not had a material impact on our operating
      results.  Gains and losses from foreign currency transactions for the
      years ended November 30, 2007 and 2006 were insignificant and are included
      in
      selling, general and administrative expenses in the consolidated statements
      of
      income.




Recent
      Accounting Pronouncements




See
      note
      2 of notes to consolidated financial statements included in Item 8 “Financial
      Statements and Supplementary Data.”




Forward
      Looking Statements




We
      may
      from time to time make written and oral forward-looking statements. Written
      forward-looking statements may appear in documents filed with the Securities
      and
      Exchange Commission, in press releases and in reports to shareholders or be
      made
      orally in publicly accessible conferences or conference calls. The Private
      Securities Litigation Reform Act of 1995 contains a safe harbor for
      forward-looking statements. We rely on this safe harbor in making such
      disclosures. These forward-looking statements generally can be identified by
      use
      of phrases such as “believe,” “plan,” “expect,” “anticipate,” “intend,”
“forecast” or




-
          40
          -


other
      similar words or phrases.  These forward-looking statements relate to,
      among other things, our strategic and business initiatives and plans for growth
      or operating changes; our financial condition and results of operation; future
      events, developments or performance; and management’s expectations, beliefs,
      plans, estimates and projections.  The forward-looking statements are
      based on management’s current beliefs and assumptions about expectations,
      estimates, strategies and projections. These statements are not guarantees
      of
      future performance and involve risks, uncertainties and assumptions that are
      difficult to predict. Therefore, actual outcomes and results may differ
      materially from what is expressed or forecasted in such forward-looking
      statements. We undertake no obligation to update publicly any forward-looking
      statements whether as a result of new information, future events or otherwise.
      Factors that could cause our actual results to differ materially from those
      anticipated in the forward-looking statements in this Form 10-K and the
      documents incorporated herein by reference include the following:





•
            we
                face significant competition in the OTC healthcare, toiletries and
                dietary
                supplements markets;


•
            our
                acquisition strategy is subject to risk and may not be successful;


•
            we
                rely on a few large customers, particularly Wal-Mart Stores, Inc.,
                for a
                significant portion of our sales;•
            litigation
              may adversely affect our business, financial condition and results
              of
              operations;•
            we
              have a significant amount of debt that could adversely affect our business
              and growth prospects;






•
            our
                product liability insurance coverage may be insufficient to cover
                existing
                or future liability claims;


•
            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
                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-10brands;


•
            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 or limited source suppliers for ingredients in certain
                of
                our products, and our inability to buy these ingredients would prevent
                us
                from manufacturing these products;


•
            we
                are subject to the risk of doing business internationally;


•
            the
                terms of our outstanding debt obligations limit certain of our activities;


•
            to
                service our indebtedness, we will require a significant amount of
                cash;


•
            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;


•
            we
                have no current intentions of paying dividends to holders of our
                common
                stock;


•
            we
                can be affected adversely and unexpectedly by the implementation
                of new,
                or changes in the interpretation of existing, accounting principles
                generally accepted in the United States of America (“GAAP”);


•
            identification
                of material weakness in internal controls over financial reporting may
                adversely affect our financial results;


•
            the
                convertible note hedge and warrant transactions may affect the value
                of
                our common stock and our convertible notes;


•
            conversion
                of our convertible notes may dilute the ownership interest of existing
                shareholders, including holders who had previously converted their
                convertible notes;


•
            virtually
                all of our assets consists of intangibles; and


•
            other
                risks described in our Securities and Exchange Commission filings.




-
          41
          -


Item
      7A. Quantitative and
      Qualitative Disclosures about Market Risk




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




Our
      exposure to interest rate risk currently relates to amounts outstanding under
      our Credit Facility.  Loans under the revolving credit facility
      portion of our Credit Facility bear interest at LIBOR plus applicable
      percentages of 0.875% to 1.50% or the higher of the federal funds rate plus
      0.50% or the prime rate (the “Base Rate”).  The applicable percentages
      are calculated based on our leverage ratio.  The term loan under our
      Credit Facility bears interest at either LIBOR plus 1.75% or the Base Rate
      plus
      0.75%.  As of November 30, 2007, $30.0 million was outstanding under
      the revolving credit facility and $145.5 million was outstanding under the
      term
      loan portion of our Credit Facility.  The variable rate for the
      revolving credit facility was LIBOR plus 1.50%, or 6.19% as of November 30,
      2007, and the variable rate for the term loan portion was LIBOR plus 1.75%,
      or
      6.97%, as of November 30, 2007.  The 7.0% Subordinated Notes, the
      1.625% Convertible Notes and the 2.0% Convertible Notes are fixed interest
      rate
      obligations.




In
      November 2006, we entered into an interest rate swap (“swap”) agreement
      effective January 2007.  The swap has decreasing notional principal
      amounts beginning in October 2007 and a swap rate of 4.98% over the life of
      the
      agreement.  As of November 30, 2007, the decrease in fair value of
      $1.2 million, net of tax, was recorded to other comprehensive
      income.  The swap was deemed to be an effective cash flow
      hedge.  The swap agreement terminates in January 2010.




In
      April
      2007, we entered into an interest rate cap (“cap”) agreement.  The cap
      has decreasing notional principal amounts beginning in May 2007 and a rate
      of
      5.0% over the life of the agreement.  As of November 30, 2007, the
      insignificant decrease in the fair value of the cap was recorded to other
      comprehensive income.  A portion of the cap was deemed an ineffective
      cash flow hedge due to the reduction of variable rate debt resulting in an
      insignificant amount recorded as additional interest expense in the consolidated
      statement of income for fiscal 2007.  The balance of the cap was
      deemed to be an effective cash flow hedge.  The cap terminates in
      September 2008.




The
      impact on our results of operations of a one-point rate change on the January
      22, 2008 outstanding revolving credit facility balance of $51.8 million and
      $109.7 million term loan balance of our Credit Facility for the next twelve
      months would be approximately $1.0 million, net of tax.




We
      are
      subject to risk from changes in the foreign exchange rates relating to our
      Canadian, U.K., Irish and Greek subsidiaries. Assets and liabilities of these
      subsidiaries are translated to U.S. dollars at year-end exchange rates. Income
      and expense items are translated at average rates of exchange prevailing during
      the year.  Translation adjustments are accumulated as a separate
      component of shareholders’ equity. Gains and losses, which result from foreign
      currency transactions, are included as a component of investment and other
      income in the accompanying consolidated statements of income.  The
      potential loss resulting from a hypothetical 10.0% adverse change in the quoted
      foreign currency exchange rate amounts to approximately $1.3 million as of
      November 30, 2007.




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




-
          42
          -


Item
      8.  Financial
      Statements and Supplementary Data




REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Shareholders Chattem, Inc.




We
      have
      audited the accompanying consolidated balance sheets of Chattem, Inc. (a
      Tennessee corporation) and subsidiaries (the “Company”) as of November 30, 2007
      and 2006, and the related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period ended November
      30, 2007.  These consolidated financial statements are the
      responsibility of the Company’s management.  Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement.  An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements.  An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement
      presentation.  We believe that our audits provide a reasonable basis
      for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Chattem, Inc.
      and subsidiaries as of November 30, 2007 and 2006, and the consolidated results
      of its operations and its consolidated cash flows for each of the three years
      in
      the period ended November 30, 2007 in conformity with accounting principles
      generally accepted in the United States of America.




Our
      audits were conducted for the purpose of forming an opinion on the basic
      consolidated financial statements taken as a whole.  The schedule
      titled “Schedule II – Valuation and Qualifying Accounts” is presented for
      purposes of additional analysis and is not a required part of the basic
      consolidated financial statements.  This schedule has been subjected
      to the auditing procedures applied in the audit of the basic consolidated
      financial statements and, in our opinion, is fairly stated in all material
      respects in relation to the basic consolidated financial statements taken as
      a
      whole.




As
      discussed in Note 10 of the
      consolidated financial statements, the Company has adopted Statement of
      Financial Accounting Standards No. 158, Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans, in 2007.




As
      discussed in Note 2 of the consolidated financial
      statements, the Company has adopted Statement of Financial Accounting Standards
      No. 123(R), Share-Based Payments, in 2006




We
      also have audited, in accordance with the standards
      of the Public Company Accounting Oversight Board (United States), the
      effectiveness of Chattem, Inc. and subsidiaries’ internal control over financial
      reporting as of November 30, 2007, based on criteria established in Internal
      Control – Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO) and our report dated January
      29,
      2008 expressed an unqualified opinion on the effectiveness of internal control
      over financial reporting.







/s/
      GRANT
      THORNTON LLP




Charlotte,
      North Carolina


January
      29, 2008







-
          43
          -


Consolidated
      Balance Sheets


November
      30, 2007 and 2006


(In
      thousands)




ASSETS
            
            2007
            
            
            2006CURRENT
                ASSETS:
              Cash
                and cash equivalents
            
            $
            15,407
            
            
            $
            90,527Accounts
                receivable, less allowances of $13,810 in 2007 and $10,907  in
                2006
            
            
            43,753
            
            
            
            29,852Inventories
            
            
            43,265
            
            
            
            31,389Deferred
                income taxes
            
            
            6,750
            
            
            
            4,341Prepaid
                expenses and other current assets
            
            
            2,065
            
            
            
            5,857Total
                current assets
            
            
            111,240
            
            
            
            161,966PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            32,349
            
            
            
            30,353OTHER
                NONCURRENT ASSETS:Patents,
                trademarks and other purchasedproduct
                rights, net
            
            
            616,810
            
            
            
            206,149Debt
                issuance costs, net
            
            
            15,430
            
            
            
            11,399Other
            
            
            4,731
            
            
            
            5,446Total
                other noncurrent assets
            
            
            636,971
            
            
            
            222,994TOTAL
                ASSETS
            
            $
            780,560
            
            
            $
            415,313




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










-
          44
          -


Consolidated
      Balance Sheets


November
      30, 2007 and 2006


(In
      thousands)




LIABILITIES
                AND SHAREHOLDERS’ EQUITY
            
            2007
            
            
            2006CURRENT
                LIABILITIES:Current
                maturities of long-term debt
            
            $
            3,000
            
            
            $
            —Accounts
                payable
            
            
            18,239
            
            
            
            9,948Bank
                overdrafts
            
            
            7,584
            
            
            
            5,824Accrued
                liabilities
            
            
            21,537
            
            
            
            11,805Total
                current liabilities
            
            
            50,360
            
            
            
            27,577LONG-TERM
                DEBT, less current maturities
            
            
            505,000
            
            
            
            232,500DEFERRED
                INCOME TAXES
            
            
            21,056
            
            
            
            17,668OTHER
                NONCURRENT LIABILITIES
            
            
            2,436
            
            
            
            1,987COMMITMENTS
                AND CONTINGENCIES  (Note 12)SHAREHOLDERS’
                EQUITY:Preferred
                shares, without par value, authorized 1,000, none issued
            
            
            —
            
            
            
            —Common
                shares, without par value, authorized 100,000, issued 19,092 in 2007
                and18,669
                in 2006
            
            
            36,800
            
            
            
            30,452Retained
                earnings
            
            
            165,655
            
            
            
            105,965202,455
            
            
            
            136,417Accumulated
                other comprehensive income, net of taxesInterest
                rate hedge adjustment
            
            
            (1,747
            )
            
            
            (597
            )Foreign
                currency translation adjustment
            
            
            1,008
            
            
            
            (239
            )Unrealized
                actuarial gains and losses
            
            
            (8
            )
            
            
            —Total
                shareholders’ equity
            
            
            201,708
            
            
            
            135,581TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            780,560
            
            
            $
            415,313




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




-
          45
          -


Consolidated
      Statements of Income


For
      the Years Ended November 30, 2007, 2006 and 2005


(In
      thousands, except per share amounts)




2007
            
            
            2006
            
            
            2005TOTAL
                REVENUES:Net
                sales
            
            $
            423,285
            
            
            $
            300,320
            
            
            $
            279,140Royalties
            
            
            93
            
            
            
            228
            
            
            
            178Total
                revenues
            
            
            423,378
            
            
            
            300,548
            
            
            
            279,318COSTS
                AND EXPENSES:Cost
                of sales
            
            
            129,055
            
            
            
            94,036
            
            
            
            79,884Advertising
                and promotion
            
            
            112,206
            
            
            
            96,071
            
            
            
            76,763Selling,
                general and administrative
            
            
            57,878
            
            
            
            46,989
            
            
            
            47,322Acquisition
                expenses
            
            
            2,057
            
            
            
            —
            
            
            
            —Executive
                severance charges
            
            
            —
            
            
            
            —
            
            
            
            2,269Loss
                on product divesture
            
            
            —
            
            
            
            —
            
            
            
            8,678Litigation
                settlement
            
            
            —
            
            
            
            (19,292
            )
            
            
            (2,086
            )Total
                costs and expenses
            
            
            301,196
            
            
            
            217,804
            
            
            
            212,830INCOME
                FROM OPERATIONS
            
            
            122,182
            
            
            
            82,744
            
            
            
            66,488OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (29,930
            )
            
            
            (11,725
            )
            
            
            (13,814
            )Investment
                and other income, net
            
            
            1,460
            
            
            
            1,076
            
            
            
            1,086Loss
                on early extinguishment of debt
            
            
            (2,633
            )
            
            
            (2,805
            )
            
            
            (750
            )Total
                other income (expense)
            
            
            (31,103
            )
            
            
            (13,454
            )
            
            
            (13,478
            )INCOME
                BEFORE INCOME TAXES
            
            
            91,079
            
            
            
            69,290
            
            
            
            53,010PROVISION
                FOR INCOME TAXES
            
            
            31,389
            
            
            
            24,178
            
            
            
            16,963NET
                INCOME
            
            $
            59,690
            
            
            $
            45,112
            
            
            $
            36,047NUMBER
                OF COMMON SHARES:Weighted
                average outstanding, basic
            
            
            18,927
            
            
            
            19,036
            
            
            
            19,652Weighted
                average and potential dilutive outstanding
            
            
            19,350
            
            
            
            19,262
            
            
            
            20,366NET
                INCOME PER COMMON SHARE:Basic
            
            $
            3.15
            
            
            $
            2.37
            
            
            $
            1.83Diluted
            
            $
            3.08
            
            
            $
            2.34
            
            
            $
            1.77




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




-
          46
          -


Consolidated
      Statements of Shareholders’
      Equity


For
      the Years Ended November 30, 2007, 2006 and 2005


(In
      thousands, except per share amounts)




Common
              Shares
            
            
            Retained
              Earnings
            
            
            Unamortized
              Value
                of
              Restricted
              Common
              Shares
                Issued
            
            
            Accumulated
              Other
              Comprehensive
              Income
            
            
            TotalBalance,
                November 30, 2004
            
            $
            85,949
            
            
            $
            24,806
            
            
            $
            (2,386
            )
            
            $
            (339
            )
            
            $
            108,030Comprehensive
                income (loss):Net
                income
            
            
            —
            
            
            
            36,047
            
            
            
            —
            
            
            
            —
            
            
            
            36,047Interest
                rate hedge adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            233
            
            
            
            233Foreign
                currency translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (178
            )
            
            
            (178
            )Total
                comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            36,102Stock
                options exercised
            
            
            6,681
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6,681Tax
                benefit realized from stock option plans
            
            
            3,292
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,292Stock
                repurchases
            
            
            (34,084
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (34,084
            )Issuance
                of 2 common shares for non-employee directors’
compensation
            
            
            70
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            70Issuance
                of 50 shares of restricted common stock at a value of $35.37 per
                share
            
            
            1,769
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,769Modification
                of restricted stock agreement
            
            
            199
            
            
            
            —
            
            
            
            (257
            )
            
            
            —
            
            
            
            (58
            )Amortization
                of value of restricted common shares issued
            
            
            —
            
            
            
            —
            
            
            
            825
            
            
            
            —
            
            
            
            825Balance,
                November 30, 2005
            
            
            63,876
            
            
            
            60,853
            
            
            
            (1,818
            )
            
            
            (284
            )
            
            
            122,627Comprehensive
                income (loss):Net
                income
            
            
            —
            
            
            
            45,112
            
            
            
            —
            
            
            
            —
            
            
            
            45,112Interest
                rate hedge adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (514
            )
            
            
            (514
            )Foreign
                currency translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (38
            )
            
            
            (38
            )Total
                comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            44,560Stock-based
                compensation expense
            
            
            5,594
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,594Stock
                options exercised
            
            
            2,480
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,480Tax
                benefit realized from stock option plans
            
            
            982
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            982Stock
                repurchases
            
            
            (39,332
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (39,332
            )Payment
                for purchase of note hedge, net of tax benefit
            
            
            (19,994
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (19,994
            )Proceeds
                from issuance of warrant
            
            
            18,581
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            18,581Issuance
                of 2 common shares for non-employee directors’
compensation
            
            
            83
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            83Adjustment
                from unamortized value of restricted common shares issued to common
                shares
            
            
            (1,818
            )
            
            
            —
            
            
            
            1,818
            
            
            
            —
            
            
            
            —Balance,
                November 30, 2006
            
            $
            30,452
            
            
            $
            105,965
            
            
            $
            —
            
            
            $
            (836
            )
            
            $
            135,581






-
          47
          -


Common
              Shares
            
            
            Retained
              Earnings
            
            
            Unamortized
              Value
                of
              Restricted
              Common
              Shares
                Issued
            
            
            Accumulated
              Other
              Comprehensive
              Income
            
            
            TotalComprehensive
                income (loss):Net
                income
            
            
            —
            
            
            
            59,690
            
            
            
            —
            
            
            
            —
            
            
            
            59,690Interest
                rate hedge adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,150
            )
            
            
            (1,150
            )Foreign
                currency translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,247
            
            
            
            1,247Total
                comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            59,787Adjustment
                to initially apply SFAS 158 and recognize postretirement loss, net
                of
                tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8
            )
            
            
            (8
            )Stock-based
                compensation expense
            
            
            6,208
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6,208Stock
                options exercised
            
            
            16,661
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,661Tax
                benefit realized from stock option plans
            
            
            7,938
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,938Stock
                repurchases
            
            
            (23,601
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (23,601
            )Payment
                for purchase of note hedge, net of tax benefit
            
            
            (18,408
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (18,408
            )Proceeds
                from issuance of warrant
            
            
            17,430
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            17,430Issuance
                of 2 common shares for non-employee directors’
compensation
            
            
            120
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            120Balance,
                November 30, 2007
            
            $
            36,800
            
            
            $
            165,655
            
            
            $
            —
            
            
            $
            (747
            )
            
            $
            201,708




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




-
          48
          -


Consolidated
      Statements of Cash Flows


For
      the Years Ended November 30, 2007, 2006 and 2005


(In
      thousands, except per share amounts)




2007
              
              
              2006
              
              
              2005OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              59,690
              
              
              $
              45,112
              
              
              $
              36,047Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              8,843
              
              
              
              5,835
              
              
              
              6,115Deferred
                  income taxes
              
              
              12,718
              
              
              
              413
              
              
              
              3,894Stock-based
                  compensation expense
              
              
              5,622
              
              
              
              4,745
              
              
              
              —Loss
                  on early extinguishment of debt
              
              
              2,633
              
              
              
              2,805
              
              
              
              750Loss
                  on product line divesture
              
              
              —
              
              
              
              —
              
              
              
              8,678Tax
                  benefit realized from stock options exercised
              
              
              (8,291
              )
              
              
              (1,627
              )
              
              
              3,292Restricted
                  stock modification expense
              
              
              —
              
              
              
              —
              
              
              
              1,360Other,
                  net
              
              
              (189
              )
              
              
              384
              
              
              
              800Changes
                  in operating assets and liabilities, net of acquisitions:Accounts
                  receivable
              
              
              (13,901
              )
              
              
              12,341
              
              
              
              (3,069
              )Inventories
              
              
              (5,820
              )
              
              
              (7,621
              )
              
              
              (1,457
              )Refundable
                  income taxes
              
              
              —
              
              
              
              2,834
              
              
              
              2,979Prepaid
                  expenses and other current assets
              
              
              1,249
              
              
              
              579
              
              
              
              (726
              )Accounts
                  payable and accrued liabilities
              
              
              24,180
              
              
              
              (11,378
              )
              
              
              (3,647
              )Net
                  cash provided by operating activities
              
              
              86,734
              
              
              
              54,422
              
              
              
              55,016INVESTING
                  ACTIVITIES:Purchases
                  of property, plant and equipment
              
              
              (6,295
              )
              
              
              (4,705
              )
              
              
              (4,302
              )(Acquisitions)
                  sale of brands
              
              
              (415,765
              )
              
              
              —
              
              
              
              3,199Decrease
                  (increase) in other assets
              
              
              1,910
              
              
              
              (2,111
              )
              
              
              445Net
                  cash used in investing activities
              
              
              (420,150
              )
              
              
              (6,816
              )
              
              
              (658
              )FINANCING
                  ACTIVITIES:Repayment
                  of long-term debt
              
              
              (154,500
              )
              
              
              (75,000
              )
              
              
              (17,500
              )Proceeds
                  from long-term debt
              
              
              400,000
              
              
              
              125,000
              
              
              
              —Proceeds
                  from borrowings under revolving credit facility
              
              
              159,000
              
              
              
              75,500
              
              
              
              —Repayments
                  of revolving credit facility
              
              
              (129,000
              )
              
              
              (75,500
              )
              
              
              —Repayments
                  of policy loans
              
              
              —
              
              
              
              —
              
              
              
              (1,031
              )Bank
                  overdraft
              
              
              1,760
              
              
              
              5,824
              
              
              
              —Repurchase
                  of common shares
              
              
              (23,601
              )
              
              
              (39,332
              )
              
              
              (34,084
              )Proceeds
                  from exercise of stock options
              
              
              16,661
              
              
              
              2,480
              
              
              
              6,681Payment
                  for purchase of note hedge
              
              
              (29,500
              )
              
              
              (32,042
              )
              
              
              —Proceeds
                  from issuance of warrant
              
              
              17,430
              
              
              
              18,581
              
              
              
              —Increase
                  in debt issuance costs
              
              
              (9,383
              )
              
              
              (9,099
              )
              
              
              (313
              )Debt
                  retirement costs
              
              
              —
              
              
              
              (1,501
              )
              
              
              (282
              )Premium
                  paid on interest rate cap agreement
              
              
              (114
              )
              
              
              (687
              )
              
              
              —Proceeds
                  from sale of interest rate cap
              
              
              909
              
              
              
              —
              
              
              
              —Tax
                  benefit realized from stock options exercised
              
              
              8,291
              
              
              
              1,627
              
              
              
              —Net
                  cash provided by (used in) financing activities
              
              
              257,953
              
              
              
              (4,149
              )
              
              
              (46,529
              )EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
              
              
              343
              
              
              
              (257
              )
              
              
              (695
              )CASH
                  AND CASH EQUIVALENTS:(Decrease)
                  increase for the year
              
              
              (75,120
              )
              
              
              43,200
              
              
              
              7,134At
                  beginning of year
              
              
              90,527
              
              
              
              47,327
              
              
              
              40,193At
                  end of year
              
              $
              15,407
              
              
              $
              90,527
              
              
              $
              47,327SCHEDULE
                  OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Issuance
                  of  50 shares at a value of $35.37 per share in
                  2005
              
              $
              —
              
              
              $
              —
              
              
              $
              1,769


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




-
          49
          -


Notes
      to Consolidated Financial Statements




All
      monetary and share amounts are expressed in thousands. Our fiscal years ended
      November 30, 2005, November 30, 2006 and November 30, 2007 are referred to
      herein as fiscal 2005, fiscal 2006 and fiscal 2007, respectively.




(1)           NATURE
      OF
      OPERATIONS







Chattem,
      Inc. and its wholly-owned subsidiaries (“we”, “us”, “our” or “Chattem”) market
      and manufacture branded over-the-counter (“OTC”) health care
      products.  The products are sold primarily through mass merchandisers,
      independent and chain drug stores, drug wholesalers and food stores in the
      United States (“U.S.”) and in various markets in approximately 80 countries
      throughout the world.




(2)           SUMMARY
      OF SIGNIFICANT ACCOUNTING
      POLICIES







BASIS
      OF CONSOLIDATION




The
      accompanying consolidated financial statements include the accounts of Chattem
      and its wholly-owned subsidiaries.  All significant intercompany
      transactions and balances have been eliminated.




CASH
      AND CASH EQUIVALENTS




We
      consider all short-term deposits and investments with original maturities of
      three months or less to be cash equivalents.  Short-term cash
      investments are placed with high credit quality financial institutions or in
      low
      risk, liquid instruments.  Cash denominated in foreign currency was
      $6,783 and $3,651 as of November 30, 2007 and 2006, respectively.




INVENTORIES




Inventory
      costs include materials, labor and factory overhead.  Inventories are
      valued at the lower of cost using the first-in, first-out (“FIFO”) method or
      market.  We estimate reserves for inventory obsolescence based on our
      judgment of future realization.  Based on consideration of Icy Hot Pro-Therapy
      performing below expectations and reviewing our on-hand inventory and purchase
      commitments outstanding as of November 30, 2007 and 2006, we provided for an
      estimate for obsolete inventory of $2,531 and $1,983, respectively, which is
      included as a component of cost of sales in the accompanying consolidated
      financial statements.




PROPERTY,
      PLANT AND EQUIPMENT




Property,
      plant and equipment are recorded at cost.  Depreciation is computed
      using the straight-line method over the estimated useful lives of 7 to 40 years
      for buildings and improvements and 3 to 15 years for machinery and
      equipment.  Expenditures for maintenance and repairs are charged to
      expense as incurred.  Depreciation expense for fiscal 2007, fiscal
      2006 and fiscal 2005 was $4,735, $4,191 and $3,961, respectively.




PATENTS,
      TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS




The
      costs
      of acquired patents and other purchased product rights are capitalized and
      amortized over their respective useful lives, generally 5 years.




The
      provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”), require certain
      fair-value-based tests of the carrying value of indefinite-lived intangible
      assets at least annually.




Under
      SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, we
      evaluate whether events and circumstances have occurred that indicate the
      remaining useful life of finite-lived assets might warrant revision or that
      the
      remaining balance may not be recoverable.  When factors indicate that
      finite-lived assets should have been evaluated for possible impairment, we
      use
      an estimate of the future undiscounted net cash flows of the related assets
      over
      the remaining lives of the assets in measuring whether the carrying values
      of
      finite-lived assets were recoverable.




-
          50
          -


DEBT
      ISSUANCE COSTS




We
      have
      incurred debt issuance costs in connection with our long-term
      debt.  These costs are capitalized and amortized over the term of the
      related debt.  Amortization expense related to debt issuance costs was
      $2,544, $693 and $727 in fiscal 2007, fiscal 2006 and fiscal 2005,
      respectively.  Accumulated amortization of these costs was $3,900 and
      $1,356 at November 30, 2007 and 2006, respectively.  Due to the
      redemption of our $75,000 of Floating Rate Senior Notes on December 30, 2005,
      we
      recorded a loss on early extinguishment of debt of $2,805.  In
      connection with our refinancing transactions (described in Note 5) in fiscal
      2005, a loss on early extinguishment of debt was recorded to the consolidated
      statements of income of $750.  On July 25, 2006, we successfully
      completed the consent solicitation from the holders of the 7.0% Subordinated
      Notes resulting in a consent fee of $5,619, which is being amortized as
      additional interest expense through 2014, the remaining term of the 7.0%
      Subordinated Notes.  In November 2006, we completed a private offering
      of $125,000 of 2.0% Convertible Senior Notes due 2013 (“2.0% Convertible Notes”)
      resulting in the capitalization of debt issuance costs of $3,465 in fiscal
      2006
      and $517 in fiscal 2007, which is being amortized as additional interest expense
      through 2013.  In
      January 2007, we completed an amendment to the Amended Revolving Credit Facility
      resulting in the capitalization of debt issuance costs of $5,507, which is
      being
      amortized as additional interest expense through 2013.   In April
      2007, we completed an amendment to our Credit Facility resulting in additional
      debt issuance costs of $625, which is being amortized through 2010 as additional
      interest expense. In April 2007, we completed a private offering of
      $100,000 of 1.625% Convertible Senior Notes due 2014 (“1.625% Convertible
      Notes”) resulting in the capitalization of debt issuance costs of $2,734, which
      is being amortized as additional interest expense through
      2014.  During 2007 we repaid a portion of a term loan, retiring a
      proportional share of the related debt issuance costs and recording a loss
      on
      extinguishment of debt of $2,633.  Subsequent to year-end, in January
      2008, we utilized additional borrowings under the revolving credit facility
      portion of our Credit Facility to repay an additional $35,000 of the term loan
      under the Credit Facility.  In connection with the term loan
      repayment, we retired a proportional share of the term loan debt issuance costs
      and recorded the resulting loss on early extinguishment of debt of $526 in
      fiscal 2008.




BANK
      OVERDRAFT




Bank
      overdraft represents outstanding checks in excess of current cash
      levels.  We fund bank overdrafts from our short-term investments and
      our operating cash flows.




PRODUCT
      DEVELOPMENT




Product
      development costs relate primarily to the development of new products and are
      expensed as incurred.  Such expenses were $5,525, $4,241 and $3,618 in
      fiscal 2007, 2006 and 2005, respectively.




ADVERTISING
      EXPENSES




The
      cost
      of advertising is expensed in the fiscal year in which the related advertising
      takes place.  Production and communication costs are expensed in the
      period in which the related advertising begins running.  Advertising
      expense for fiscal 2007, 2006 and 2005 was $74,510, $64,411 and $53,096,
      respectively.  At November 30, 2007 and 2006, we reported $759 and
      $2,096, respectively, of advertising paid for in fiscal 2007 and fiscal 2006,
      which will run or did run in the next fiscal year.  These amounts are
      included in prepaid expenses and other current assets in the accompanying
      consolidated balance sheets.




FOREIGN
      CURRENCY TRANSLATION




Assets
      and liabilities of our Canadian, United Kingdom (“U.K.”) and Irish subsidiaries
      are translated to U.S. dollars at year-end exchange rates.  Income and
      expense items are translated at average rates of exchange prevailing during
      the
      year.  Translation adjustments are accumulated as a separate component
      of shareholders’ equity.  Gains (losses) which result from foreign
      currency transactions amounted to $295, ($21) and $189 in fiscal 2007, 2006
      and
      2005, respectively, and are included in the accompanying consolidated statements
      of income as a component of investment and other income.




USE
      OF ESTIMATES




The
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosures of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period.  Several different estimates or methods can be used
      by management that might yield different results.  The following are
      the significant estimates used by management in the preparation of the
      consolidated financial statements for fiscal 2007, 2006 and 2005.




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          51
          -


Allowance
      For Doubtful Accounts




As
      of
      November 30, 2007, an estimate was made of the collectibility of the outstanding
      accounts receivable balances.   This estimate requires the
      utilization of outside credit services, knowledge about the customer and the
      customer’s industry, new developments in the customer’s industry and operating
      results of the customer as well as general economic conditions and historical
      trends.  When all these facts are compiled, a judgment as to the
      collectibility of the individual account is made.   Many factors
      can impact this estimate, including those noted in this
      paragraph.  The adequacy of the estimated allowance may be impacted by
      the deterioration in the financial condition of a large customer, weakness
      in
      the economic environment resulting in a higher level of customer bankruptcy
      filings or delinquencies and the competitive environment in which the customer
      operates.  During the year ended November 30, 2007, we performed an
      assessment of the collectibility of trade accounts receivable and increased
      our
      estimate of allowance for doubtful accounts by approximately $73, which resulted
      in an increase to selling, general and administrative expense in the
      accompanying consolidated statement of income.  The balance of
      allowance for doubtful accounts was $419 and $346 at November 30, 2007 and
      2006,
      respectively.




Revenue
      Recognition




Revenue
      is recognized when our products are shipped and title transfers to our
      customers.  It is generally our policy across all classes of customers
      that all sales are final.  As is common in the consumer products
      industry, customers return products for a variety of reasons including products
      damaged in transit, discontinuance of a particular size or form of product
      and
      shipping errors.  As sales are recorded, we accrue an estimated amount
      for product returns, as a reduction of these sales, based upon our historical
      experience and consideration of discontinued products, product divestitures,
      estimated inventory levels held by our customers and retail point-of-sale data
      on existing and newly introduced products.  The level of returns may
      fluctuate from our estimates due to several factors including weather
      conditions, customer inventory levels and competitive conditions.  We
      charge the allowance account for product returns when the customer provides
      appropriate supporting documentation that the product is properly destroyed
      or
      upon receipt of the product.




We
      separate returns into the two categories of seasonal and non-seasonal
      products.  We use the historical return detail of seasonal and
      non-seasonal products for at least the most recent three fiscal years on
      generally all products, which is normalized for any specific occurrence that
      is
      not reasonably likely to recur, to determine the amount of product returned
      as a
      percentage of sales, and estimate an allowance for potential returns based
      on
      product sold in the current period.  To consider product sold in
      current and prior periods, an estimate of inventory held by our retail customers
      is calculated based on customer inventory detail.  This estimate of
      inventory held by our customers, along with historical returns as a percentage
      of sales, is used to determine an estimate of potential product
      returns.  This estimate of the allowance for seasonal and non-seasonal
      returns is further analyzed by considering retail customer point-of-sale
      data.  We also consider specific events, such as discontinued product
      or product divestitures, when determining the adequacy of the
      allowance.




Our
      estimate of product returns for seasonal and non-seasonal products was $1,174
      and $1,254, respectively, as of November 30, 2007 and $1,204 and $1,321,
      respectively, as of November 30, 2006.  Higher sales volume in fiscal
      2007 offset by customers returning seasonal product earlier in the season
      resulted in our estimate of returns for seasonal products remaining consistent
      as compared to fiscal 2006.  Higher sales volumes in fiscal 2006
      caused an increase in our estimate of returns for seasonal products by $956,
      which resulted in a decrease to net sales in our consolidated financial
      statements. During fiscal 2007, our estimate of non-seasonal returns remained
      consistent as compared to fiscal 2006.  During fiscal year 2006,
      as a result of our estimate of customer inventory levels, historical
      non-seasonal product returns and retail point-of-sale data, we increased our
      estimate of non-seasonal returns by 674, which resulted in a decrease to net
      sales in our consolidated financial statements.  Each percentage point
      change in the seasonal return rate would impact net sales by approximately
      $200.  Each percentage point change in the non-seasonal return rate
      would impact net sales by approximately $600.




At
      November 30, 2006, based on consideration of the sales of Icy Hot Pro-Therapy
      performing below expectations, review of retail point-of-sale data throughout
      fiscal 2006 and an estimate of inventory on hand at customers, we estimated
      returns of Icy Hot
      Pro-Therapy as of November 30, 2006 of $3,339, which was included as a
      reduction of net sales.  During fiscal 2007, we continued to monitor
Icy Hot Pro-Therapy
      retail sales and inventory levels on-hand at customers and increased the
      specific reserve for Icy Hot
      Pro-Therapy returns by $4,522 as of November 30, 2007, which is included
      as a reduction of net sales in our consolidated financial
      statements.




We
      routinely enter into agreements with customers to participate in promotional
      programs.  The cost of these programs is recorded as either
      advertising and promotion expense or as a reduction of sales as prescribed
      by
      Emerging Issues Task Force




-
          52
          -


01-9,
      “Accounting for Consideration Given by a Vendor to a Customer (Including a
      Reseller of the Vendor’s Products)”.  A significant portion of the
      programs are recorded as a reduction of sales and generally take the form of
      coupons and vendor allowances, which are normally taken via temporary price
      reductions, scan downs, display activity and participations in in-store programs
      provided uniquely by the customer.  We also enter into cooperative
      advertising programs with certain customers, the cost of which is recorded
      as
      advertising and promotion expense.  In order for retailers to receive
      reimbursement under such programs, the retailer must meet specified advertising
      guidelines and provide appropriate documentation of the advertisement being
      run.




We
      analyze promotional programs in two primary categories -- coupons and vendor
      allowances.  Customers normally utilize vendor allowances in the form
      of temporary price reductions, scan downs, display activity and participations
      in in-store programs provided uniquely by the customer.  We estimate
      the accrual for outstanding coupons by utilizing a third-party clearinghouse
      to
      track coupons issued, coupon value, distribution and expiration dates, quantity
      distributed and estimated redemption rates that are provided by
      us.  We estimate the redemption rates based on internal analysis of
      historical coupon redemption rates and expected future retail sales by
      considering recent point of sale data.  The estimate for vendor
      allowances is based on estimated unit sales of a product under a program and
      amounts committed for such programs in each fiscal year.  Estimated
      unit sales are determined by considering customer forecasted sales, point of
      sale data and the nature of the program being offered.  The three most
      recent years of expected program payments versus actual payments made and
      current year retail point of sale trends are analyzed to determine future
      expected payments.  Customer delays in requesting promotional program
      payments due to their audit of program participation and resulting request
      for
      reimbursement is also considered to evaluate the accrual for vendor
      allowances.  The cost of these programs is often variable based on the
      number of units actually sold.  As of November 30, 2007, the coupon
      accrual and reserve for vendor allowances were $1,895 and $5,513, respectively,
      and $1,236 and $3,718, respectively, as of November 30, 2006.  Each
      percentage point change in promotional program participation would impact net
      sales by $200 and advertising and promotion expense by an insignificant
      amount.




Income
      Taxes




We
      account for income taxes using the asset and liability approach as prescribed
      by
      SFAS No. 109, “Accounting for Income Taxes”.  This approach requires
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the consolidated financial
      statements or tax returns.  Using the enacted tax rates in effect for
      the year in which the differences are expected to reverse, deferred tax assets
      and liabilities are determined based on the differences between the financial
      reporting and the tax basis of an asset or liability.  We record
      income tax expense in our consolidated financial statements based on an
      estimated annual effective income tax rate.  Our estimated annual
      effective income tax rate during fiscal 2007 was 34.5%, as compared to 34.9%
      in
      fiscal 2006 and 32.0% in fiscal 2005, as a result of lower deductions for
      charitable contributions and greater apportionment in states with higher
      statutory tax rates.




DERIVATIVE
      FINANCIAL INSTRUMENTS




We
      entered into an interest rate cap agreement effective June 2004 as a means
      of
      managing our interest rate exposure and not for trading
      purposes.  During fiscal 2007, the interest rate cap was sold for
      $353.  As a result, $49 was recorded as additional interest expense in
      the accompanying consolidated statement of income.




In
      November 2006, we entered into an interest rate cap agreement effective January
      2007 as a means of managing our interest rate exposure and not for trading
      purposes.  During fiscal 2007, the interest rate cap was sold for
      $555.  As a result, $50 was recorded as additional interest expense in
      the accompanying consolidated statement of income.




In
      November 2006, we entered into an interest rate swap agreement effective January
      2007 as a means of managing our interest rate exposure and not for trading
      purposes.  In accordance with SFAS 133, as of November 30, 2007, the
      forward starting swap was deemed to be an effective cash flow hedge and the
      change in fair value of $1,227, net of tax, was recorded to other comprehensive
      income.




In
      April
      2007, we entered into an interest rate cap agreement effective May 2007 as
      a
      means of managing our interest rate exposure and not for trading
      purposes.  We paid a premium of $114 to enter into the cap agreement,
      which is being amortized over the life of the agreement.  In
      accordance with SFAS 133, a portion of the interest rate cap was deemed to
      be an
      ineffective cash flow hedge due to the reduction of variable rate debt resulting
      in a charge of $38 as additional interest expense in the accompanying
      consolidated statement of income.  The balance of the interest rate
      cap was deemed to be an effective cash flow hedge and the change in fair value
      of $12, net of tax, was recorded to other comprehensive income.




-
          53
          -


CONCENTRATIONS
      OF CREDIT RISK




Financial
      instruments, which subject us to concentrations of credit risk, consist
      primarily of accounts receivable and short-term cash investments.  Our
      exposure to credit risk associated with nonpayment of accounts receivable is
      affected by conditions or occurrences within the retail industry.  As
      a result, we perform ongoing credit evaluations of our customers’ financial
      position but generally require no collateral from our customers.  Our
      largest customer accounted for 33%, 36% and 36% of consolidated sales in fiscal
      2007, 2006 and 2005, respectively.  No other customer exceeded 10% of
      our consolidated sales during the period.  Shoppers Drug Mart, a
      Canadian retailer, accounts for more than 10% of our international
      revenues.  Our ten largest customers represented approximately 71% of
      total revenues during fiscal 2007, and approximately 68% of our total accounts
      receivable at November 30, 2007.




OTHER
      CONCENTRATIONS




We
      purchase raw materials and packaging materials from a number of third party
      suppliers primarily on a purchase order basis.  Except for pamabrom,
      pyrilamine maleate and compap, active ingredients used in our Pamprin and Prēmsyn
      PMS products, we are not limited to a single source of supply for the
      ingredients used in the manufacture of our products.  Net sales of
Pamprin and Prēmsyn
      PMS products in fiscal 2007 represented $12,480 of our consolidated total
      revenues in that year.  In addition, we have a limited source of
      supply for selenium sulfide, the active ingredient in Selsun Blue.  As a
      result of the limited supply and increase in worldwide demand, prices have
      been
      and are expected to be volatile.  We believe that our current sources
      of supply and potential alternative sources will be adequate to meet future
      product demands.




SHIPPING
      AND HANDLING COSTS




Shipping
      and handling costs of $12,105, $8,947 and $7,998 for fiscal 2007, 2006 and
      2005,
      respectively, are included in selling expenses in our consolidated statements
      of
      income.




STOCK-BASED
      COMPENSATION




We
      currently provide stock-based compensation under five stock incentive plans
      that
      have been approved by our shareholders.  Our 1998 Non-Statutory Stock
      Option Plan provides for the issuance of up to 1,400 shares of common stock
      to
      key employees while the 1999 Non-Statutory Stock Option Plan for Non-Employee
      Directors allows for the issuance of up to 200 shares of common
      stock.  The 2000 Non-Statutory Stock Option Plan provides for the
      issuance of up to 1,500 shares of common stock.  The 2003 and 2005
      Stock Incentive Plans both provide for the issuance of up to 1,500 shares of
      common stock.  Stock options granted under all of these plans
      generally vest over four years from the date of grant as specified in the plans
      or by the compensation committee of our board of directors and are exercisable
      for a period of up to ten years from the date of grant.




Effective
      December 1, 2005, we adopted SFAS 123R, using the modified prospective
      method.  SFAS 123R requires the recognition of the cost of employee
      services received in exchange for an award of equity instruments in the
      financial statements and is measured based on the grant date fair value of
      the
      award.  SFAS 123R also requires the stock option compensation expense
      to be recognized over the period during which an employee is required to provide
      service in exchange for the award (the vesting period).   Prior
      to our adopting SFAS 123R, we accounted for our stock-based compensation plans
      under APB 25 and adopted the disclosure-only provision of SFAS
      123.  Under APB 25, generally no compensation expense is recorded when
      the terms of the award are fixed and the exercise price of the employee stock
      option equals or exceeds the fair value of the underlying stock on the date
      of
      grant.




For
      fiscal 2007 and 2006, we recorded compensation expense related to stock options
      that reduced income from operations by $5,622 and $4,745, provision for income
      taxes by $1,940 and $1,656, net income by $3,682 and $3,089 and basic and
      diluted income per share by $0.19 and $0.16, respectively.  The stock
      option compensation expense was included partly in cost of sales, advertising
      and promotion expenses and selling, general and administrative expenses in
      the
      accompanying consolidated statements of income.  We capitalized $183
      and $137 of stock options compensation cost as a component of the carrying
      cost
      of inventory on-hand as of November 30, 2007 and 2006,
      respectively.




On
      October 27, 2005, the compensation committee of our board of directors approved
      the immediate acceleration of vesting for all unvested outstanding stock options
      granted under our 2005 Non-Statutory Stock Option Plan whose exercise price
      exceeded the closing sale price of the shares of our common stock on the last
      business day prior to November 30, 2005, the




-
          54
          -


effective
      date of the acceleration.  As a result, options to purchase
      approximately 436 shares, including options to purchase approximately 260 shares
      held by our executive officers, became immediately exercisable.




The
      decision to accelerate vesting of these options was made primarily to minimize
      future compensation expense that we would otherwise recognize in our
      consolidated statements of income upon effectiveness of SFAS 123R.  As
      a result of the acceleration, stock option expense will be reduced by $2,594,
      net of tax, over the next two fiscal years.




For
      options granted subsequent to our SFAS 123R adoption date of December 1, 2005,
      the fair value of each stock option grant was estimated on the date of grant
      using a Flex Lattice Model.  For options granted prior to our adoption
      date of SFAS 123R, we used the Black-Scholes option pricing
      model.  The following assumptions were used to determine the fair
      value of stock option grants:




For
                the Year Ended November 30,2007
            
            
            2006
            
            
            2005Risk-free
                interest rate
            
            
            4.47
            %
            
            
            4.48
            %
            
            
            4.49
            %Expected
                dividend yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Expected
                volatility
            
            
            34
            %
            
            
            43
            %
            
            
            55
            %Expected
                life (years)
            
            
            6
            
            
            
            6
            
            
            
            6




Had
      compensation expense for stock option grants been determined based on the fair
      value at the grant dates consistent with the method prescribed by SFAS 123,
      our
      net income (loss) and net income (loss) per share would have been adjusted
      to
      the pro forma amounts for fiscal 2005 as indicated below:




2005Net
                income (loss):As
                reported
            
            $
            36,047Recognized
                stock-based compensation costs, net
            
            
            —Fair
                value method compensation costs, net
            
            
            (10,005
            )Pro
                forma
            
            $
            26,042Net
                income (loss) per share, basic:As
                reported
            
            $
            1.83Pro
                forma
            
            $
            1.33Net
                income (loss) per share, diluted:As
                reported
            
            $
            1.77Pro
                forma
            
            $
            1.28




RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision of
      SFAS No. 123, “Accounting for Stock-Based Compensation”.  SFAS 123R
      supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
      Stock Issued to Employees” (“APB 25”) and amends SFAS No. 95, “Statement of Cash
      Flows”.  SFAS 123R focuses primarily on accounting for transactions in
      which an entity obtains employee services in share-based payment transactions
      and requires all share-based payments to employees, including grants of employee
      stock options, to be recognized as additional compensation expense in the
      financial statements based on the calculated fair value of the
      awards.  SFAS 123R also requires the benefits of tax deductions in
      excess of recognized compensation costs to be reported as a financing cash
      flow.  This requirement has reduced net operating cash flows and
      increased net financing cash flows in periods after adoption.  We
      adopted SFAS 123R effective for our fiscal year beginning December 1,
      2005.




In
      July
      2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income
      taxes recognized in the financial statements in accordance with FASB




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          55
          -


Statement
      No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 provides guidance on
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosures, and transition. FIN 48 is effective for our fiscal year
      beginning December 1, 2007, with the cumulative effect of adopting FIN 48 being
      recorded as a reduction of shareholders’ equity during the first quarter of our
      fiscal 2008.  Additionally, in May 2007, the FASB published FSP No.
      FIN 48-1 (“FSP FIN
      48-1”), “Definition
      of
      Settlement in FASB Interpretation No. 48”. FSP FIN 48-1 is an
      amendment to FIN 48. It clarifies how an enterprise should determine whether
      a
      tax position is effectively settled for the purpose of recognizing previously
      unrecognized tax benefits. FSP FIN 48-1 is effective upon the initial adoption
      of FIN 48, and therefore is effective our first quarter of fiscal 2008. The
      actual impact of the adoption of FIN 48 and FSP FIN 48-1 on our
      consolidated results of operations and financial condition will depend on facts
      and circumstances that exist on the date of adoption. While we
      continue to analyze and quantify the impact of adopting FIN 48, we estimate
      the
      cumulative effect adjustment to reduce shareholders’ equity to range from
      approximately $600 to $900.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”).  SFAS 157 provides guidance for using fair value to measure
      assets and liabilities and is intended to respond to investors’ requests for
      expanded information about the extent to which companies measure assets and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings.  SFAS 157 applies
      whenever other standards require (or permit) assets or liabilities to be
      measured at fair value but does not expand the use of fair value in any new
      circumstances.  SFAS 157 also requires expanded disclosure of the
      effect on earnings for items measured using unobservable data, establishes
      a
      fair value hierarchy that prioritizes the information used to develop those
      assumptions and requires separate disclosure by level within the fair value
      hierarchy.  The provisions of SFAS 157 are effective for interim
      financial statements issued for fiscal years beginning after November 15, 2007,
      or our fiscal year beginning December 1, 2007, and we are currently evaluating
      the impact.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans -- An Amendment of FASB
      Statements No. 87, 88, 106, and 132R” (“SFAS 158”).  SFAS 158 requires
      an employer to recognize in its balance sheet an asset or liability for a plan’s
      funded status, measure a plan’s assets and obligations as of the end of the
      employer’s fiscal year and recognize changes in the funded status in the year in
      which the changes occur.  SFAS 158 also enhances the current
      disclosure requirements for pension and other postretirement plans to include
      disclosure related to certain effects on net periodic benefit
      cost.  We adopted SFAS 158 effective November 30, 2007.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
      permits entities to choose to measure certain financial assets and liabilities
      at fair value.  Unrealized gains and losses on items for which the
      fair value option has been elected are reported in earnings.  SFAS 159
      is effective for our fiscal year beginning December 1, 2007, and is not expected
      to have a material impact on our consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
      141R”).  SFAS 141R provides guidance to improve the relevance,
      representational faithfulness, and comparability of the information that a
      reporting entity provides in its financial reports about its business
      combinations and its effects.  SFAS 141R establishes principles and
      requirements for how the acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, liabilities assumed, the goodwill
      acquired and determines what information to disclose to enable users of the
      financial statements to evaluate the nature and financial effects of the
      business combination.  SFAS 141R is effective for acquisitions
      beginning in our fiscal year beginning December 1, 2009 and earlier application
      is prohibited.







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          56
          -


(3)           SHAREHOLDERS’
      EQUITY







COMPUTATION
      OF EARNINGS PER SHARE




The
      following table presents the computation of per share earnings for the years
      ended November 30, 2007, 2006 and 2005, respectively:




For
                the year ended November
                30,2007
            
            
            2006
            
            
            2005NET
                INCOME:
            
            $
            59,690
            
            
            $
            45,112
            
            
            $
            36,047NUMBER
                OF COMMON SHARES:Weighted
                average outstanding
            
            
            18,927
            
            
            
            19,036
            
            
            
            19,652Issued
                upon assumed exercise ofoutstanding
                stock options
            
            
            345
            
            
            
            209
            
            
            
            684Issued
                upon assumed exercise ofconvertible
                notes
            
            
            69
            
            
            
            —
            
            
            
            —Effect
                of issuance of restricted common shares
            
            
            9
            
            
            
            17
            
            
            
            30Weighted
                average and potential dilutive outstanding (1)
            
            
            19,350
            
            
            
            19,262
            
            
            
            20,366NET
                INCOME PER COMMON SHARE:Basic
            
            $
            3.15
            
            
            $
            2.37
            
            
            $
            1.83Diluted
            
            $
            3.08
            
            
            $
            2.34
            
            
            $
            1.77




(1)Because
      their effects are anti-dilutive, excludes shares issuable under stock option
      plans and restricted stock issuance whose grant price was greater than the
      average market price of common shares outstanding as follows:  249
      shares in fiscal 2007, 797 shares in fiscal 2006 and 267 shares in fiscal
      2005.




-
          57
          -


STOCK
      OPTIONS




We
      have
      granted stock options to key employees and non-employee directors under the
      plans described in Note 2.  A summary of the activity of stock options
      during fiscal 2007, 2006 and 2005 is presented below:




2007
            
            
            2006
            
            
            2005Shares
              Under
              Option
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Shares
              Under
              Option
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Shares
              Under
              Option
            
            
            Weighted
              Average
              Exercise
              PriceOutstanding
                at beginning   of year
            
            
            1,936
            
            
            $
            27.63
            
            
            
            1,753
            
            
            $
            23.94
            
            
            
            2,032
            
            
            $
            15.38Granted
            
            
            427
            
            
            
            60.05
            
            
            
            449
            
            
            
            37.87
            
            
            
            548
            
            
            
            41.99Exercised
            
            
            (824
            )
            
            
            20.23
            
            
            
            (174
            )
            
            
            14.26
            
            
            
            (635
            )
            
            
            10.51Cancelled
            
            
            (81
            )
            
            
            43.36
            
            
            
            (92
            )
            
            
            32.49
            
            
            
            (192
            )
            
            
            27.85Outstanding
                at end of year
            
            
            1,458
            
            
            $
            40.43
            
            
            
            1,936
            
            
            $
            27.63
            
            
            
            1,753
            
            
            $
            23.94Options
                exercisable at   year-end
            
            
            673
            
            
            $
            31.47
            
            
            
            1,126
            
            
            $
            25.13
            
            
            
            989
            
            
            $
            25.93Weighted
                average fair   value of options granted
            
            
            
            
            
            $
            24.63
            
            
            
            
            
            
            $
            16.75
            
            
            
            
            
            
            $
            19.73Fair
                value of options   granted
            
            
            
            
            
            $
            10,505
            
            
            
            
            
            
            $
            7,520
            
            
            
            
            
            
            $
            11,716Fair
                value of options   vested
            
            
            
            
            
            $
            5,665
            
            
            
            
            
            
            $
            4,882
            
            
            
            
            
            
            $
            14,713Intrinsic
                value of options   exercised
            
            
            
            
            
            $
            33,574
            
            
            
            
            
            
            $
            4,518
            
            
            
            
            
            
            $
            20,393




As
      of
      November 30, 2007, the aggregate intrinsic value of stock options outstanding
      was $42,649 and the weighted average remaining contractual life was six
      years.  The aggregate intrinsic value of stock options exercisable was
      $25,731 and the weighted average remaining contractual life was five
      years.




As
      of
      November 30, 2007, we had $12,867 of unrecognized compensation cost related
      to
      stock options that will be recorded over a weighted average period of
      approximately three years.




A
      summary
      of the exercise prices for options outstanding under our stock-based
      compensation plans at November 30, 2007 is presented below:




Range
                of
              Exercise
                Prices
            
            
            Shares
                Under
              Option
            
            
            Weighted
              Average
                Exercise
              Price
            
            
            Weighted
                Average
              Remaining
                Life in
              Years
            
            
            Shares
              Exercisable
            
            
            Weighted
              Average
              Exercise
                Price
              of
                Shares
              Exercisable$ 
                4.66 - $28.39
            
            
            
            387
            
            
            $
            21.73
            
            
            
            5.62
            
            
            
            300
            
            
            $
            19.83$33.00
                - $37.96
            
            
            
            91
            
            
            
            36.82
            
            
            
            5.49
            
            
            
            58
            
            
            
            37.66$38.07
                - $38.07
            
            
            
            318
            
            
            
            38.07
            
            
            
            4.16
            
            
            
            58
            
            
            
            38.07$42.09
                - $59.73
            
            
            
            284
            
            
            
            43.54
            
            
            
            4.59
            
            
            
            257
            
            
            
            42.17$59.77
                - $73.90
            
            
            
            378
            
            
            
            60.12
            
            
            
            5.42
            
            
            
            —
            
            
            
            —Total
            
            
            
            1,458
            
            
            
            40.43
            
            
            
            5.04
            
            
            
            673
            
            
            
            31.47




-
          58
          -


PREFERRED
      SHARES




We
      are
      authorized to issue up to 1,000 preferred shares in series and with rights
      established by the board of directors.  At November 30, 2007 and 2006,
      no shares of any series of preferred stock were issued and
      outstanding.




STOCK
      REPURCHASE




On
      July
      25, 2006, we successfully completed a consent solicitation from the holders
      of
      the 7% Subordinated Notes to an amendment to the indenture to increase our
      capacity to make restricted payments by an additional $85.0 million, including
      payments for the repurchase of our common stock and adjust the fixed charge
      coverage ratio as defined in the indenture.  In connection with the
      consent solicitation, our Board of Directors authorized the repurchase of up
      to
      an additional $100.0 million of our common stock under the terms of our existing
      stock repurchase program.




In
      fiscal
      2007, 400 shares at a cost of $23,601 were repurchased, in fiscal 2006, 1,172
      shares were repurchased at a cost of $39,332 and in fiscal 2005, 882 shares
      at a
      cost of $34,084 were repurchased.  The repurchased shares were retired
      and returned to unissued.  As of January 22, 2008, the current amount
      available under the authorization from the Board of Directors was
      $64,540.




SHAREHOLDER
      RIGHTS PLAN




On
      January 26, 2000, our board of directors adopted a shareholder rights
      plan.  Under the plan, rights were constructively distributed as a
      dividend at the rate of one right for each share of our common stock, without
      par value, held by shareholders of record as of the close of business on
      February 11, 2000.  As a result of the two-for-one split of our common
      stock on November 29, 2002, there is now one-half (1/2) right associated with
      each share of common stock outstanding.  Each right initially will
      entitle shareholders to buy one one-hundredth of a share of a new Series A
      Junior Participating Preferred Stock at an exercise price of $90.00 per right,
      subject to adjustment.  The rights generally will be exercisable only
      if a person or group acquires beneficial ownership of 15% or more of our common
      stock.  If the rights are triggered, the resulting issued shares would
      be included in the calculation of diluted earnings per
      share.   The rights will expire on February 11,
      2010.  As of November 30, 2007, no person or group has acquired
      beneficial ownership of 15% of our common stock, therefore, no rights have
      been
      exercised.




RESTRICTED
      STOCK ISSUANCE




We
      issued
      50 restricted shares of common stock to certain employees in fiscal
      2005.  The market value of these shares on the dates of issuance was
      $1,769.  These amounts are being amortized using the straight-line
      method over respective four year periods from the date of issuance as additional
      compensation expense.  Amortization expense for restricted stock
      issued was $565, $712 and $825 in fiscal 2007, 2006 and 2005, respectively,
      with
      the unamortized value of $328 and $1,000 being included as a component of
      shareholders’ equity in the November 30, 2007 and 2006 consolidated balance
      sheets, respectively.  The unamortized value of the restricted shares
      remaining as of November 30, 2007 will be recorded over a weighted average
      period of approximately 1 year.  The shares issued in fiscal 2005
      reduced the number of shares available for issuance under our 2003 Stock
      Incentive Plan.  No restricted shares of common stock were issued in
      fiscal 2007 and 2006.




A
      summary
      of our nonvested restricted stock activity as of November 30, 2007 is presented
      below:




Nonvested
                Restricted
                Stock
            
            Number
                of shares
            
            
            Weighted
                Average Grant-Date Fair
                ValueNonvested
                at November 30, 2006
            
            
            37
            
            
            $
            26.45Granted
            
            
            —
            
            
            
            —Vested
            
            
            (25
            )
            
            
            22.72Forfeited
            
            
            (3
            )
            
            
            35.37Nonvested
                at November 30, 2007
            
            
            9
            
            
            $
            33.11




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          59
          -


Effective
      September 1, 2005, our former president and chief operating officer, A.
      Alexander Taylor II, resigned his positions with the Company, after which Robert
      E. Bosworth assumed responsibility for both positions.  In connection
      with such resignation, Mr. Taylor and the Company entered into a separation
      agreement, which, among other things, included accelerated removal of
      restrictions on a portion of his restricted stock, which resulted in a $1,360
      non-cash charge in fiscal 2005.




(4)           PATENT,
      TRADEMARKS AND OTHER
      PURCHASED PRODUCT RIGHTS







We
      account for intangible assets within the provisions of SFAS
      142.  During fiscal 2007, 2006 and 2005, we performed impairment
      testing of our intangible assets as prescribed by SFAS 142.  The
      valuations indicated no impairment.  The carrying value of trademarks,
      which are not subject to amortization under the provisions of SFAS 142, was
      $613,328 and $205,983 as of November 30, 2007 and November 30, 2006,
      respectively.




The
      gross
      carrying amount of intangible assets subject to amortization at November 30,
      2007 and November 30, 2006, which consist primarily of non-compete agreements,
      was $6,053 and $2,139, respectively.  The related accumulated
      amortization of these intangible assets at November 30, 2007 and November 30,
      2006, was $2,797 and $1,973, respectively.  Amortization of our
      intangible assets subject to amortization under the provisions of SFAS 142
      was
      $824, $238 and $251 for fiscal 2007, 2006 and 2005,
      respectively.  Estimated annual amortization expense for these assets
      for fiscal 2008, 2009, 2010, 2011 and 2012 is $823, $803, $783, $783 and $65,
      respectively.  Royalty expense related to other purchased product
      rights for fiscal 2007, 2006 and 2005 was $62, $78 and $112,
      respectively.  Amortization and royalty expense are included in
      advertising and promotion expense in the accompanying consolidated statements
      of
      income.




(5)           LONG-TERM
      DEBT







Long-term
      debt consisted of the following as of November 30, 2007 and 2006:




2007
              
              
              2006Revolving
                  Credit Facility due 2010 at a variable rate
                  of 6.19%  and 8.25% as of November 30, 2007 and 2006,
                  respectively
              
              $
              30,000
              
              
              $
              —2.0%
                  Convertible Senior Notes due 2013
              
              
              125,000
              
              
              
              125,0001.625%
                  Convertible Senior Notes due 2014
              
              
              100,000
              
              
              
              —Term
                  Loan due 2013 at a variable rate of 6.97% as of November 30,
                  2007
              
              
              145,500
              
              
              
              —7.0%
                  Senior Subordinated Notes due 2014
              
              
              107,500
              
              
              
              107,500
 Total
                  long-term debt
              
              
              508,000
              
              
              
              232,500Less:  current
                  maturities
              
              
              3,000
              
              
              
              —Total
                  long-term debt, net of current maturities
              
              $
              505,000
              
              
              $
              232,500





In
      February 2004, we entered into a Senior Secured Revolving Credit Facility with
      a
      maturity date of February 2009 (the “Revolving Credit Facility”) with Bank of
      America, N.A. that provided an initial borrowing capacity of $25,000 and an
      additional $25,000, subject to successful syndication.  In March 2004,
      we entered into a commitment agreement with a syndicate of commercial banks
      led
      by Bank of America, N.A., as agent, that enabled us to borrow up to a total
      of
      $50,000 under the Revolving Credit Facility and an additional $50,000, subject
      to successful syndication.  In November 2005, we entered into an
      amendment to our Revolving Credit Facility (the “Amended Revolving Credit
      Facility”) that, among other things, increased our borrowing capacity under the
      facility from $50,000 to $100,000, increased our flexibility to repurchase
      shares of our stock, improved our borrowing rate under the facility and extended
      the maturity date to November 2010.  Upon successful syndication, we
      were able to increase the borrowing capacity under the Amended Revolving Credit
      Facility by $50,000 to an aggregate of $150,000.  In November 2006, we
      entered into an amendment to our Amended Revolving Credit Facility that, among
      other things, permitted the sale of the 2.0% Convertible Senior Notes due 2013
      (the “2.0% Convertible Notes”).  In January 2007, we completed an
      amendment to the Amended Revolving Credit Facility providing for up to a
      $100,000 revolving credit facility and a $300,000 term loan (the “Credit
      Facility”).  The proceeds from the term loan under the Credit Facility
      were used to finance in part the acquisition of the five consumer and OTC brands
      from Johnson & Johnson.  The Credit Facility includes “accordion”
features that permit us under certain circumstances to increase our borrowings
      under the revolving credit facility by $50,000 and to borrow an additional
      $50,000 as a term loan, subject to successful syndication.  In April
      2007, we entered into an amendment to our Credit Facility that, among other
      things, permitted the sale of the 1.625% Convertible Senior Notes due
      2014  (the “1.625% Convertible Notes”) and reduced the applicable
      interest rates on the revolving credit facility portion of our Credit
      Facility.





-
          60
          -


Borrowings
      under the revolving credit facility portion of our Credit Facility bear interest
      at LIBOR plus applicable percentages of 0.875% to 1.500% or the higher of the
      federal funds rate plus 0.5% or the prime rate (the “Base Rate”).  The
      applicable percentages are calculated based on our leverage ratio.  As
      of November 30, 2007 and 2006, we had $30,000 and $0, respectively, of
      borrowings outstanding under the revolving credit facility portion of our Credit
      Facility.  As of January 22, 2008, we had $51,750 of borrowings
      outstanding under the revolving credit facility portion of our Credit Facility
      and our borrowing capacity was $48,250.





The
      term
      loan under the Credit Facility bears interest at either LIBOR plus 1.75% or
      the
      Base Rate plus 0.75%.  The term loan borrowings are to be repaid in
      increments of $750 each calendar quarter, with the first principal payment
      paid
      June 2007.  The principal outstanding after scheduled repayment and
      any unscheduled prepayments matures and is payable January 2013.  In
      April 2007, we utilized the net proceeds from the 1.625% Convertible Notes
      and
      borrowings under the revolving credit facility portion of our Credit Facility
      to
      repay $128,000 of the term loan under the Credit Facility.   In
      July 2007, we utilized borrowings under the revolving credit facility portion
      of
      our Credit Facility to repay an additional $25,000 of the term loan under the
      Credit Facility.  In connection with the term loan repayments during
      April 2007 and July 2007, we retired a proportional share of the term loan
      debt
      issuance costs and recorded the resulting loss on early extinguishment of debt
      of $2,633 in fiscal 2007.





Borrowings
      under the Credit Facility are secured by substantially all of our assets, except
      real property, and shares of capital stock of our domestic subsidiaries held
      by
      us and by the assets of the guarantors (our domestic
      subsidiaries).  The Credit Facility contains covenants,
      representations, warranties and other agreements by us that are customary in
      credit agreements and security instruments relating to financings of this
      type.  The significant financial covenants include fixed charge
      coverage ratio, leverage ratio, senior secured leverage ratio and brand value
      calculations.





In
      February 2004, we issued and sold $75,000 of Floating Rate Senior Notes due
      March 1, 2010 (the “Floating Rate Senior Notes”) and $125,000 of 7.0% Senior
      Subordinated Notes due 2014 (the “7.0% Subordinated Notes”).  During
      fiscal 2005, we repurchased $17,500 of our 7.0% Subordinated Notes in the open
      market at an average premium of 1.6% over the principal amount of the
      notes.  The outstanding balance of the remaining 7.0% Subordinated
      Notes was reduced to $107,500.  In November 2005, we called our
      $75,000 of Floating Rate Senior Notes for full redemption on December 30, 2005
      at a price of 102% of par plus accrued interest to December 30,
      2005.  We utilized borrowings under our Amended Revolving Credit
      Facility and cash on hand to fund the redemption of the Floating Rate Senior
      Notes.  As a result of the redemption, we retired associated debt
      issuance costs of $1,303 and incurred other related call fees, which resulted
      in
      a loss on early extinguishment of debt of $2,805 during the first quarter of
      fiscal 2006.





Interest
      payments on the 7.0% Subordinated Notes are due semi-annually in arrears March
      and September.  Our domestic subsidiaries are guarantors of the 7.0%
      Subordinated Notes.  The guarantees of the 7.0% Subordinated Notes are
      unsecured senior subordinated obligations of the guarantors.  At any
      time after March 1, 2009, we may redeem any of the 7.0% Subordinated Notes
      upon
      not less than 30 nor more than 60 days’ notice at redemption prices (expressed
      in percentages of principal amount), plus accrued and unpaid interest, if any,
      and liquidation damages, if any, to the applicable redemption rate, if redeemed
      during the twelve-month periods beginning March 2009 at 103.500%, March 2010
      at
      102.333%, March 2011 at 101.167% and March 2012 and thereafter at
      100.000%.





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





In
      March
      2004, we entered into an interest rate cap agreement effective June 2004 with
      decreasing annual notional principal amounts of $15,000 beginning March 2006
      and
      cap rates ranging from 4.0% to 5.0% over the life of the
      agreement.  We paid a premium of $1,375 to enter into the interest
      rate cap agreement.  During the second quarter of fiscal 2007, the
      interest rate cap was sold for $353.  As a result, $49 was recorded as
      additional interest expense in the accompanying consolidated statement of income
      for the second quarter of fiscal 2007.





-
          61
          -


In
      July
      2006, we successfully completed a consent solicitation from the holders of
      the
      7.0% Subordinated Notes to an amendment to the indenture to increase our
      capacity to make restricted payments by an additional $85,000, including
      payments for the repurchase of our common stock, and adjust the fixed charge
      coverage ratio (as defined in the indenture).





In
      November 2006, we completed a private offering of $125,000 of the 2.0%
      Convertible Notes to qualified institutional purchasers pursuant to Section
      4(2)
      of the Securities Act of 1933.  The 2.0% Convertible Notes bear
      interest at an annual rate of 2.0%, payable semi-annually May and November
      of
      each year.  The 2.0% Convertible Notes are convertible into our common
      stock at an initial conversion price of $58.92 per share, upon the occurrence
      of
      certain events, including the closing price of our common stock exceeding 130%
      of the conversion price per share for 20 of the last 30 trading days of the
      conversion reference period.  The stock price at which the notes would
      be convertible is $76.59 and as of November 30, 2007 our closing stock price
      was
      $70.91. Upon conversion, a holder
      will receive, in lieu of common stock, an amount of cash equal to the lesser
      of
      (i) the principal amount of the 2.0% Convertible Notes, or (ii) the
      conversion value, determined in the manner set forth in the indenture governing
      the 2.0% Convertible Notes, of a number of shares equal to the conversion rate.
      If the conversion value exceeds the principal amount of the 2.0% Convertible
      Note on the conversion date, we will also deliver, at our election, cash or
      common stock or a combination of cash and common stock with respect to the
      conversion value upon conversion. If conversion occurs in connection with a
      change of control, we may be required to deliver additional shares of our common
      stock by increasing the conversion rate with respect to such notes. The maximum
      aggregate number of shares that we would be obligated to issue upon conversion
      of the 2.0% Convertible Notes is 2,673.





Concurrently
      with the sale of the 2.0%
      Convertible Notes, we purchased a note hedge from an affiliate of Merrill Lynch
      (the “Counterparty”), which is designed to mitigate potential dilution from the
      conversion of the 2.0% Convertible Notes. Under the note hedge, the Counterparty
      is required to deliver to us the number of shares of our common stock that
      we
      are obligated to deliver to the holders of the 2.0% Convertible Notes with
      respect to the conversion, calculated exclusive of shares deliverable by us
      by
      reason of any additional premium relating to the 2.0% Convertible Notes or
      by
      reason of any election by us to unilaterally increase the conversion rate
      pursuant to the indenture governing the 2.0% Convertible Notes. The note hedge
      expires at the close of trading on November 15, 2013, which is the maturity
      date of the 2.0% Convertible Notes, although the Counterparty will have ongoing
      obligations with respect to 2.0% Convertible Notes properly converted on or
      prior to that date of which the Counterparty has been timely
      notified.





In
      addition, we issued warrants to the
      Counterparty that could require us to issue up to approximately 2,122 shares
      of
      our common stock on November 15, 2013 upon notice of exercise by the
      Counterparty. The exercise price is $74.82 per share, which represented a 60.0%
      premium over the closing price of our shares of common stock on
      November 16, 2006. If the Counterparty exercises the warrant, we will have
      the option to settle in cash or shares the excess of the price of our shares
      on
      that date over the initially established exercise price.





The
      note hedge and warrant are separate
      and legally distinct instruments that bind us and the Counterparty and have
      no
      binding effect on the holders of the 2.0% Convertible Notes.





In
      November 2006, we entered into an interest rate swap (“swap”) agreement
      effective January 2007.  The swap has decreasing notional principal
      amounts beginning October 2007 and a swap rate of 4.98% over the life of the
      agreement.  As of November 30, 2007, we had $146,250 of LIBOR based
      borrowings hedged under the provisions of the swap.  During fiscal
      2007, the decrease in fair value of the swap of $1,227, net of tax, was recorded
      to other comprehensive income.  The current portion of the fair value
      of the swap of $1,274 is included in accrued liabilities, and the long-term
      portion of $1,434 is included in noncurrent liabilities.  As of
      November 30, 2007, the swap was deemed to be an effective cash flow
      hedge.  The fair value of the swap agreement is valued by a third
      party.  The swap agreement terminates January 2010.





In
      November 2006, we entered into an interest rate cap agreement effective January
      2007.  The interest rate cap had decreasing notional principal amounts
      beginning October 2007 and a cap rate of 5.0% over the life of the
      agreement.  We paid a premium of $687 to enter into the interest rate
      cap agreement.  During the second fiscal quarter of 2007, the interest
      rate cap was sold for $555.  As a result, $50 was recorded as
      additional interest expense in the accompanying consolidated statement of
      income.





In
      April
      2007, we entered into an interest rate cap agreement.  The cap has
      decreasing notional principal amounts beginning May 2007 and a cap rate of
      5.0%
      over the life of the agreement.  We paid a $114 premium to enter into
      the cap agreement, which is being amortized over the life of the
      agreement.  As of November 30, 2007, we had $28,500 of LIBOR based
      borrowings hedged under the provisions of the cap.  During fiscal
      2007, the value of the cap premium was compared to the fair




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          62
          -


value
      of
      the cap and the decrease in the market value of the premium of $12, net of
      tax,
      was recorded to other comprehensive income.  The current portion of
      the premium on the cap agreement of $5 is included in prepaid expenses and
      other
      current assets.  As of November 30, 2007, a portion of the interest
      rate cap was deemed an ineffective cash flow hedge due to the reduction of
      variable rate debt resulting in a charge of $38 recorded as additional interest
      expense in the accompanying consolidated statement of income.  The
      balance of the cash flow hedge was deemed to be effective.  The fair
      value of the cap agreement is valued by a third party.  The cap
      agreement terminates on September 2008.





In
      April
      2007, we completed a private offering of $100,000 of the 1.625% Convertible
      Notes to qualified institutional investors pursuant to Rule 144A under the
      Securities Act of 1933.  The 1.625% Convertible Notes bear interest at
      an annual rate of 1.625%, payable semi-annually May and November of each
      year.  The 1.625% Convertible Notes are convertible into our common
      stock at an initial conversion price of $73.20 per share, upon the occurrence
      of
      certain events, including the closing price of our common stock exceeding 130%
      of the conversion price per share for 20 of the last 30 trading days of the
      conversion reference period.  The stock price at which the notes would
      be convertible is $95.16. Upon
      conversion, a holder will receive, in lieu of common stock, an amount of cash
      equal to the lesser of (i) the principal amount of the 1.625% Convertible
      Notes, or (ii) the conversion value, determined in the manner set forth in
      the indenture governing the 1.625%  Convertible Notes, of a number of
      shares equal to the conversion rate. If the conversion value exceeds the
      principal amount of the 1.625% Convertible Note on the conversion date, we
      will
      also deliver, at our election, cash or common stock or a combination of cash
      and
      common stock with respect to the conversion value upon conversion. If conversion
      occurs in connection with a change of control, we may be required to deliver
      additional shares of our common stock by increasing the conversion rate with
      respect to such notes. The maximum aggregate number of shares that we would
      be
      obligated to issue upon conversion of the 1.625% Convertible Notes is
      1,694.





Concurrently
      with the sale of the1.625% Convertible Notes,
      we purchased a note hedge from the Counterparty, which is designed to mitigate
      potential dilution from the conversion of the1.625% Convertible Notes. Under
      the note hedge,
      the Counterparty is required to deliver to us the number of shares of our common
      stock that we are obligated to deliver to the holders of the1.625% Convertible Notes with
      respect to the
      conversion, calculated exclusive of shares deliverable by us by reason of any
      additional premium relating to the1.625% Convertible Notes or
      by reason of any
      election by us to unilaterally increase the conversion rate pursuant to the
      indenture governing the1.625% Convertible Notes. The
      note hedge
      expires at the close of trading on May 1, 2014, which is the maturity date
      of
      the1.625% Convertible
      Notes, although the Counterparty will have ongoing obligations with respect
      to1.625% Convertible Notes
      properly converted on or prior to that date of which the Counterparty has been
      timely notified.





In
      addition, we issued warrants to the
      Counterparty that could require us to issue up to approximately 1,366 shares
      of
      our common stock on May 1, 2014 upon notice of exercise by the Counterparty.
      The
      exercise price is $94.45 per share, which represented a 60% premium over the
      closing price of our shares of common stock on April 4, 2007. If the
      Counterparty exercises the warrant, we will have the option to settle in cash
      or
      shares the excess of the price of our shares on that date over the initially
      established exercise price.





Proceeds
      from the 1.625% Convertible Notes were used to repay a portion of the amount
      outstanding under the Credit Facility term loan, pay for a note hedge and
      pay $2,734 in debt issuance costs.  The note hedge and warrant are
      separate
      and legally distinct instruments that bind us and the Counterparty and have
      no
      binding effect on the holders of the1.625% Convertible Notes.





Pursuant
      to EITF 90-19,“Convertible
      Bonds with Issuer Option to
      Settle for Cash upon Conversion”, (“EITF 90-19”),EITF
      00-19, “Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock”(“EITF
      00-19”), and EITF 01-6,“The Meaning of Indexed
      to a
      Company’s Own Stock”(“EITF 01-6”), the 2.0%
      Convertible Notes and the 1.625% Convertible Notes are accounted for as
      convertible debt in the accompanying consolidated balance sheet and the embedded
      conversion option in the 2.0% Convertible Notes and the 1.625% Convertible
      Notes
      has not been accounted for as a separate derivative. Additionally, pursuant
      to
      EITF 00-19 and EITF 01-6, the note hedges and warrants are accounted for as
      equity transactions, and therefore, the payments associated with the issuance
      of
      the note hedges and the proceeds received from the issuance of the warrants
      were
      recorded as a charge and an increase, respectively, in common shares in
      shareholders’ equity as separate equity transactions.





For
      income tax reporting purposes, we have elected to integrate the 2.0% Convertible
      Notes and the 1.625% Convertible Notes and the respective note hedge
      transaction. Integration of the respective note hedge with the 2.0% Convertible




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          63
          -


Notes
      and
      the 1.625% Convertible Notes creates an in-substance original issue debt
      discount for income tax reporting purposes and therefore, the cost of the note
      hedge transactions will be accounted for as interest expense over the term
      of
      the 2.0% Convertible Notes and the 1.625% Convertible Notes, respectively,
      for
      income tax reporting purposes. The income tax benefit related to each respective
      convertible note issuance was recognized as a deferred tax asset.





The
      future maturities of long-term debt outstanding as of November 30, 2007 are
      as
      follows:




2008
            
            $
            3,0002009
            
            
            3,0002010
            
            
            33,0002011
            
            
            3,0002012
            
            
            3,000Thereafter
            
            
            463,000$
            508,000




Cash
      interest payments during 2007, 2006 and 2005 were $26,671, $10,831 and $12,791,
      respectively.




(6)           FAIR
      VALUE OF FINANCIAL
      INSTRUMENTS







Unless
      otherwise indicated elsewhere in the notes to the consolidated financial
      statements, the carrying value of our financial instruments approximates fair
      value.




At
      November 30, 2007, the carrying value of the 7.0% Subordinated Notes, 2.0%
      Convertible Notes and the 1.625% Convertible Notes equaled their estimated
      fair
      market value.  The fair value was estimated based on quoted market
      prices for the same or similar issues.




(7)           INCOME
      TAXES







The
      provision for income taxes includes the following components for fiscal 2007,
      2006 and 2005:




2007
            
            
            2006
            
            
            2005Current:Federal
            
            $
            16,850
            
            
            $
            23,009
            
            
            $
            12,710State
            
            
            1,674
            
            
            
            1,058
            
            
            
            359Deferred
            
            
            12,865
            
            
            
            111
            
            
            
            3,894$
            31,389
            
            
            $
            24,178
            
            
            $
            16,963




As
      of
      November 30, 2007, we had a foreign tax credit of $1,385 which will expire
      over
      eight years beginning in fiscal 2011 through 2017, and state net operating
      loss
      carry forwards of $5,488, which will begin to expire in 2019 through 2020 if
      unused.  In fiscal 2007, 2006 and 2005 income tax benefits of $8,291,
      $1,627 and $5,839, respectively, attributable to employee stock option
      transactions were allocated to shareholders’ equity.




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          64
          -


Deferred
      income tax assets and liabilities reflect the impact of temporary differences
      between the amounts of assets and liabilities for financial reporting and income
      tax reporting purposes.  Temporary differences and carryforwards,
      which give rise to deferred tax assets and liabilities at November 30, 2007
      and
      2006, are as follows:




2007
            
            
            2006Deferred
                tax assets:Allowances
                and accruals
            
            $
            1,671
            
            
            $
            761Inventory
                reserve
            
            
            1,830
            
            
            
            1,034Stock-based
                compensation expense
            
            
            2,578
            
            
            
            1,737Allowance
                for product returns
            
            
            2,622
            
            
            
            2,150State
                net operating loss carryforwards
            
            
            232
            
            
            
            270Accrued
                postretirement health care benefits
            
            
            382
            
            
            
            535Note
                hedge call option
            
            
            21,179
            
            
            
            12,048Other
            
            
            4,793
            
            
            
            3,929Gross
                deferred tax assets
            
            
            35,287
            
            
            
            22,464Valuation
                allowance
            
            
            —
            
            
            
            —Net
                deferred tax assets
            
            
            35,287
            
            
            
            22,464Deferred
                tax liabilities:Depreciation
                and amortization
            
            
            48,335
            
            
            
            33,588Prepaid
                advertising
            
            
            289
            
            
            
            788Inventory
            
            
            177
            
            
            
            350Other
            
            
            792
            
            
            
            1,065Gross
                deferred tax liabilities
            
            
            49,593
            
            
            
            35,791Net deferred liability
            
            $
            14,306
            
            
            $
            13,327




The
      deferred provision for income taxes excludes the tax effect of the note hedge
      call option of $11,092 and $12,048, the interest rate cap adjustment of $647
      and
      $311 and the foreign currency translation adjustment of $0 and $317 for fiscal
      2007 and 2006, respectively, which are included in the consolidated statements
      of shareholders’ equity.




The
      difference between the provision for income taxes and the amount computed by
      multiplying income before income taxes by the United States statutory rate
      for
      fiscal 2007, 2006 and 2005 is summarized as follows:




2007
            
            
            2006
            
            
            2005Expected
                federal tax provision
            
            $
            31,878
            
            
            $
            24,252
            
            
            $
            18,544State
                income taxes, net of federal income tax benefit
            
            
            1,922
            
            
            
            1,022
            
            
            
            424Reversal
                of valuation allowance
            
            
            —
            
            
            
            —
            
            
            
            (610
            )Other,
                net
            
            
            (2,411
            )
            
            
            (1,096
            )
            
            
            (1,395
            )$
            31,389
            
            
            $
            24,178
            
            
            $
            16,963




During
      fiscal 2005, pursuant to the provisions of the American Jobs Creation Act of
      2004, we adopted a domestic reinvestment plan for purposes of facilitating
      the
      repatriation of dividends from our Canadian affiliates.  Upon
      distribution of fiscal 2004 and 2005 earnings, we were subject to U.S. income
      taxes of $213.  The majority of the cash distribution was treated as
      an extraordinary dividend and qualified for the 85 percent dividend received
      deduction.




Income
      taxes paid in fiscal 2007, 2006 and 2005 were $7,977, $21,665 and $6,733,
      respectively.  We received income tax refunds of $34, $376 and $97
      during fiscal 2007, 2006 and 2005, respectively.




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          65
          -


(8)           SUPPLEMENTAL
      FINANCIAL
      INFORMATION







Inventories
      consisted of the following at November 30, 2007 and 2006:




2007
            
            
            2006Raw
                materials and work in process
            
            $
            17,892
            
            
            $
            15,495Finished
                goods
            
            
            25,373
            
            
            
            15,894Total
                inventories
            
            $
            43,265
            
            
            $
            31,389




International
      inventories included above were $3,803 and $2,785 at November 30, 2007 and
      2006,
      respectively.




Property,
      plant and equipment consisted of the following at November 30, 2007 and
      2006:




2007
            
            
            2006Land
            
            $
            1,123
            
            
            $
            1,123Buildings
                and improvements
            
            
            10,876
            
            
            
            10,607Machinery
                and equipment
            
            
            60,127
            
            
            
            57,116Package
                design and tooling
            
            
            7,629
            
            
            
            6,928Construction
                in progress
            
            
            3,474
            
            
            
            1,265Total
                property, plant and equipment
            
            
            83,229
            
            
            
            77,039Less
                – accumulated depreciation
            
            
            (50,880
            )
            
            
            (46,686
            )Property,
                plant and equipment, net
            
            $
            32,349
            
            
            $
            30,353




Accrued
      liabilities consisted of the following at November 30, 2007 and
      2006:




2007
            
            
            2006Interest
            
            $
            3,510
            
            
            $
            2,599Salaries,
                wages and commissions
            
            
            6,209
            
            
            
            3,878Product
                advertising and promotion
            
            
            3,051
            
            
            
            1,936Litigation
                settlements and legal fees
            
            
            2,084
            
            
            
            1,162Income
                Taxes Payable
            
            
            3,643
            
            
            
            635Other
            
            
            3,040
            
            
            
            1,595Total
                accrued liabilities
            
            $
            21,537
            
            
            $
            11,805




(9)           ACQUISITION
      AND SALE OF
      BRANDS







In
      January 2007, we acquired the U.S. rights to five leading consumer and OTC
      brands from Johnson & Johnson (“J&J Acquisition”).  The
      acquired brands were: ACT, an anti-cavity
      mouthwash/mouth rinse; Unisom, an OTC sleep-aid;
      Cortizone-10, a
      hydrocortisone anti-itch product; Kaopectate, an anti-diarrhea
      product; and Balmex, a
      diaper rash product.  The J&J Acquisition was funded with the
      proceeds from a $300,000 term loan provided under our Credit Facility,
      borrowings under the revolving credit facility of the Credit Facility and
      through the use of a portion of the proceeds derived from the 2.0% Convertible
      Notes.  The purchase price of the J&J Acquisition was $410,000
      plus $1,573 of costs directly related to the acquisition, of which $468 was
      incurred and funded during our fiscal year ended November 30,
      2006.  The purchase price related to $5,916 of inventory, $1,781 of
      assumed liabilities, $463 of equipment, $403,061 of trademarks, which were
      assigned an indefinite life, and $3,914 of distribution rights, which was
      assigned a useful life of five years.  Johnson & Johnson will
      continue to manufacture and supply certain of the products to us for a period
      of
      up to 18 months from the close of the acquisition, or such earlier date as
      we
      are able to move production to our facilities.  The price we pay
      Johnson & Johnson for these products is equivalent to the manufacturing
      cost, which includes all costs associated with the manufacturing and delivery
      of
      the product.  Certain of the products are manufactured and supplied
      under assumed agreements with third party manufacturers.  During
      fiscal 2007, the manufacturing of certain products was transferred to our
      facilities.  For a period of up to six months from the close of the
      acquisition, Johnson & Johnson was to provide transition services consisting
      of consumer affairs, distribution and collection services (including related
      financial, accounting and reporting services).  We terminated the
      distribution and collections services effective April 2, 2007 and the consumer
      affairs services effective June 21, 2007.  The costs charged for these
      transition services approximated the actual costs incurred by Johnson &
Johnson.  During the year ended November 30, 2007, we incurred $2,057
      of expenses related to these transition services.




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          66
          -


The
      following unaudited consolidated pro forma information assumes the J&J
      Acquisition had occurred at the beginning of the periods presented:




PRO
      FORMA
      CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)




Year
                Ended November 30,2007
            
            
            2006Total
                revenue
            
            $
            432,559
            
            
            $
            418,944Net
                income
            
            
            60,472
            
            
            
            56,285Earnings
                per share – basic:
            
            
            3.20
            
            
            
            2.96Earnings
                per share – diluted:
            
            
            3.13
            
            
            
            2.92




The
      pro
      forma consolidated results of operations include adjustments to give effect
      to
      interest expense on debt to finance the J&J Acquisition, increased
      advertising expense to raise brand awareness, incremental selling, general
      and
      administrative expenses, amortization of certain intangible assets and decreased
      interest income on cash used in the J&J Acquisition, together with related
      income tax effects. The pro forma information is for comparative purposes only
      and does not purport to be indicative of the results that would have occurred
      had the J&J Acquisition and borrowings occurred at the beginning of the
      periods presented, or indicative of the results that may occur in the
      future.




On
      May
      25, 2007, we acquired the worldwide trademark and rights to sell and market
      ACT in Western Europe
      from Johnson & Johnson (“ACT Acquisition”) for $4,100
      in cash plus certain assumed liabilities.  The ACT Acquisition was
      funded
      with existing cash.




(10)         POSTRETIREMENT
      BENEFIT
      PLANS







We
      maintain two defined benefit postretirement plans that cover certain employees
      who have met specific age and service requirements.  The plans include
      a noncontributory defined benefit pension plan (the “Pension Plan”) and a
      postretirement health care benefits plan (the “Retiree Health
      Plan”).  The Pension Plan provides benefits based upon years of
      service and employee compensation to employees who had completed one year of
      service prior to December 31, 2000.  On December 31, 2000 Pension Plan
      benefits and participation were frozen.  The Retiree Health Plan
      provides benefits to certain eligible employees over the age of
      65.  On May 31, 2006, Retiree Health Plan eligibility was restricted
      to current retirees and those active employees that were retirement eligible
      as
      of that date (age 55 and 10 years of service or age
      65).  Contributions to the Pension Plan are calculated by an
      independent actuary and have been sufficient to provide benefits to participants
      and meet the funding requirements of the Employee Retirement Income Security
      Act
      (“ERISA”).  Contributions to the Retiree Health Plan are limited to
      $1,500 per participant per year and are paid monthly on a fully insured
      basis.  Retiree Health Plan participants are required to pay any
      insurance premium amount in excess of the $1,500 employer
      contribution.  Plan assets and benefit obligations are measured as of
      November 30 for both plans.




In
      addition to the previously described plans, we also sponsor a defined
      contribution plan that covers substantially all employees.  Eligible
      employees are allowed to contribute up to 15% of their eligible annual
      compensation.  We make matching contributions of 25% on the first 6%
      of contributed compensation.  Our expense for the matching
      contribution totaled $286 in 2007, $249 in 2006 and $235 in 2005,
      respectively.  In addition to matching contributions, safeharbor
      contributions equaling 3% of eligible annual compensation are made on behalf
      of
      eligible participants.  Safeharbor contributions totaled $775 in 2007,
      $758 in 2006 and $751 in 2005, respectively.  Our contributions to
      this plan are expensed as incurred.




The
      frozen status of the Pension Plan prevents any future salary increase of
      participants from affecting the plan’s accumulated benefit
      obligation.  Therefore, the Pension Plan’s projected benefit
      obligation continually equals the accumulated benefit obligation.  In
      2007 and 2006, the Pension Plan recognized previously unrecognized losses in
      the
      amount of $89 and $54 as a result of benefit payments exceeding interest
      costs.




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          67
          -


We
      have adopted SFAS 158 (see note 2)
      as of November 30, 2007.  Below is a summary of the incremental effect
      of applying the statement on individual items on our consolidated balance
      sheet:




Before
              application
                of
              SFAS
                158
            
            
            Adjustments
            
            
            After
                application
              of
                SFAS 158Assets:Current
                assets:Deferred
                income taxes
            
            $
            —
            
            
            $
            134
            
            
            $
            134Other
                noncurrent assets:Prepaid
                pension cost
            
            
            2,073
            
            
            
            (355
            )
            
            
            1,718Total
                assets
            
            
            2,073
            
            
            
            (221
            )
            
            
            1,852Liabilities
                and Shareholders’ Equity:Other
                noncurrent liabilities:Deferred
                income taxes
            
            
            —
            
            
            
            (129
            )
            
            
            (129
            )Accrued
                postretirement medical cost
            
            
            (1,345
            )
            
            
            342
            
            
            
            (1,003
            )Shareholders
                Equity:Accumulated
                other comprehensive income (loss), net of tax
            
            
            —
            
            
            
            8
            
            
            
            8Total
                liabilities and shareholders’ equity
            
            $
            (1,345
            )
            
            $
            221
            
            
            $
            (1,124
            )




Prior
      to
      the adoption of SFAS 158, we updated our consolidated balance sheet under
      previous guidance to reflect the calculations for the Pension Plan and Retiree
      Health Plan.  As a result, the Pension Plan’s net amount recognized
      increased by $240 and the Retiree Health Plan’s net amount recognized decreased
      by $83. Our projected and accumulated benefit obligation related to the Pension
      Plan decreased by $568 while the accumulated postretirement benefit obligation
      related to the Retiree Health Plan decreased by $91.  The amounts in
      the column of the table above labeled “Before application of SFAS 158” reflect
      these updated balances.




Net
      periodic benefit cost for fiscal 2007, 2006 and 2005 comprised the following
      components:




Pension
                Plan
            
            
            Retiree
                Health Plan2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006
            
            
            2005Service
                cost
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            21
            
            
            $
            57
            
            
            $
            72Interest
                cost
            
            
            609
            
            
            
            610
            
            
            
            622
            
            
            
            56
            
            
            
            73
            
            
            
            82Amortization
                of prior service cost
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            15
            
            
            
            15Expected
                return on plan assets
            
            
            (937
            )
            
            
            (882
            )
            
            
            (858
            )
            
            
            —
            
            
            
            —
            
            
            
            —Recognized
                net actuarial (gain)/loss
            
            
            —
            
            
            
            5
            
            
            
            28
            
            
            
            (96
            )
            
            
            (16
            )
            
            
            (17
            )Settlement/Curtailment
                loss
            
            
            89
            
            
            
            54
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
                pension cost (benefit)
            
            $
            (239
            )
            
            $
            (213
            )
            
            $
            (208
            )
            
            $
            (19
            )
            
            $
            129
            
            
            $
            152








-
          68
          -


The
      changes in the benefit obligations
      resulted from the following components for fiscal 2007 and 2006:





Pension
                Plan
            
            
            Retiree
                Health Plan2007
            
            
            2006
            
            
            2007
            
            
            2006Benefit
                obligation, beginning of year
            
            $
            10,733
            
            
            $
            11,119
            
            
            $
            1,094
            
            
            $
            1,566Service
                cost
            
            
            —
            
            
            
            —
            
            
            
            21
            
            
            
            57Interest
                cost
            
            
            609
            
            
            
            610
            
            
            
            56
            
            
            
            73Plan
                participants’ contributions
            
            
            —
            
            
            
            —
            
            
            
            7
            
            
            
            —Actuarial
                (gain)/loss
            
            
            185
            
            
            
            9
            
            
            
            (104
            )
            
            
            19Benefits
                paid
            
            
            ( 1,362
            )
            
            
            (1,005
            )
            
            
            (71
            )
            
            
            (71
            )Settlements/Curtailments
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (550
            )Benefit
                obligation, end of year
            
            $
            10,165
            
            
            $
            10,733
            
            
            $
            1,003
            
            
            $
            1,094





The
      changes in Plan assets resulted from the following components for fiscal 2007
      and 2006:





Pension
                Plan
            
            
            Retiree
                Health Plan2007
            
            
            2006
            
            
            2007
            
            
            2006Plan
                assets at fair value, beginning of year
            
            $
            12,040
            
            
            $
            11,564
            
            
            $
            —
            
            
            $
            —Actual
                return on plan assets
            
            
            1,205
            
            
            
            1,481
            
            
            
            —
            
            
            
            —Employer
                contribution
            
            
            —
            
            
            
            —
            
            
            
            64
            
            
            
            71Plan
                participants’ contributions
            
            
            —
            
            
            
            —
            
            
            
            7
            
            
            
            —Benefits
                paid
            
            
            (1,362
            )
            
            
            (1,005
            )
            
            
            (71
            )
            
            
            (71
            )Plan
                assets at fair value, end of year
            
            $
            11,883
            
            
            $
            12,040
            
            
            $
            —
            
            
            $
            —




The
      following table sets forth the funded status of the Plan as of November 30,
      2007
      and 2006:




Pension
                Plan
            
            
            Retiree
                Health Plan2007
            
            
            2006
            
            
            2007
            
            
            2006Plan
                assets at fair value
            
            $
            11,883
            
            
            $
            12,040
            
            
            $
            —
            
            
            $
            —Benefit
                obligation
            
            
            10,165
            
            
            
            10,733
            
            
            
            1,003
            
            
            
            1,094Funded
                status prepaid (deficiency)
            
            
            1,718
            
            
            
            1,307
            
            
            
            (1,003
            )
            
            
            (1,094
            )Unrecognized
                actuarial net (gain)/loss
            
            
            355
            
            
            
            526
            
            
            
            (342
            )
            
            
            (334
            )Total
                recognized in consolidated balance   sheet before adoption of
                SFAS 158
            
            $
            2,073
            
            
            $
            1,833
            
            
            $
            (1,345
            )
            
            $
            (
              1,428
            )







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          69
          -


Amounts
      recognized in the Company’s balance sheet as of November 30, 2007 and 2006
      consist of the following:




Pension
                Plan
            
            
            Retiree
                Health Plan2007
            
            
            2006
            
            
            2007
            
            
            2006Before
                Adoption of SFAS 158:Prepaid
                pension cost
            
            $
            2,073
            
            
            $
            1,833
            
            
            $
            —
            
            
            $
            —Accrued
                postretirement medical cost
            
            
            —
            
            
            
            —
            
            
            
            (1,345
            )
            
            
            (1,428
            )Net
                asset (liability) recognized in the consolidated balance
                sheet
            
            $
            2,073
            
            
            $
            1,833
            
            
            $
            (1,345
            )
            
            $
            (
              1,428
            )After
                Adoption of SFAS 158:Current
                assets:Deferred
                income taxes
            
            $
            134
            
            
            
            N/A
            
            
            $
            —
            
            
            
            N/AOther
                noncurrent assets
            
            
            1,718
            
            
            
            N/A
            
            
            
            —
            
            
            
            N/AOther
                noncurrent liabilities
            
            
            —
            
            
            
            N/A
            
            
            
            (1,132
            )
            
            
            N/AShareholder
                equity:Accumulated
                other comprehensive income
            
            
            221
            
            
            
            
            
            
            
            (213
            )Net
                asset (liability) recognized in the consolidated balance
                sheet
            
            $
            2,073
            
            
            
            N/A
            
            
            $
            (1,345
            )
            
            
            N/A




The
      discount rate used in determining the actuarial present value of the projected
      benefit obligation for the Pension Plan and the Retiree Health Plan was 5.75%
      in
      fiscal 2007 and 2006, respectively.  The expected long-term rate of
      return on the Pension Plan assets was 8% in fiscal 2007 and 2006,
      respectively.  The long-term return percentage on assets is based on
      the weighted-average of the Pension Plan’s invested allocation as of the
      measurement date and the available historical returns for those asset categories
      as published by Ibbotson Associates, a leading provider of historical financial
      market data.




Our
      existing investment policy of the Pension Plan recognizes that the most
      significant decision to affect the ability to meet the investment objectives
      is
      the asset allocation decision.  Therefore, based on the investment
      objectives and our risk tolerances, the investment policy defines the following
      asset mix range:




Pension
                Plan Asset
                Class
            RangeCorporate
                & Government Bonds
            40.0
                – 70.0%Equities
            40.0
                – 70.0%




In
      addition, the existing investment policy requires a performance review
      annually.  The weighted-average asset allocations at November 30, 2007
      and 2006 by asset class are as follows:




Pension
                Plan Assets at
              November
                30,Asset
                Class
            
            2007
            
            
            2006Mutual
                funds
            
            
            88
            %
            
            
            92
            %Equity
                securities
            
            
            12
            
            
            
            8Total
            
            
            100
            %
            
            
            100
            %




As
      of
      November 30, 2007, we had 20 shares of our common stock in the Pension Plan
      with
      a fair value of $1,418.




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          70
          -


The
      following benefit payments, which reflect expected future service, as
      appropriate, are expected to be paid:




Estimated
                Benefit PaymentPension
                Plan
            
            
            Retiree
                Health Plan2008
            
            $
            620
            
            
            $
            782009
            
            
            630
            
            
            
            782010
            
            
            640
            
            
            
            782011
            
            
            650
            
            
            
            782012
            
            
            660
            
            
            
            782013-2017
            
            
            2,250
            
            
            
            400




In
      fiscal
      2008, no employer contributions are expected for the Pension
      Plan.  Employer contributions for the Retiree Health Plan are expected
      to be paid upon receipt of the monthly insurance premium.




(11)         PRODUCT
      AND GEOGRAPHICAL SEGMENT
      INFORMATION







We
      currently operate in only one primary segment – OTC health care.  This
      segment includes medicated skin care, topical pain care, oral care, internal
      OTC, medicated dandruff shampoo, dietary supplement and other OTC and toiletry
      products.




Geographical
      segment information is as follows for fiscal 2007, 2006 and 2005:




2007
            
            
            2006
            
            
            2005Revenues:Domestic
            
            $
            393,493
            
            
            $
            276,397
            
            
            $
            252,436International
                (1)
            
            
            29,885
            
            
            
            24,151
            
            
            
            26,882Total
            
            $
            423,378
            
            
            $
            300,548
            
            
            $
            279,318Long-Lived
                Assets (2)Domestic
            
            $
            646,926
            
            
            $
            235,909
            
            
            $
            235,729International
            
            
            2,233
            
            
            
            593
            
            
            
            542Total
            
            $
            649,159
            
            
            $
            236,502
            
            
            $
            236,271




(1)International
      sales include export sales from United States operations and royalties from
      international sales of Selsun.  These
      royalties were $93, $228 and $178 for fiscal 2007, 2006 and 2005,
      respectively.




(2)Consists
      of book value of property, plant, equipment, trademarks and other product
      rights.




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          71
          -


Net
      sales
      of our domestic product categories within our single healthcare business segment
      are as follows for fiscal 2007, 2006 and 2005:




2007
            
            
            2006
            
            
            2005Revenues:Medicated
                skin care
            
            $
            123,456
            
            
            $
            67,238
            
            
            $
            62,458Topical
                pain care
            
            
            95,858
            
            
            
            101,396
            
            
            
            89,539Oral
                Care
            
            
            48,863
            
            
            
            6,773
            
            
            
            6,600Internal
                OTC
            
            
            45,043
            
            
            
            11,958
            
            
            
            10,590Medicated
                dandruff shampoos
            
            
            36,934
            
            
            
            37,742
            
            
            
            34,880Dietary
                supplements
            
            
            26,121
            
            
            
            35,081
            
            
            
            33,828Other
                OTC and toiletry products
            
            
            17,218
            
            
            
            16,209
            
            
            
            14,541Total
            
            $
            393,493
            
            
            $
            276,397
            
            
            $
            252,436




(12)        COMMITMENTS
      AND
      CONTINGENCIES







GENERAL
      LITIGATION




We
      were
      named as a defendant in a number of lawsuits alleging that the plaintiffs were
      injured as a result of ingestion of products containing phenylpropanolamine
      (“PPA”), which was an active ingredient in most of our Dexatrim products until
      November 2000.  The lawsuits filed in federal court were transferred
      to the United States District Court for the Western District of Washington
      before United States District Judge Barbara J. Rothstein (In Re Phenylpropanolamine
      (“PPA”)
      Products Liability Litigation, MDL No. 1407).  The remaining
      lawsuits were filed in state court in a number of different states.




On
      April
      13, 2004, we entered into a class action settlement agreement with
      representatives of the plaintiffs’ settlement class, which provided for a
      national class action settlement of all Dexatrim PPA
      claims.  On November 12, 2004, Judge Barbara J. Rothstein of the
      United States District Court for the Western District of Washington entered
      a
      final order and judgment certifying the class and granting approval of the
Dexatrim PPA
      settlement.  The Dexatrim PPA settlement
      included claims against us involving alleged injuries by Dexatrim products containing
      PPA in which the alleged injury occurred after December 21, 1998, the date
      we
      acquired the Dexatrim
      brand.  A total of 14 claimants with alleged injuries that occurred
      after December 21, 1998 elected to opt-out of the class
      settlement.  Subsequently, we have settled twelve of the opt-out
      claims. The other two opt-outs have not filed lawsuits against us, and we
      believe the applicable statutes of limitation have run against their
      claims.Consequently, we are not
      currently defending any PPA products liability claims.




In
      accordance with the terms of the class action settlement, approximately $70,885
      was initially funded into a settlement trust.  All claims in the
      settlement have been resolved and expenses of the trust have been
      paid.  On June 14, 2006, we filed a motion to dissolve the settlement
      trust.  The court granted this motion on July 14,
      2006.  Although the court granted our motion to dissolve the
      settlement trust, we have continued the trust’s existence.  These
      funds are available in the unlikely event an additional PPA products liability
      lawsuit is filed against us.




We
      were
      also named as a defendant in approximately 206 lawsuits relating to Dexatrim containing PPA which
      involved alleged injuries by Dexatrim products containing
      PPA manufactured and sold prior to our acquisition of Dexatrim on December 21,
      1998.  The DELACO Company (“DELACO”), successor by merger to the
      Thompson Medical Company, Inc., which owned the brand prior to December 21,
      1998, owed us an indemnity obligation for any liabilities arising from these
      lawsuits.  On February 12, 2004, DELACO filed a Chapter 11 bankruptcy
      petition in the United States Bankruptcy Court for the Southern District of
      New
      York.  We filed a claim for indemnification in DELACO’s
      bankruptcy.  We entered into a settlement agreement with DELACO dated
      June 30, 2005 that resolved DELACO’s indemnity obligations to us (“the DELACO
      Agreement”).  The DELACO Agreement was approved by the DELACO
      bankruptcy court on July 28, 2005.  In accordance with the DELACO
      bankruptcy plan, a settlement trust established under the plan paid us $8,750
      on
      March 17, 2006, which is included in our consolidated statement of income,
      net
      of legal expenses, as litigation settlement for 2006.  The payment to
      us by the DELACO settlement trust of $8,750 has conclusively compromised and
      settled our indemnity claim filed in the DELACO bankruptcy. The confirmation
      of
      the DELACO bankruptcy plan effectively released us from liability for all PPA
      products liability cases with injury dates prior to December 21,
      1998.




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          72
          -


On
      December 30, 2003, the United States Food and Drug Administration (“FDA”) issued
      a consumer alert on the safety of dietary supplements containing ephedrine
      alkaloids and on February 6, 2004 published a final rule with respect to these
      products.  The final rule prohibits the sale of dietary supplements
      containing ephedrine alkaloids because such supplements present an unreasonable
      risk of illness or injury.  The final rule became effective on April
      11, 2004.  Although we discontinued the manufacturing and shipment of
Dexatrim containing
      ephedrine after September 2002, the FDA’s final rule resulted in lawsuits being
      filed against us alleging damages related to the use or purchase of Dexatrim containing
      ephedrine.  We have resolved all of the lawsuits against us alleging
      ingestion of Dexatrim containing
      ephedrine, including the previously disclosed Gundez case.





We
      maintain insurance coverage for product liability claims relating to our
      products under claims-made policies which are subject to annual
      renewal.   For the current annual policy period beginning June 1,
      2007, we maintain product liability insurance coverage in the amount of $30,000
      through our captive insurance subsidiary, of which approximately $2,951 has
      been
      funded as of January 22, 2008.  We also have $25,000 of excess
      coverage through a third party reinsurance policy, which excludes coverage
      for
      our Dexatrim products
      containing ephedrine.





We
      were
      named as a defendant in a putative class action lawsuit filed in the United
      States District Court for the Southern District of California relating to the
      labeling, advertising, promotion and sale of our Garliqueproduct.  We were served with
      this lawsuit on July 5,
      2007.  The lawsuit seeks class certification of a nationwide class of
      consumers who purchased this product.  The time period for purchases
      that would apply to the class is not clear from the complaint.  The
      lawsuit seeks restitution and/or disgorgement of profits, punitive damages,
      costs and attorney fees, injunctive relief, and other unspecified
      damages.  We plan to vigorously defend this case.





On
      December 20, 2007, Avon Products, Inc. filed a patent infringement lawsuit
      against us in the U.S. District Court for the Southern District of New York
      alleging that our Bullfrog Mosquito
      Coast product infringes an Avon patent.  We dispute this claim and
      plan to defend this lawsuit vigorously.  As of January 22, 2008, we
      have not been served with this lawsuit.





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





REGULATORY




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





Certain
      of our topical analgesic products are currently marketed under a FDA tentative
      final external analgesic monograph. The FDA has proposed that the final
      monograph exclude external analgesic products in patch, plaster or poultice
      form, unless the FDA receives additional data supporting the safety and efficacy
      of these products. On October 14, 2003, we submitted to the FDA information
      regarding the safety of our Icy Hot patches and arguments
      to support our product’s inclusion in the final monograph. We have also
      participated in an industry effort coordinated by Consumer Healthcare Products
      Association (“CHPA”) to establish with the FDA a protocol of additional research
      that will allow the patches to be marketed under the final monograph even if
      the
      final monograph does not explicitly allow them. The CHPA submission to the
      FDA
      was made on October 15, 2003. Thereafter, in April 2004, we launched the Icy Hot Sleeve, a flexible,
      non-occlusive fabric patch containing 16% menthol.  In February 2006,
      we launched the Capzasin Back & Body
      patch containing 0.025% capsaicin.  All of these drug




-
          73
          -


products
      contain levels of active ingredients consistent with levels permitted in the
      OTC
      monograph.  If additional research is required either as a preliminary
      to final FDA monograph approval and/or as a requirement of future individual
      product sale, we may need to invest in a considerable amount of costly testing
      and data analysis. Any preliminary expenditures may be shared with other patch
      manufacturers. Because the submissions made into the FDA docket have been
      forwarded from its OTC Division to its Dermatological Division within the Center
      for Drug Evaluation and Research (“CDER”), we are uncertain as to when this
      matter is likely to become final.  For example, the FDA could choose
      to hold in abeyance a final ruling on alternative dose forms even if the
      monograph is otherwise finalized.  If the final monograph excludes
      such products, we will have to file a new drug application (“NDA”) for
      previously marketed drugs in order to continue to market the Icy Hot and AspercremePatches,
      the Icy Hot Sleeve, the Capzasin
      Back & Body
      Patch and/or similar delivery systems under our other topical analgesic brands.
      In such case, we would likely have to remove the existing products from the
      market one year from the effective date of the final monograph, pending FDA
      review and approval of an NDA. The preparation of an NDA would likely take
      us
      six to 18 months and would be a significant cost. It typically takes the FDA
      at
      least twelve months to rule on an NDA once it is submitted.





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





In
      early
      2005, infrequent, but serious, adverse cardiovascular events were reported
      to
      the FDA associated with patients who were prescribed a subclass of COX-2
      inhibitor non-steroidal anti-inflammatory drugs (“NSAID’s”) for long periods to
      relieve pain of chronic diseases such as arthritis.  These products
      include Vioxx®, Bextra®, and Celebrex®.  In February 2005, the FDA
      held a joint advisory committee meeting to seek external counsel on the extent
      to which manufacturers might further warn patients of these cardiovascular
      risks
      on prescription product labeling, or prohibit sale of these prescription
      products.  As part of its response on this issue, the FDA has
      recommended labeling changes for both the prescription and OTC NSAID’s.
      Well-known OTC NSAID’s such as ibuprofen and naproxen, which have been sold in
      vast quantities since the 1970s, were affected by this regulatory
      action.   Manufacturers of OTC NSAID’s were asked to revise their
      labeling to provide more specific information about the potential cardiovascular
      and gastrointestinal risks recognizing the limited dose and duration of
      treatment of these products.  Our Pamprin All Dayproduct,
      which contains naproxen sodium, is subject to these new labeling
      requirements.  Pamprin All Day is
      manufactured for us by The Perrigo Company (“Perrigo”), holder of an abbreviated
      NDA for naproxen sodium.  As holder of the abbreviated NDA, Perrigo
      made the mandated labeling changes within the time frame required by the FDA.
      Product with revised labeling compliant with new FDA regulations began shipping
      in February 2006.  We are also aware of the FDA’s concern about the
      potential toxicity due to concomitant use of OTC and prescription products
      that
      contain the analgesic ingredient acetaminophen, an ingredient also found in
      Pamprin and Prēmsyn
      PMS.  We are also aware that the FDA will revise acetaminophen
      labeling to reflect the concerns similar to NSAID analgesics such as
      naproxen.  We are participating in an industry-wide effort to reassure
      the FDA that the current recommended dosing regimen is safe and effective and
      that proper labeling and public education by both OTC and prescription drug
      companies are the best policies to abate the FDA’s concern.   The
      FDA will address both issues in its effort to finalize the monograph on internal
      analgesic products.  We believe the FDA may issue revised labeling
      requirements within the next year, perhaps prior to monograph closure that
      will
      cause the industry to relabel its analgesic products to better inform
      consumers.





During
      the finalization of the
      monograph on sunscreen products, the FDA chose to hold in abeyance specific
      requirements relating to the characterization of a product’s ability to reduce
      UVA radiation.  In September 2007, the FDA published a new proposed
      rule amending the previously stayed final monograph on sunscreens to include
      new
      formulation options, labeling requirements and testing standards for measuring
      UVA protection and revised testing for UVB protection.  When
      implemented, the final rule will require all sunscreen manufacturers to conduct
      new testing and revise the labeling of their products within eighteen months
      after issuance of the final rule.  We will be required to take such
      actions for our BullFrog product
      line.





Our
      business is also regulated by the
      California Safe Drinking Water and Toxic Enforcement Act of 1986, known as
      Proposition 65.  Proposition 65 prohibits businesses from exposing
      consumers to chemicals that the state has determined cause cancer or
      reproduction toxicity without first giving fair and reasonable warning unless
      the level of exposure to the carcinogen or




-
          74
          -


reproductive
      toxicant falls below prescribed levels.  From time to time, one or
      more ingredients in our products could become subject to an inquiry under
      Proposition 65.  If an ingredient is on the state’s list as a
      carcinogen, it is possible that a claim could be brought in which case we would
      be required to demonstrate that exposure is below a “no significant risk” level
      for consumers.  Any such claims may cause us to incur significant
      expense, and we may face monetary penalties or injunctive relief, or both,
      or be
      required to reformulate our product to acceptable levels.  The State
      of California under Proposition 65 is also considering the inclusion of titanium
      dioxide on the state’s list of suspected carcinogens.  Titanium
      dioxide has a long history of widespread use as an excipient in prescription
      and
      OTC pharmaceuticals, cosmetics, dietary supplements and skin care products
      and
      is an active ingredient in our Bullfrog Superblock products.
      We have participated in an industry-wide submission to the State of California,
      facilitated through the CHPA, presenting evidence that titanium dioxide presents
      “no significant risk” to consumers.





In
      March
      2006, the FDA conducted a routine site audit of our manufacturing plants and
      laboratories.  There were no material adverse findings resulting from
      the audit.





In
      June
      2007, the FDA published a final rule establishing regulations requiring current
      good manufacturing practices for dietary supplements.  This final rule
      becomes effective June 2008.




LEASES
      AND ENDORSEMENTS




The
      minimum rental commitments under all noncancelable operating leases, primarily
      real estate, in effect at November 30, 2007 are as follows:




2008
            
            $
            6182009
            
            
            4032010
            
            
            2592011
            
            
            2072012
            
            
            199Thereafter
            
            
            294$
            1,980




Rental
      expense was $2,395, $2,060 and $2,135 for fiscal 2007, 2006 and 2005,
      respectively.




The
      minimum commitments under noncancelable endorsement contracts related to our
      advertising in effect at November 30, 2007 are as follows:




2008
            
            $
            8002009
            
            
            800$
            1,600




We
      have
      entered into a supply agreement for the supply of selenium sulfide, the active
      ingredient in Selsun
      Blue, which will expire in December 2008 with an automatic renewal for
      successive one year terms unless written termination notice is given six months
      prior to the end of the term or any renewal term by either party.  As
      of November 30, 2007, our remaining purchase commitment obligations based on
      the
      last price paid are approximately $1,242 for our 2008 fiscal year.




(13)         CONSOLIDATING
      FINANCIAL
      STATEMENTS







The
      consolidating financial statements, for the dates or periods indicated, of
      Chattem, Inc.  (“Chattem”), Signal Investment & Management Co.
      (“Signal”), SunDex, LLC (“SunDex”) and Chattem (Canada) Holdings, Inc.
      (“Canada”), the guarantors of the long-term debt of Chattem, and the
      non-guarantor direct and indirect wholly-owned subsidiaries of Chattem are
      presented below.  Signal is 89% owned by Chattem and 11% owned by
      Canada.  SunDex and Canada are wholly-owned subsidiaries of
      Chattem.  The guarantees of Signal, SunDex and Canada are full and
      unconditional and joint and several.  The guarantees of Signal, SunDex
      and Canada as of November 30, 2007 arose in conjunction with Chattem’s Credit
      Facility and Chattem’s issuance of the 7.0% Subordinated Notes (See Note
      5).  The maximum amount of future payments the guarantors would be
      required to make under the guarantees as of November 30, 2007 is
      $283,000.




-
          75
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      BALANCE SHEETS




NOVEMBER
      30, 2007


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            4,685
            
            
            $
            590
            
            
            $
            10,132
            
            
            $
            —
            
            
            $
            15,407Accounts
                receivable, less allowances of $13,810
            
            
            37,492
            
            
            
            16,693
            
            
            
            6,261
            
            
            
            (16,693
            )
            
            
            43,753Interest
                receivable
            
            
            101
            
            
            
            625
            
            
            
            (84
            )
            
            
            (642
            )
            
            
            —Inventories
            
            
            36,220
            
            
            
            3,242
            
            
            
            3,803
            
            
            
            —
            
            
            
            43,265Refundable
                income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Deferred
                income taxes
            
            
            6,709
            
            
            
            —
            
            
            
            41
            
            
            
            —
            
            
            
            6,750Prepaid
                expenses and other current assets
            
            
            1,913
            
            
            
            —
            
            
            
            302
            
            
            
            (150
            )
            
            
            2,065Total
                current assets
            
            
            87,120
            
            
            
            21,150
            
            
            
            20,455
            
            
            
            (17,485
            )
            
            
            111,240PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            30,902
            
            
            
            775
            
            
            
            672
            
            
            
            —
            
            
            
            32,349OTHER
                NONCURRENT ASSETS:Patents,
                trademarks and other purchased product rights, net
            
            
            3,482
            
            
            
            674,058
            
            
            
            1,560
            
            
            
            (62,290
            )
            
            
            616,810Debt
                issuance costs, net
            
            
            15,430
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            15,430Investment
                in subsidiaries
            
            
            336,936
            
            
            
            33,000
            
            
            
            66,860
            
            
            
            (436,796
            )
            
            
            —Note
                receivable
            
            
            —
            
            
            
            33,000
            
            
            
            —
            
            
            
            (33,000
            )
            
            
            —Other
            
            
            4,218
            
            
            
            —
            
            
            
            513
            
            
            
            —
            
            
            
            4,731Total
                other noncurrent assets
            
            
            360,066
            
            
            
            740,058
            
            
            
            68,933
            
            
            
            (532,086
            )
            
            
            636,971TOTAL
                ASSETS
            
            $
            478,088
            
            
            $
            761,983
            
            
            $
            90,060
            
            
            $
            (549,571
            )
            
            $
            780,560LIABILITIES
                AND
                SHAREHOLDERS’ EQUITYCURRENT
                LIABILITIES:Current
                maturities of long-term debt
            
            $
            3,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            3,000Accounts
                payable
            
            
            16,439
            
            
            
            —
            
            
            
            1,800
            
            
            
            —
            
            
            
            18,239Bank
                overdraft
            
            
            7,584
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            7,584Accrued
                liabilities
            
            
            33,561
            
            
            
            691
            
            
            
            4,770
            
            
            
            (17,485
            )
            
            
            21,537Total
                current liabilities
            
            
            60,584
            
            
            
            691
            
            
            
            6,570
            
            
            
            (17,485
            )
            
            
            50,360LONG-TERM
                DEBT, less current maturities
            
            
            504,400
            
            
            
            (1,200
            )
            
            
            34,800
            
            
            
            (33,000
            )
            
            
            505,000DEFERRED
                INCOME TAXES
            
            
            (23,976
            )
            
            
            45,032
            
            
            
            —
            
            
            
            —
            
            
            
            21,056OTHER
                NONCURRENT LIABILITIES
            
            
            2,436
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,436INTERCOMPANY
                ACCOUNTS
            
            
            (267,058
            )
            
            
            259,083
            
            
            
            7,975
            
            
            
            —
            
            
            
            —SHAREHOLDERS’
                EQUITYPreferred
                shares, without par value, authorized 1,000, none issued
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Common
                shares, without par value, authorized 100,000, issued
                19,092
            
            
            36,800
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            36,800Share
                capital of subsidiaries
            
            
            —
            
            
            
            329,704
            
            
            
            39,804
            
            
            
            (369,508
            )
            
            
            —Dividends
            
            
            —
            
            
            
            (18,046
            )
            
            
            (9,000
            )
            
            
            27,046
            
            
            
            —Retained
                earnings
            
            
            165,655
            
            
            
            146,719
            
            
            
            8,430
            
            
            
            (155,149
            )
            
            
            165,655Total
            
            
            202,455
            
            
            
            458,377
            
            
            
            39,234
            
            
            
            (497,611
            )
            
            
            202,455Cumulative
                other comprehensive income, net of taxes:Minimum
                funding pension liability
            
            
            (8
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (8
            )Interest
                rate hedge adjustment
            
            
            (1,747
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,747
            )Foreign
                currency translation adjustment
            
            
            1,002
            
            
            
            —
            
            
            
            1,481
            
            
            
            (1,475
            )
            
            
            1,008Total
                shareholders’ equity
            
            
            201,702
            
            
            
            458,377
            
            
            
            40,715
            
            
            
            (499,086
            )
            
            
            201,708TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            478,088
            
            
            $
            761,983
            
            
            $
            90,060
            
            
            $
            (549,571
            )
            
            $
            780,560




-
          76
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      BALANCE SHEETS




NOVEMBER
      30, 2006


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            80,198
            
            
            $
            1,967
            
            
            $
            8,362
            
            
            $
            —
            
            
            $
            90,527Accounts
                receivable, less allowances of $10,907
            
            
            25,203
            
            
            
            9,407
            
            
            
            4,649
            
            
            
            (9,407
            )
            
            
            29,852Interest
                receivable
            
            
            17
            
            
            
            625
            
            
            
            —
            
            
            
            (642
            )
            
            
            —Inventories
            
            
            24,444
            
            
            
            4,160
            
            
            
            2,785
            
            
            
            —
            
            
            
            31,389Refundable
                income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Deferred
                income taxes
            
            
            4,304
            
            
            
            —
            
            
            
            37
            
            
            
            —
            
            
            
            4,341Prepaid
                expenses and other current assets
            
            
            3,666
            
            
            
            —
            
            
            
            2,191
            
            
            
            —
            
            
            
            5,857Total
                current assets
            
            
            137,832
            
            
            
            16,159
            
            
            
            18,024
            
            
            
            (10,049
            )
            
            
            161,966PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            28,985
            
            
            
            775
            
            
            
            593
            
            
            
            —
            
            
            
            30,353OTHER
                NONCURRENT ASSETS:Patents,
                trademarks and other purchased product rights, net
            
            
            166
            
            
            
            268,273
            
            
            
            —
            
            
            
            (62,290
            )
            
            
            206,149Debt
                issuance costs, net
            
            
            11,399
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,399Investment
                in subsidiaries
            
            
            313,922
            
            
            
            33,000
            
            
            
            66,860
            
            
            
            (413,782
            )
            
            
            —Note
                receivable
            
            
            —
            
            
            
            33,000
            
            
            
            —
            
            
            
            (33,000
            )
            
            
            —Other
            
            
            4,978
            
            
            
            468
            
            
            
            —
            
            
            
            —
            
            
            
            5,446Total
                other noncurrent assets
            
            
            330,465
            
            
            
            334,741
            
            
            
            66,860
            
            
            
            (509,072
            )
            
            
            222,994TOTAL
                ASSETS
            
            $
            497,282
            
            
            $
            351,675
            
            
            $
            85,477
            
            
            $
            (519,121
            )
            
            $
            415,313LIABILITIES
                AND
                SHAREHOLDERS’ EQUITYCURRENT
                LIABILITIES:Current
                maturities of long-term debt
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Accounts
                payable
            
            
            10,473
            
            
            
            —
            
            
            
            1,580
            
            
            
            (2,105
            )
            
            
            9,948Bank
                overdrafts
            
            
            5,824
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,824Accrued
                liabilities
            
            
            17,869
            
            
            
            1,132
            
            
            
            748
            
            
            
            (7,944
            )
            
            
            11,805Total
                current liabilities
            
            
            34,166
            
            
            
            1,132
            
            
            
            2,328
            
            
            
            (10,049
            )
            
            
            27,577LONG-TERM
                DEBT, less current maturities
            
            
            232,500
            
            
            
            —
            
            
            
            33,000
            
            
            
            (33,000
            )
            
            
            232,500DEFERRED
                INCOME TAXES
            
            
            (16,517
            )
            
            
            34,185
            
            
            
            —
            
            
            
            —
            
            
            
            17,668OTHER
                NONCURRENT LIABILITIES
            
            
            1,987
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,987INTERCOMPANY
                ACCOUNTS
            
            
            109,564
            
            
            
            (114,014
            )
            
            
            4,450
            
            
            
            —
            
            
            
            —SHAREHOLDERS’
                EQUITYPreferred
                shares, without par value, authorized 1,000, none issued
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Common
                shares, without par value, authorized 100,000, issued
                18,669
            
            
            30,452
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            30,452Share
                capital of subsidiaries
            
            
            —
            
            
            
            329,705
            
            
            
            39,803
            
            
            
            (369,508
            )
            
            
            —Dividends
            
            
            —
            
            
            
            (2,500
            )
            
            
            —
            
            
            
            2,500
            
            
            
            —Retained
                earnings
            
            
            105,965
            
            
            
            103,167
            
            
            
            5,679
            
            
            
            (108,846
            )
            
            
            105,965Total
            
            
            136,417
            
            
            
            430,372
            
            
            
            45,482
            
            
            
            (475,854
            )
            
            
            136,417Cumulative
                other comprehensive income, net of taxes:Interest
                rate hedge adjustment
            
            
            (597
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (597
            )Foreign
                currency translation adjustment
            
            
            (238
            )
            
            
            —
            
            
            
            217
            
            
            
            (218
            )
            
            
            (239
            )Total
                shareholders’ equity
            
            
            135,582
            
            
            
            430,372
            
            
            
            45,699
            
            
            
            (476,072
            )
            
            
            135,581TOTAL
                LIABILITIES AND  SHAREHOLDERS’ EQUITY
            
            $
            497,282
            
            
            $
            351,675
            
            
            $
            85,477
            
            
            $
            (519,121
            )
            
            $
            415,313




-
          77
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      STATEMENTS OF INCOME




FOR
      THE YEAR ENDED NOVEMBER 30, 2007


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDTOTAL
                REVENUES
            
            $
            378,225
            
            
            $
            92,089
            
            
            $
            22,875
            
            
            $
            (69,811
            )
            
            $
            423,378COSTS
                AND EXPENSES:Cost
                of sales
            
            
            115,001
            
            
            
            7,125
            
            
            
            10,932
            
            
            
            (4,003
            )
            
            
            129,055Advertising
                and promotion
            
            
            96,471
            
            
            
            9,844
            
            
            
            6,004
            
            
            
            (113
            )
            
            
            112,206Selling,
                general and administrative
            
            
            55,120
            
            
            
            320
            
            
            
            2,438
            
            
            
            —
            
            
            
            57,878Acquisition
                expenses
            
            
            2,057
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,057Equity
                in subsidiary income
            
            
            (46,302
            )
            
            
            —
            
            
            
            —
            
            
            
            46,302
            
            
            
            —Total
                costs and expenses
            
            
            222,347
            
            
            
            17,289
            
            
            
            19,374
            
            
            
            42,186
            
            
            
            301,196INCOME
                FROM OPERATIONS
            
            
            155,878
            
            
            
            74,800
            
            
            
            3,501
            
            
            
            (111,997
            )
            
            
            122,182OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (30,142
            )
            
            
            —
            
            
            
            (2,645
            )
            
            
            2,857
            
            
            
            (29,930
            )Investment
                and other income, net
            
            
            801
            
            
            
            2,589
            
            
            
            3,428
            
            
            
            (5,358
            )
            
            
            1,460Loss
                on early extinguishment of debt
            
            
            (2,633
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,633
            )Royalties
            
            
            (61,517
            )
            
            
            (4,178
            )
            
            
            —
            
            
            
            65,695
            
            
            
            —Corporate
                allocations
            
            
            2,424
            
            
            
            (2,362
            )
            
            
            (62
            )
            
            
            —
            
            
            
            —Total
                other income (expense)
            
            
            (91,067
            )
            
            
            (3,951
            )
            
            
            721
            
            
            
            63,194
            
            
            
            (31,103
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            64,811
            
            
            
            70,849
            
            
            
            4,222
            
            
            
            (48,803
            )
            
            
            91,079(BENEFIT
                FROM) PROVISION FOR INCOME TAXES
            
            
            5,121
            
            
            
            24,797
            
            
            
            1,471
            
            
            
            —
            
            
            
            31,389NET
                INCOME
            
            $
            59,690
            
            
            $
            46,052
            
            
            $
            2,751
            
            
            $
            (48,803
            )
            
            $
            59,690




-
          78
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      STATEMENTS OF INCOME




FOR
      THE YEAR ENDED NOVEMBER 30, 2006


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDTOTAL
                REVENUES
            
            $
            248,219
            
            
            $
            79,722
            
            
            $
            19,686
            
            
            $
            (47,079
            )
            
            $
            300,548COSTS
                AND EXPENSES:Cost
                of sales
            
            
            78,044
            
            
            
            9,661
            
            
            
            8,784
            
            
            
            (2,453
            )
            
            
            94,036Advertising
                and promotion
            
            
            80,316
            
            
            
            10,713
            
            
            
            5,042
            
            
            
            —
            
            
            
            96,071Selling,
                general and administrative
            
            
            47,059
            
            
            
            (93
            )
            
            
            23
            
            
            
            —
            
            
            
            46,989Litigation
                settlement
            
            
            (19,292
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (19,292
            )Equity
                in subsidiary income
            
            
            (36,764
            )
            
            
            —
            
            
            
            —
            
            
            
            36,764
            
            
            
            —Total
                costs and expenses
            
            
            149,363
            
            
            
            20,281
            
            
            
            13,849
            
            
            
            34,311
            
            
            
            217,804INCOME
                FROM OPERATIONS
            
            
            98,856
            
            
            
            59,441
            
            
            
            5,837
            
            
            
            (81,390
            )
            
            
            82,744OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (11,582
            )
            
            
            —
            
            
            
            (2,618
            )
            
            
            2,475
            
            
            
            (11,725
            )Investment
                and other income, net
            
            
            483
            
            
            
            2,535
            
            
            
            3,033
            
            
            
            (4,975
            )
            
            
            1,076Loss
                on early extinguishment of debt
            
            
            (2,805
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,805
            )Royalties
            
            
            (39,017
            )
            
            
            (5,610
            )
            
            
            —
            
            
            
            44,627
            
            
            
            —Corporate
                allocations
            
            
            3,324
            
            
            
            (3,260
            )
            
            
            (64
            )
            
            
            —
            
            
            
            —Total
                other income (expense)
            
            
            (49,597
            )
            
            
            (6,335
            )
            
            
            351
            
            
            
            42,127
            
            
            
            (13,454
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            49,259
            
            
            
            53,106
            
            
            
            6,188
            
            
            
            (39,263
            )
            
            
            69,290(BENEFIT
                FROM) PROVISION FOR INCOME TAXES
            
            
            4,147
            
            
            
            17,940
            
            
            
            2,091
            
            
            
            —
            
            
            
            24,178NET
                INCOME
            
            $
            45,112
            
            
            $
            35,166
            
            
            $
            4,097
            
            
            $
            (39,263
            )
            
            $
            45,112




-
          79
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      STATEMENTS OF INCOME




FOR
      THE YEAR ENDED NOVEMBER 30, 2005


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDTOTAL
                REVENUES
            
            $
            225,874
            
            
            $
            76,405
            
            
            $
            22,120
            
            
            $
            (45,081
            )
            
            $
            279,318COSTS
                AND EXPENSES:Cost
                of sales
            
            
            63,312
            
            
            
            8,561
            
            
            
            10,693
            
            
            
            (2,682
            )
            
            
            79,884Advertising
                and promotion
            
            
            61,411
            
            
            
            10,336
            
            
            
            5,016
            
            
            
            —
            
            
            
            76,763Selling,
                general and administrative
            
            
            46,089
            
            
            
            (180
            )
            
            
            1,413
            
            
            
            —
            
            
            
            47,322Executive
                severance charges
            
            
            2,269
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,269Litigation
                settlement
            
            
            (4,262
            )
            
            
            —
            
            
            
            2,176
            
            
            
            —
            
            
            
            (2,086
            )Loss
                on product divesture
            
            
            8,678
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,678Equity
                in subsidiary income
            
            
            (26,838
            )
            
            
            —
            
            
            
            —
            
            
            
            26,838
            
            
            
            —Total
                costs and expenses
            
            
            150,659
            
            
            
            18,717
            
            
            
            19,298
            
            
            
            24,156
            
            
            
            212,830INCOME
                FROM OPERATIONS
            
            
            75,215
            
            
            
            57,688
            
            
            
            2,822
            
            
            
            (69,237
            )
            
            
            66,488OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (13,814
            )
            
            
            —
            
            
            
            (2,499
            )
            
            
            2,499
            
            
            
            (13,814
            )Investment
                and other income, net
            
            
            4,714
            
            
            
            6,334
            
            
            
            6,549
            
            
            
            (16,511
            )
            
            
            1,086Loss
                on early extinguishment of debt
            
            
            (750
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (750
            )Royalties
            
            
            (34,774
            )
            
            
            (5,430
            )
            
            
            (2,195
            )
            
            
            42,399
            
            
            
            —Corporate
                allocations
            
            
            3,196
            
            
            
            (3,127
            )
            
            
            (69
            )
            
            
            —
            
            
            
            —Total
                other income (expense)
            
            
            (41,428
            )
            
            
            (2,223
            )
            
            
            1,786
            
            
            
            28,387
            
            
            
            (13,478
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            33,787
            
            
            
            55,465
            
            
            
            4,608
            
            
            
            (40,850
            )
            
            
            53,010(BENEFIT
                FROM) PROVISION FOR INCOME TAXES
            
            
            (2,260
            )
            
            
            17,749
            
            
            
            1,474
            
            
            
            —
            
            
            
            16,963NET
                INCOME
            
            $
            36,047
            
            
            $
            37,716
            
            
            $
            3,134
            
            
            $
            (40,850
            )
            
            $
            36,047





-
          80
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      STATEMENTS OF CASH FLOWS




FOR
      THE YEAR ENDED NOVEMBER 30, 2007


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDOPERATING
                ACTIVITIES:Net
                income
            
            $
            59,690
            
            
            $
            46,052
            
            
            $
            2,751
            
            
            $
            (48,803
            )
            
            $
            59,690Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            8,480
            
            
            
            —
            
            
            
            363
            
            
            
            —
            
            
            
            8,843Deferred
                income tax provision
            
            
            1,875
            
            
            
            10,847
            
            
            
            (4
            )
            
            
            —
            
            
            
            12,718Stock-based
                compensation
            
            
            5,622
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,622Loss
                on early extinguishment of debt
            
            
            2,633
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,633Tax
                benefit realized from stock option plans
            
            
            (8,291
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (8,291
            )Other,
                net
            
            
            154
            
            
            
            —
            
            
            
            (343
            )
            
            
            —
            
            
            
            (189
            )Equity
                in subsidiary income
            
            
            (48,803
            )
            
            
            —
            
            
            
            —
            
            
            
            48,803
            
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (12,289
            )
            
            
            (7,286
            )
            
            
            (1,612
            )
            
            
            7,286
            
            
            
            (13,901
            )Interest
                receivable
            
            
            (83
            )
            
            
            —
            
            
            
            83
            
            
            
            —
            
            
            
            —Inventories
            
            
            (5,721
            )
            
            
            918
            
            
            
            (1,017
            )
            
            
            —
            
            
            
            (5,820
            )Refundable
                income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Prepaid
                expenses and other current assets
            
            
            1,243
            
            
            
            —
            
            
            
            (144
            )
            
            
            150
            
            
            
            1,249Accounts
                payable and accrued liabilities
            
            
            27,814
            
            
            
            (441
            )
            
            
            4,243
            
            
            
            (7,436
            )
            
            
            24,180Net
                cash provided by operating activities
            
            
            32,324
            
            
            
            50,090
            
            
            
            4,320
            
            
            
            -
            
            
            
            86,734INVESTING
                ACTIVITIES:Purchase
                of property, plant and equipment
            
            
            (5,854
            )
            
            
            —
            
            
            
            (441
            )
            
            
            —
            
            
            
            (6,295
            )Purchase
                of patents, trademarks and other product rights
            
            
            (8,420
            )
            
            
            (405,784
            )
            
            
            (1,561
            )
            
            
            —
            
            
            
            (415,765
            )Increase
                in note receivable
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Decrease
                in other assets, net
            
            
            (1,342
            )
            
            
            468
            
            
            
            2,784
            
            
            
            —
            
            
            
            1,910Net
                cash (used in) provided by investing activities
            
            
            (15,616
            )
            
            
            (405,316
            )
            
            
            782
            
            
            
            —
            
            
            
            (420,150
            )FINANCING
                ACTIVITIES:Repayment
                of long-term debt
            
            
            (154,500
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (154,500
            )Proceeds
                from long-term debt
            
            
            400,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            400,000Proceeds
                from borrowing under revolver
            
            
            159,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            159,000Payments
                under revolver
            
            
            (129,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (129,000
            )Repurchase
                of common shares
            
            
            (23,601
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (23,601
            )Proceeds
                from exercise of stock options
            
            
            16,661
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,661Bank
                overdraft
            
            
            1,760
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,760Purchase
                of note hedge
            
            
            (29,500
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (29,500
            )Proceeds
                from issuance of warrants
            
            
            17,430
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            17,430Increase
                in debt issuance costs
            
            
            (9,383
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (9,383
            )Premium
                on interest rate cap agreement
            
            
            (114
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (114
            )Proceeds
                from sale of interest rate cap
            
            
            909
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            909Tax
                benefit realized from stock options
            
            
            8,291
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,291Changes
                in intercompany accounts
            
            
            (374,120
            )
            
            
            373,095
            
            
            
            1,025
            
            
            
            —
            
            
            
            —Dividends
                paid
            
            
            17,546
            
            
            
            (18,046
            )
            
            
            500
            
            
            
            —
            
            
            
            —Intercompany
                debt proceeds (payments)
            
            
            6,400
            
            
            
            (1,200
            )
            
            
            (5,200
            )
            
            
            —
            
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            (92,221
            )
            
            
            353,849
            
            
            
            (3,675
            )
            
            
            —
            
            
            
            257,953EFFECT
                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
            
            
            —
            
            
            
            —
            
            
            
            343
            
            
            
            —
            
            
            
            343CASH
                AND CASH EQUIVALENTSIncrease
                for the year
            
            
            (75,513
            )
            
            
            (1,377
            )
            
            
            1,770
            
            
            
            —
            
            
            
            (75,120
            )At
                beginning of year
            
            
            80,198
            
            
            
            1,967
            
            
            
            8,362
            
            
            
            —
            
            
            
            90,527At
                end of year
            
            $
            4,685
            
            
            $
            590
            
            
            $
            10,132
            
            
            $
            —
            
            
            $
            15,407




-
          81
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      STATEMENTS OF CASH FLOWS




FOR
      THE YEAR ENDED NOVEMBER 30, 2006


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDOPERATING
                ACTIVITIES:Net
                income
            
            $
            45,112
            
            
            $
            35,166
            
            
            $
            4,097
            
            
            $
            (39,263
            )
            
            $
            45,112Adjustments
                to reconcile net income to net cash (used in) provided by operating
                activities:Depreciation
                and amortization
            
            
            5,655
            
            
            
            —
            
            
            
            180
            
            
            
            —
            
            
            
            5,835Deferred
                income tax provision
            
            
            (5,204
            )
            
            
            5,653
            
            
            
            (36
            )
            
            
            —
            
            
            
            413Stock-based
                compensation
            
            
            4,745
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,745Loss
                on early extinguishment of debt
            
            
            2,805
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,805Tax
                benefit realized from stock options exercised
            
            
            (1,627
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,627
            )Other,
                net
            
            
            127
            
            
            
            —
            
            
            
            257
            
            
            
            —
            
            
            
            384Equity
                in subsidiary income
            
            
            (39,263
            )
            
            
            —
            
            
            
            —
            
            
            
            39,263
            
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            12,538
            
            
            
            1,774
            
            
            
            (197
            )
            
            
            (1,774
            )
            
            
            12,341Inventories
            
            
            (6,115
            )
            
            
            (1,730
            )
            
            
            224
            
            
            
            —
            
            
            
            (7,621
            )Refundable
                income taxes
            
            
            2,834
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,834Prepaid
                expenses and other current assets
            
            
            574
            
            
            
            —
            
            
            
            425
            
            
            
            (420
            )
            
            
            579Accounts
                payable and accrued liabilities
            
            
            (7,497
            )
            
            
            163
            
            
            
            (6,238
            )
            
            
            2,194
            
            
            
            (11,378
            )Net
                cash provided by (used in) operating activities
            
            
            14,684
            
            
            
            41,026
            
            
            
            (1,288
            )
            
            
            —
            
            
            
            54,422INVESTING
                ACTIVITIES:Purchase
                of property, plant and equipment
            
            
            (4,473
            )
            
            
            —
            
            
            
            (232
            )
            
            
            —
            
            
            
            (4,705
            )Increase
                in other assets, net
            
            
            (487
            )
            
            
            (468
            )
            
            
            (1,156
            )
            
            
            —
            
            
            
            (2,111
            )Net
                cash used in provided by investing activities
            
            
            (4,960
            )
            
            
            (468
            )
            
            
            (1,388
            )
            
            
            —
            
            
            
            (6,816
            )FINANCING
                ACTIVITIES:Repayment
                of long-term debt
            
            
            (75,000
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (75,000
            )Proceeds
                from long-term debt
            
            
            125,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            125,000Proceeds
                from borrowing under revolving credit facility
            
            
            75,500
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            75,500Repayments
                of revolving credit facility
            
            
            (75,500
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (75,500
            )Bank
                overdraft
            
            
            5,824
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,824Repurchase
                of common shares
            
            
            (39,332
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (39,332
            )Proceeds
                from exercise of stock options
            
            
            2,480
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,480Payment
                for purchase of note hedge
            
            
            (32,042
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (32,042
            )Proceeds
                from issuance of warrant
            
            
            18,581
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            18,581Increase
                in debt issuance costs
            
            
            (9,099
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (9,099
            )Debt
                retirement costs
            
            
            (1,501
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,501
            )Premium
                on interest rate cap agreement
            
            
            (687
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (687
            )Tax
                benefit realized from stock options exercised
            
            
            1,627
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,627Changes
                in intercompany accounts
            
            
            37,976
            
            
            
            (38,073
            )
            
            
            97
            
            
            
            —
            
            
            
            —Dividends
                paid
            
            
            —
            
            
            
            (2,500
            )
            
            
            2,500
            
            
            
            —
            
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            33,827
            
            
            
            (40,573
            )
            
            
            2,597
            
            
            
            —
            
            
            
            (4,149
            )EFFECT
                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
            
            
            —
            
            
            
            —
            
            
            
            (257
            )
            
            
            —
            
            
            
            (257
            )CASH
                AND CASH EQUIVALENTSIncrease
                (decrease) for the year
            
            
            43,551
            
            
            
            (15
            )
            
            
            (336
            )
            
            
            —
            
            
            
            43,200At
                beginning of year
            
            
            36,647
            
            
            
            1,982
            
            
            
            8,698
            
            
            
            —
            
            
            
            47,327At
                end of year
            
            $
            80,198
            
            
            $
            1,967
            
            
            $
            8,362
            
            
            $
            —
            
            
            $
            90,527




-
          82
          -


Note
      13




CHATTEM,
      INC. AND SUBSIDIARIES


CONSOLIDATING
      STATEMENTS OF CASH FLOWS




FOR
      THE YEAR ENDED NOVEMBER 30, 2005


(In
      thousands)




CHATTEM
            
            
            GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            NON-GUARANTOR
              SUBSIDIARY
              COMPANIES
            
            
            ELIMINATIONS
            
            
            CONSOLIDATEDOPERATING
                ACTIVITIES:Net
                income
            
            $
            36,047
            
            
            $
            37,716
            
            
            $
            3,134
            
            
            $
            (40,850
            )
            
            $
            36,047Adjustments
                to reconcile net income to net cash (used in) provided by operating
                activities:Depreciation
                and amortization
            
            
            6,115
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6,115Deferred
                income tax provision
            
            
            1,606
            
            
            
            2,288
            
            
            
            —
            
            
            
            —
            
            
            
            3,894Loss
                on early extinguishment of debt
            
            
            750
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            750Loss
                on product line divestures
            
            
            8,678
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,678Tax
                benefit realized from stock options
            
            
            3,292
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,292Stock
                option expense
            
            
            1,360
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,360Other,
                net
            
            
            105
            
            
            
            —
            
            
            
            695
            
            
            
            —
            
            
            
            800Equity
                in subsidiary income
            
            
            (40,850
            )
            
            
            —
            
            
            
            —
            
            
            
            40,850
            
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (3,987
            )
            
            
            (2,448
            )
            
            
            923
            
            
            
            2,443
            
            
            
            (3,069
            )Interest
                receivable
            
            
            (17
            )
            
            
            —
            
            
            
            —
            
            
            
            17
            
            
            
            —Inventories
            
            
            (1,028
            )
            
            
            591
            
            
            
            (1,020
            )
            
            
            —
            
            
            
            (1,457
            )Refundable
                income taxes
            
            
            2,979
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,979Prepaid
                expenses and other current assets
            
            
            (759
            )
            
            
            —
            
            
            
            (387
            )
            
            
            420
            
            
            
            (726
            )Accounts
                payable and accrued liabilities
            
            
            (2,675
            )
            
            
            (137
            )
            
            
            2,045
            
            
            
            (2,880
            )
            
            
            (3,647
            )Net
                cash provided by (used in) operating activities
            
            
            11,616
            
            
            
            38,010
            
            
            
            5,390
            
            
            
            —
            
            
            
            55,016INVESTING
                ACTIVITIES:Purchase
                of property, plant and equipment
            
            
            (4,027
            )
            
            
            —
            
            
            
            (275
            )
            
            
            —
            
            
            
            (4,302
            )Sales
                (purchases) of patents, trademarks and other product
                rights
            
            
            3,199
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,199Decrease
                in other assets, net
            
            
            224
            
            
            
            —
            
            
            
            221
            
            
            
            —
            
            
            
            445Net
                cash (used in) provided by investing activities
            
            
            (604
            )
            
            
            —
            
            
            
            (54
            )
            
            
            —
            
            
            
            (658
            )FINANCING
                ACTIVITIES:Repayment
                of long-term debt
            
            
            (17,500
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (17,500
            )Repayments
                of policy loans
            
            
            (1,031
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,031
            )Repurchase
                of common shares
            
            
            (34,084
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (34,084
            )Proceeds
                from exercise of stock options
            
            
            6,681
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            6,681Increase
                in debt issuance costs
            
            
            (313
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (313
            )Debt
                retirement costs
            
            
            (282
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (282
            )Changes
                in intercompany accounts
            
            
            39,974
            
            
            
            (35,495
            )
            
            
            (4,479
            )
            
            
            —
            
            
            
            —Dividends
                paid
            
            
            3,846
            
            
            
            (2,500
            )
            
            
            (1,346
            )
            
            
            —
            
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            (2,709
            )
            
            
            (37,995
            )
            
            
            (5,825
            )
            
            
            —
            
            
            
            (46,529
            )EFFECT
                OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
            
            
            —
            
            
            
            —
            
            
            
            (695
            )
            
            
            —
            
            
            
            (695
            )CASH
                AND CASH EQUIVALENTSIncrease
                (decrease) for the year
            
            
            8,303
            
            
            
            15
            
            
            
            (1,184
            )
            
            
            —
            
            
            
            7,134At
                beginning of year
            
            
            28,344
            
            
            
            1,967
            
            
            
            9,882
            
            
            
            —
            
            
            
            40,193At
                end of year
            
            $
            36,647
            
            
            $
            1,982
            
            
            $
            8,698
            
            
            $
            —
            
            
            $
            47,327




-
          83
          -


(14)         QUARTERLY
      INFORMATION (Unaudited
      and in thousands, except per share amounts)







Quarter
                EndedTotal
            
            
            February
                28
            
            
            May
                31
            
            
            August
                31
            
            
            November
                30FISCAL
                2007:Total
                revenues
            
            $
            423,378
            
            
            
            100,831
            
            
            
            112,964
            
            
            
            108,965
            
            
            
            100,618Gross
                profit
            
            $
            294,323
            
            
            
            69,851
            
            
            
            77,869
            
            
            
            76,172
            
            
            
            70,431Net
                income (loss)
            
            $
            59,690
            
            
            
            13,650
            
            
            
            14,908
            
            
            
            16,312
            
            
            
            14,820Net
                income (loss) per share:Basic
                (1)
            
            $
            3.15
            
            
            
            .73
            
            
            
            .78
            
            
            
            .86
            
            
            
            .78Diluted
                (1)
            
            $
            3.08
            
            
            
            .71
            
            
            
            .77
            
            
            
            .84
            
            
            
            .76FISCAL
                2006:Total
                revenues
            
            $
            300,548
            
            
            
            84,024
            
            
            
            79,411
            
            
            
            72,005
            
            
            
            65,108Gross
                profit
            
            $
            206,512
            
            
            
            58,004
            
            
            
            54,357
            
            
            
            49,767
            
            
            
            44,384Net
                income (loss)
            
            $
            45,112
            
            
            
            14,773
            
            
            
            10,200
            
            
            
            15,229
            
            
            
            4,910Net
                income (loss) per share:Basic  (1)
            
            $
            2.37
            
            
            
            .76
            
            
            
            .53
            
            
            
            .81
            
            
            
            .26Diluted
                (1)
            
            $
            2.34
            
            
            
            .75
            
            
            
            .52
            
            
            
            .81
            
            
            
            .26




(1)The
      sum
      of the quarterly earnings per share amounts may differ from annual earnings
      per
      share because of the differences in the weighted average number of common shares
      and dilutive potential shares used in the quarterly and annual
      computations.




-
          84
          -


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Shareholders Chattem, Inc.




We
      have
      audited Chattem, Inc. (a Tennessee corporation) and subsidiaries’ (“the
      Company”) internal control over financial reporting as of November 30, 2007,
      based on criteria established in Internal Control—Integrated Framework issued by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The
      Company’s management is responsible for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting. Our responsibility is
      to
      express an opinion on Chattem, Inc. and subsidiaries’ internal control over
      financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control based
      on the assessed risk, and performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, Chattem, Inc. and subsidiaries maintained, in all material respects,
      effective internal control over financial reporting as of November 30, 2007,
      based on criteria established in Internal Control—Integrated Framework issued by
      COSO.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Chattem,
      Inc. and subsidiaries as of November 30, 2007 and 2006, and the related
      consolidated statements of income, shareholder’s equity, and cash flows for each
      of the three years in the period ended November 30, 2007 and our report dated
      January 29, 2008 expressed an unqualified opinion on those consolidated
      financial statements.





/s/
      GRANT
      THORNTON LLP




Charlotte,
      North Carolina


January
      29, 2008




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          85
          -


Item
      9.Changes
      in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure




None




Item
      9A.Controls
      and
      Procedures




Disclosure
      Controls and Procedures




Under
      the
      supervision and with the participation of our management, including our chief
      executive officer and principal financial officer, we have evaluated the
      effectiveness of our disclosure controls and procedures (as such terms are
      defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended (the “Exchange Act”)) as of November 30, 2007 (the “Evaluation
      Date”).  Based on such evaluation, such officers have concluded that,
      as of the Evaluation Date, our disclosure controls and procedures were effective
      in alerting them on a timely basis to material information relating to us
      (including our consolidated subsidiaries) required to be included in our filings
      under the Exchange Act.




Management’s
      Report on Internal Control Over Financial Reporting




The
      management of the Company is responsible for establishing and maintaining
      adequate internal control over financial reporting.  Internal control
      over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
      under the Exchange Act as a process designed by, or under the supervision of,
      the Company’s principal executive and principal financial officers and effected
      by the Company’s board of directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that:




•
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                Company;




•
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that receipts and expenditures of the
                Company
                are being made only in accordance with authorizations of management
                and
                directors of the Company; and




•
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of the Company’s assets that
                could have a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements.  Projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




The
      Company’s management assessed the effectiveness of the Company’s internal
      control over financial reporting as of November 30, 2007 using the criteria
      set
      forth by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) in Internal Control-Integrated Framework.  Management’s
      assessment included an evaluation of the design of our internal control over
      financial reporting and testing the operational effectiveness of our internal
      control over financial reporting.  Management reviewed the results of
      the assessment with the Audit Committee of the Board of
      Directors.  Based on our assessment, management determined that, at
      November 30, 2007, we maintained effective internal control over financial
      reporting.




Changes
      in Internal Control Over Financial Reporting




There
      have been no changes during the quarter ended November 30, 2007 in the Company’s
      internal control over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




-
          86
          -


Item
      9B.Other
      Information




None




PART
      III




Item
      10.Directors
      and Executive
      Officers of the Registrant




(a)           
      Directors




The
      information found in our 2008 Proxy Statement under the heading “Information
      about Nominees and Continuing Directors” is hereby incorporated by
      reference.




(b)           
      Executive
      Officers




The
      following table lists the names of the executive officers and other key
      employees of the Company as of January 22, 2008, their ages and their positions
      and offices with the Company:




NAME
            AGE
            POSITION
                WITH
                REGISTRANTZan
                Guerry*
            59
            Chairman
                of the Board and
              Chief
                Executive Officer; DirectorRobert
                E. Bosworth*
            60
            President
                and Chief Operating Officer;
              DirectorAndrea
                M. Crouch
            49
            Vice
                President – Brand ManagementRon
                Galante
            64
            Vice
                President – New Business DevelopmentRobert
                B. Long*
            36
            Vice
                President – FinanceB.
                Derrill Pitts
            65
            Vice
                President – OperationsJ.
                Blair Ramey
            41
            Vice
                President – MarketingJohn
                L. Stroud
            47
            Vice
                President – MarketingCharles
                M. Stafford
            57
            Vice
                President – SalesJoseph
                J. Czerwinski
            58
            Vice
                President – Product DevelopmentTheodore
                K. Whitfield, Jr.*
            43
            Vice
                President, General Counsel and Secretary*Executive
                Officer




Zan
      Guerry.  Mr.
      Guerry became our chairman of the board and chief executive officer in June
      1990.  Previously, he served as our vice president and chief financial
      officer from 1980 until 1983, as executive vice president from 1983 to 1990,
      as
      president of Chattem Consumer Products from 1989 to 1994, as chief operating
      officer from 1989 to 1990 and as president from 1990 to 1998.  Mr.
      Guerry became one of our directors in 1981.  He is also a director of
      SunTrust Bank, Chattanooga, N.A.




Robert
      E.
      Bosworth.  Mr. Bosworth became our president and chief
      operating officer in September 2005.  From 2001 to September 2005, Mr.
      Bosworth served as Vice President-Corporate Finance of Livingston Company,
      a
      merchant banking firm.




-
          87
          -


Andrea
      M.
      Crouch.  Ms. Crouch became our vice president-brand management
      in 1995.  Ms. Crouch joined us in 1985 as an assistant brand
      manager.  Prior to joining us, she served as product planner for Hayes
      Microcomputer Products, a manufacturer of modems and communication equipment,
      and previously was a systems consultant with Arthur Andersen LLP, an accounting
      firm.




Ron
      Galante.  Mr.
      Galante became our vice president-new business development in June
      1996.  Previously, he was director - new business
      development.  Prior to that, Mr. Galante served as general manager of
      Chattem Canada, our Canadian subsidiary, from June 1990 to May 1993 and as
      director of marketing for many of our domestic brands from 1980 until
      1990.




Robert
      B.
      Long.  Mr. Long became our vice president-finance in July
      2007.  Previously, he served as our Chief Accounting Officer since
      joining the Company in April 2006.  Prior to joining us, Mr. Long was
      Chief Financial Officer of Charleston Hosiery, Inc. and served as a senior
      audit
      manager with Ernst & Young LLP from 2003 to 2005.




B.
      Derrill
      Pitts.  Mr. Pitts joined us in 1961 and since that time has
      served us in all manufacturing operation disciplines.  He was promoted
      to vice president-operations in 1984.




J.
      Blair
      Ramey.  Mr. Ramey became our vice president-marketing in
      November 2007.  Mr. Ramey joined us in 1998 and previously served as a
      marketing manager, a marketing director, and since April 2006 as our vice
      president-brand management and media.  Prior to joining the Company,
      he held marketing positions at Nabisco, Inc. and Bryan Foods.




John
      L.
      Stroud.  Mr. Stroud became our vice president-marketing in
      November 2007.  Previously, he served as our vice president-brand
      management and category manager since joining the Company in August
      2005.  Prior to joining us, he served in various capacities, including
      Vice President, Marketing, R&D and Quality, at Brach’s Confections, Inc., a
      manufacturer of confections and fruit snacks.




Charles
      M.
      Stafford.  Mr. Stafford became our vice president-sales in June
      1994.  Previously, he served as our director of field sales and zone
      sales manager.  Prior to joining us in 1983, Mr. Stafford held sales
      management positions with Johnson & Johnson, a pharmaceutical company, and
      Schering Corporation (now Schering–Plough Corporation), a research-based
      pharmaceutical company.




Joseph
      J.
      Czerwinski.  Mr. Czerwinski became our vice president-product
      development in July 2007.  Since joining the company in 2002, he has
      served as the Company’s Director of Product Development.




Theodore
      K. Whitfield,
      Jr.  Mr. Whitfield became our vice president, general counsel
      and secretary in June 2004.  Prior to joining us, Mr. Whitfield was a
      member with the law firm of Miller & Martin PLLC, from 1999 to
      2004.




(c)           
      Compliance with
      Section 16(a) of the Exchange Act




The
      information found in our 2008 Proxy Statement under the heading “Section 16(a)
      Beneficial Ownership Reporting Compliance” is hereby incorporated by
      reference.




(d)           
      Audit Committee;
      Audit
      Committee Financial Expert




The
      information found in our 2008 Proxy Statement regarding the identity of the
      audit committee members and the audit committee financial expert under the
      heading “Audit Committee Report – Identification of Members and Functions of
      Committee” is hereby incorporated by reference.




(e)           
      Code of
      Ethics




We
      have
      adopted a code of business conduct and ethics that applies to our directors,
      officers and employees, including our principal executive officer, principal
      financial officer, principal accounting officer, controller or persons
      performing similar functions.  A copy of this code of business conduct
      and ethics is posted on the Company’s website at www.chattem.com.  In
      the event waivers are granted under the code of business conduct and ethics,
      such waivers will be posted on our website for one year from the date the waiver
      is granted.




-
          88
          -


Item
      11.Executive
      Compensation




The
      information found in our 2008 Proxy Statement under the heading “Executive
      Compensation and Other Information” is hereby incorporated by
      reference.




Item
      12.Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters




The
      information found in our 2008 Proxy Statement under the headings “Executive
      Compensation and Other Information – Equity Compensation Plan Information” and
“Ownership of Common Stock” is hereby incorporated by reference.




Item
      13.Certain
      Relationships, Related Transactions and Director
      Independence




The
      information found in our 2008 Proxy Statement under the heading “Executive
      Compensation and Other Information” is hereby incorporated by
      reference.




Item
      14.Principal
      Accountant Fees and Services




The
      information found in our 2008 Proxy Statement under the headings “Corporate
      Governance - Audit Committee Pre-Approval of Services by the Independent
      Auditor” and “Corporate Governance - Audit and Non-Audit Fees” is hereby
      incorporated by reference.




PART
      IV




Item
      15.Exhibits
      and
      Financial Statement Schedules




(a)           
      1.           
Consolidated Financial Statements




The
      following consolidated financial statements of Chattem, Inc. and Subsidiaries
      are set forth in Item 8 hereof:




Report
      of
      Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets as of November 30, 2007 and 2006


Consolidated
      Statements of Income for the Years Ended November 30, 2007, 2006 and
      2005


Consolidated
      Statements of Shareholders’ Equity for the Years Ended November 30, 2007, 2006
      and 2005


Consolidated
      Statements of Cash Flows for the Years Ended November 30, 2007, 2006 and
      2005


Notes
      to
      Consolidated Financial Statements


Report
      of
      Independent Registered Public Accounting Firm on Internal Control over Financial
      Reporting




2.           
      The following financial statement schedule is filed as Exhibit 99.1 to this
      report:




Schedule
      II - Valuation and Qualifying Accounts




All
      other
      schedules for which provision is made in the applicable accounting regulation
      of
      the Securities and Exchange Commission are not required under the related
      instructions or are inapplicable and therefore have been omitted.




3.           
      The following documents are filed or incorporated by reference as exhibits
      to
      this report:




Exhibit
              Number
            Description
                of
                Exhibit
            References3.1
            Restated
                Charter of Chattem, Inc., as  amended
            (4),
                (5), (11), and (20)3.2
            Amended
                and Restated By-Laws of Chattem, Inc.
            (1),
                (6), (26) and (36)




-
          89
          -


Exhibit
              Number
            Description
                of
                Exhibit
            References


4.1
            Rights
                Agreement dated January 27, 2000   between Chattem, Inc.
                and SunTrust Bank,  Atlanta, N.A.
            (2)4.2
            Indenture
                dated as of February 26, 2004 among  Chattem, Inc., its domestic
                subsidiaries and  SouthTrust Bank, as trustee, relating to the
                 Floating Rate Senior Notes due 2010
            (3)4.3
            Indenture
                dated as of February 26, 2004 among  Chattem, Inc., its domestic
                subsidiaries and  SouthTrust Bank, as trustee, relating to the 7%
                 Senior Subordinated Notes due 2014
            (3)4.4
            First
                Amendment to and Supplemental Indenture  dated July 25, 2006 among
                Chattem, Inc., its  domestic subsidiaries and U.S. Bank, National
                 Association, as successor trustee, relating to the  7% Senior
                Subordinated Notes due 2014
            (28)4.5
            Indenture
                dated as of November 22, 2006  between Chattem, Inc. and U.S. Bank,
                National  Association, as trustee, relating to 2%  Convertible
                Senior Notes due 2013
            (31)4.6
            Registration
                Rights Agreement dated November  22, 2006 among Chattem, Inc. and the
                 purchasers of the 2% Convertible Senior Notes  due
                2013
            (31)4.7
            Indenture
                dated as of April 11, 2007 between Chattem, Inc., and U.S. Bank,
                National
                Association, as trustee, relating to 1.625% Convertible Senior Notes
                due
                2014
            (35)4.8
            Registration
                Rights Agreement dated April 11, 2007 between Chattem, Inc., and
                Merrill
                Lynch, Pierce, Fenner & Smith Incorporated
            (35)10.1
            Lease
                Agreements as amended, dated  February 1, 1996 between
                Tammy  Development Company and Chattem,  Inc. for
                warehouse space at 3100  Williams Street, Chattanooga,
                Tennessee
            (6)
                and (7)10.2
            First
                Amended and Restated Master  Trademark License Agreement
                between  Signal Investment & Management Co.  and
                Chattem, Inc., effective  June 30, 1992
            (8)10.3
            Commercial
                Lease dated April 1, 1998  between Chattem, Inc., lessee, and
                Kenco Group, Inc., lessor, for warehouse space  located at 4309
                Distribution Avenue,  Chattanooga, Tennessee
            (9)10.4
            Purchase
                and Sale Agreement dated November 16, 1998 by and among Thompson
                 Medical Company, Inc.,  Chattem, Inc. and  Signal
                Investment &  Management Co. for  certain
                products
            (10)10.5*
            Chattem,
                Inc. Non-Statutory Stock  Option Plan-1998
            (8)10.6*
            1999
                Stock Plan for Non-Employee Directors
            (27)10.7*
            Chattem,
                Inc. Non-Statutory Stock Option  Plan –  2000
            (11)




-
          90
          -


Exhibit
              Number
            Description
                of
                Exhibit
            References


10.8*
            Chattem,
                Inc. Stock Incentive Plan – 2003
            (15)10.9*
            Chattem,
                Inc. Stock Incentive Plan – 2005
            (21)10.10*
            Form
                of Stock Option Grant Agreement under  Chattem, Inc.  Stock
                Incentive Plan – 2005
            (21)10.11*
            Form
                of Restricted Stock Agreement under  Chattem, Inc. Stock Incentive
                Plan – 2005
            (21)10.12*
            Form
                of Amendment to Grant Agreement under  2005 Stock Incentive Plan
                pertaining only to officers
            (24)10.13*
            Form
                of Amendment to Grant Agreement under  2005 Stock Incentive Plan
                pertaining to all  optionees other than officers
            (24)10.14*
            Form
                of Employment Agreement -Zan
                Guerry
            (12)10.15*
            Form
                of Amended and Restated Severance Agreements -
              Zan
                Guerry
            (12)10.16*
            Form
                of Amended and Restated Non-Competition and Severance
                Agreements-
              Andrea
                M. Crouch
              Ron
                Galante
              Richard
                W. Kornhauser
              B.
                Derrill Pitts
              Charles
                M. Stafford
            (12)10.17*
            Non-Competition
                and Severance Agreement dated June 1, 2004 by and between
                Chattem, Inc. and Theodore K. Whitfield, Jr.
            (19)10.18*
            Non-Competition
                and Severance Agreement dated October 28, 2005 by and
                between Chattem, Inc. and Robert E. Bosworth
            (23)10.19*
            Form
                of Restricted Stock Agreements –
              Zan
                Guerry
            (13)10.20*
            Separation
                Agreement dated August 24, 2005  between Chattem, Inc. and A.
                Alexander  Taylor II
            (26)10.21
            Asset
                Purchase Agreement dated March 5,  2002  by and between Abbott
                Laboratories and  Chattem, Inc. for the Selsun Blue product
                line
            (14)10.22
            Asset
                Purchase and Sale Agreement dated  November 30, 2005 by and between
                Chattem,  Inc., Signal Investment & Management Co., The
                 Mentholatum Company, Inc. and the  Mentholatum Company of
                Canada Ltd.
            (25)




-
          91
          -


Exhibit
              Number
            Description
                of
                Exhibit
            References


10.23
            Asset
                Purchase Agreement dated as of October 5, 2006, among Johnson &
                Johnson, Pfizer, Inc. and Chattem, Inc.
            (29)10.24
            Letter
                Agreement dated November 16, 2006 among Chattem, Inc., Merrill Lynch
                International and Merrill Lynch, Pierce, Ferner & Smith Incorporated
                regarding confirmation of OTC Convertible Note Hedge
            (31)10.25
            Letter
                Agreement dated November 16, 2006 among Chattem, Inc., Merrill Lynch
                International and Merrill Lynch, Pierce, Ferner & Smith Incorporated
                regarding confirmation of OTC Warrant Transaction
            (31)10.26
            Securities
                Purchase Agreement dated November 16, 2006 among Chattem, Inc. and
                the
                purchasers of the 2% Convertible Senior Notes due 2013
            (30)10.27
            Purchase
                Agreement dated April 4, 2007 among Chattem, Inc., and the initial
                purchasers of the 1.625% Convertible Senior Notes due 2014
            (34)10.28
            Letter
                Agreement dated April 10, 2007 among Chattem, Inc., Merrill Lynch
                International and Merrill Lynch, Pierce, Fenner & Smith Incorporated
                regarding confirmation of OTC Convertible Note Hedge
            (35)10.29
            Letter
                Agreement dated April 10, 2007 among Chattem, Inc., Merrill Lynch
                Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated
                regarding confirmation of the OTC Warrant Transactions
            (35)10.30
            Credit
                Agreement dated as of February 26, 2004  among Chattem, Inc., its
                domestic subsidiaries,  identified lenders and Bank of America, N.A.,
                as  agent
            (3)10.31
            New
                Commitment Agreement dated March 9,  2004 between Chattem, Inc. and
                Bank of  America, N.A., as administrative agent
            (17)10.32
            First
                Amendment to Credit Agreement dated as  of December 22, 2004 among
                Chattem, Inc., its  domestic subsidiaries, identified lenders and
                 Bank of America, N.A., as agent
            (22)10.33
            Waiver
                and Second Amendment to Credit Agreement dated as of February 25,
                2005
                among Chattem, Inc., its domestic subsidiaries, identified lenders
                and
                Bank of America, N.A., as  agent
            (22)10.34
            Third
                Amendment to Credit Agreement dated as of November 29, 2005 among
                Chattem,
                Inc., its domestic subsidiaries, identified lenders and  Bank of
                America, N.A., as agent
            (24)10.35
            Fourth
                Amendment to Credit Agreement dated as of November 16, 2006 among
                Chattem,
                Inc., its domestic subsidiaries, identified lenders and Bank of America,
                N.A., as agent
            (30)10.36
            Fifth
                Amendment to Credit Agreement dated December 22, 2006 among Chattem,
                Inc.,
                its domestic subsidiaries, identified lenders and Bank of America,
                N.A.,
                as agent
            (32)10.37
            Sixth
                Amendment to Credit Agreement dated April 3, 2007 among Chattem,
                Inc., its
                domestic subsidiaries, identified lenders and Bank of America, N.A.,
                as
                agent
            (33)




-
          92
          -


Exhibit
              Number
            Description
                of
                Exhibit
            References


10.38
            Rate
                Cap Transaction Agreement dated March  8, 2004 between Chattem, Inc.
                and JP Morgan  Chase Bank
            (17)10.39
            First
                Amendment to the Second Amended and  Restated Master Trademark
                License   Agreement between Signal Investment &
                 Management Co. and Chattem, Inc. effective  May 31,
                2003
            (16)10.40
            First
                Amendment to Master Trademark License  Agreement between Signal
                Investment &  Management Co. and SunDex, LLC, effective  May
                31, 2003
            (16)10.41
            Memorandum
                of Understanding dated  December 19, 2003 with Plaintiffs’ Steering
                 Committee in In re: Phenylpropanalomine (PPA)  Products
                Liability Litigation, MDL 1407, pending  before the United States
                District Court for the  Western District of
                Washington
            (15)10.42
            Class
                Action Settlement Agreement dated as of  April 13, 2004 between
                Chattem, Inc. and Class  Counsel on behalf of Class Representatives
                In  re: Phenylpropanolamine (PPA) Products  Liability
                Litigation
            (17)10.43
            Initial
                Settlement Trust Agreement dated April  12, 2004 between Chattem,
                Inc. and Amsouth  Bank
            (17)10.44
            Final
                Settlement Trust Agreement between  Chattem, Inc. and AmSouth Bank
                dated March  16, 2005
            (22)10.45
            Settlement
                Agreement dated April 26, 2004  between Chattem, Inc. and General
                Star  Indemnity Company
            (17)10.46
            Memorandum
                of Understanding dated  December 13, 2003 between and among
                 Chattem, Inc. and Kemper Indemnity Insurance
                 Company
            (17)10.47
            Settlement
                Agreement dated December 30,  2003 between Chattem, Inc. and Admiral
                 Insurance Company
            (17)10.48
            Settlement
                Agreement dated July 14, 2004  between Chattem, Inc. and Sidmak
                 Laboratories
            (18)10.49
            Dexatrim
                Case Scoring
                System and Matrix for  the Chattem Dexatrim Class
                Action
                Settlement
            (18)10.50
            Settlement
                and Coverage-In-Place Agreement  between Interstate Fire &
                Casualty Company  and Chattem, Inc. effective March 18,
                2005
            (22)10.51
            Settlement
                Agreement dated as of June 30,  2005 by and between Chattem, Inc. and
                The  DELACO Company
            (21)10.52*
            Retirement
                Agreement effective January 31, 2007 between Chattem, Inc. and Donald
                K.
                Riker, Ph.D.10.53*
            Separation
                Agreement effective November 16, 2007 between Chattem, Inc. and Richard
                W.
                Kornhauser




-
          93
          -


Exhibit
              Number
            Description
                of
                Exhibit
            References


10.54*
            Summary
                Description of Incentive  Compensation Plan21
            Subsidiaries
                of the Company23.1
            Consent
                of Independent Registered Public  Accounting Firm31.1
            Certification
                required by Rule 13a-14(a) under  the Securities Exchange
                Act31.2
            Certification
                required by Rule 13a-14(a) under  the Securities Exchange
                Act32
            Certification
                required by Rule 13a-14(b) under  the Securities Exchange Act of 1934
                and 18  U.S.C. Section 135099.1
            Schedule
                II – Valuation and Qualifying Accounts




*This
      item is a management contract or compensatory plan or arrangement required
      to be
      filed as an exhibit to this Form 10-K pursuant to Item 15(b) of this
      report.




References:




Previously
      filed as an exhibit to and incorporated by reference from the indicated report
      filed with the Securities and Exchange Commission:




(1)           
      Form 8-K filed February 1, 2000.




(2)           
      Form 8-A filed February 1, 2000.




(3)           
      Form S-4 filed March 22, 2004.




(4)           
      Form S-8 filed June 2, 1999.




(5)           
      Form 10-K for the year ended November 30, 1992.




(6)           
      Form 10-K for the year ended November 30, 1995.




(7)           
      Form 10-K for the year ended November 30, 1996.




(8)           
      Form 10-K for the year ended November 30, 1997.




(9)           
      Form 10-K for the year ended November 30, 1998.




(10)           
      Form 8-K filed December 28, 1998.




-
          94
          -


(11)           
      Form 10-K for the year ended November 30, 1999.




(12)           
      Form 10-K for the year ended November 30, 2000.




(13)           
      Form 10-K for the year ended November 30, 2001.




(14)           
      Form 8-K filed April 10, 2002, as amended.




(15)           
      Form 10-K for the year ended November 30, 2003.




(16)           
      Form 10-Q filed for the quarter ended May 31, 2003.




(17)           
      Form 10-Q filed for the quarter ended May 31, 2004.




(18)           
      Form 10-Q filed for the quarter ended August 31, 2004.




(19)           
      Form 10-K for the year ended November 30, 2004.




(20)           
      Schedule 14A filed March 4, 2005.




(21)           
      Form 10-Q filed for the quarter ended May 31, 2005.




(22)           
      Form 10-Q filed for the quarter ended February 28, 2005.




(23)           
      Form 8-K filed November 3, 2005.




(24)           
      Form 8-K filed December 2, 2005.




(25)           
      Form 8-K filed December 5, 2005.




(26)           
      Form 8-K/A filed August 31, 2005.




(27)           
      Schedule 14A filed March 8, 1999.




(28)           
      Form 8-K filed July 19, 2006, as supplemented by Form 8-K filed July 26,
      2006.




(29)           
      Form 8-K filed November 15, 2006.




(30)           
      Form 8-K filed November 22, 2006.




(31)           
      Form 8-K filed November 29, 2006.




(32)           
      Form 8-K filed December 28, 2006.




(33)           
        Form 8-K filed April 4, 2007.
  (34)           
          Form 8-K filed April 11, 2007.
  (35)           
            Form 8-K filed April 17, 2007.
  (36)           
              Form 8-K filed November 13, 2007.




-
          95
          -


SIGNATURES




Pursuant
      to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
      of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




Dated:                                
      January 29,
      2008




CHATTEM,
                INC.By:
              /s/ Zan
                GuerryZan
                GuerryChairman
                and Chief Executive Officer


By:
                /s/ Robert
                  B. LongRobert
                  B. LongVice
                  President, Finance




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Report has
      been
      signed below by the following persons on behalf of the Registrant in the
      capacities and on the dates indicated:




Signature
            Title
            Date/s/
                Zan Guerry
              Zan
                Guerry
            Chairman
                of the Board and Director
              (Chief
                Executive Officer)
            1-29-08/s/
                Robert E. Bosworth
              Robert
                E. Bosworth
            President
                and Director
              (Chief
                Operating Officer)
            1-29-08/s/
                Samuel E. Allen
              Samuel
                E. Allen
            Director
            1-29-08/s/
                Ruth W. Brinkley
              Ruth
                W. Brinkley
            Director
            1-29-08/s/
                Gary D. Chazen
              Gary
                D. Chazen
            Director
            1-29-08/s/
                Bill W. Stacy
              Bill
                W. Stacy
            Director
            1-29-08/s/
                Philip H. Sanford
              Philip
                H. Sanford
            Director
            1-29-08




-
          96
          -


CHATTEM,
      INC. AND
      SUBSIDIARIES




EXHIBIT
      INDEX




EXHIBIT




NUMBER                                
      DESCRIPTION OF
      EXHIBIT




10.52*
            Retirement
                Agreement effective January 31, 2007 between Chattem, Inc. and Donald
                K.
                Riker, Ph. D.




10.53*
            Separation
                Agreement effective November 16, 2007 between Chattem, Inc. and Richard
                W.
                Kornhauser




10.54*
            Summary
                Description of Incentive Compensation
                Plan




21
            Subsidiaries
                of the Company




23.1
            Consent
                of Independent Registered Public Accounting
                Firm




31.1
            Certification
                required by Rule 13a-14(a) under the Securities Exchange
                Act




31.2
            Certification
                required by Rule 13a-14(a) under the Securities Exchange
                Act




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




99.1
            Schedule
                II – Valuation and Qualifying
                Accounts




-
          97
          -