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                                  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, 2004

                          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:


                                                     NAME OF EACH EXCHANGE ON
    TITLE OF EACH CLASS                                  WHICH REGISTERED
    -------------------                                  ----------------
           NONE                                                NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         COMMON STOCK, WITHOUT PAR VALUE

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

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

         DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K
IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED IN THE DEFINITIVE PROXY
STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K.

         AS OF MAY 31, 2004, THE AGGREGATE MARKET VALUE OF VOTING SHARES HELD BY
NON-AFFILIATES WAS $346,933,084. FOR PURPOSES OF THIS COMPUTATION, ALL EXECUTIVE
OFFICERS, DIRECTORS AND FIVE PERCENT OR MORE BENEFICIAL OWNERS OF THE COMMON
STOCK OF THE REGISTRANT HAVE BEEN DEEMED TO BE AFFILIATES OF THE REGISTRANT.
SUCH DETERMINATION SHALL NOT BE DEEMED TO BE AN ADMISSION THAT SUCH OFFICERS,
DIRECTORS OR FIVE PERCENT OR MORE OWNERS ARE IN FACT AFFILIATES OF THE
REGISTRANT. AS OF FEBRUARY 7, 2005, 19,835,416 SHARES OF COMMON STOCK WERE
OUTSTANDING.

                      DOCUMENTS INCORPORATED BY REFERENCE:
         PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT EXPECTED TO BE
DATED MARCH 4, 2005 RELATING TO THE REGISTRANT'S 2005 ANNUAL MEETING OF
SHAREHOLDERS (THE "2005 PROXY STATEMENT") ARE INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10-K.
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                                     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, 2002, November
30, 2003 and November 30, 2004 are referred to as fiscal 2002, fiscal 2003 and
fiscal 2004, respectively, and our fiscal year ending on November 30, 2005 is
referred to as fiscal 2005. Also in this Form 10-K, all share amounts reflect
the two-for-one split of our common stock on November 29, 2002. Brand names that
are capitalized in this Form 10-K refer to trademarks that we own or license.

GENERAL

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

         o   Topical analgesics such as ICY HOT and ASPERCREME;

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

         o   SELSUN BLUE medicated dandruff shampoos and conditioner;

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

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

         Our products target niche markets that are often outside the core
product areas of larger companies where we believe we can achieve and sustain
significant market penetration through strong advertising and promotion support.
Many of our products are among the U.S. market leaders in their respective
categories. For example, our portfolio of topical analgesic brands and our GOLD
BOND medicated body powders have the leading U.S. market share in these
categories. We support our brands through extensive and cost-effective
advertising and promotion, the expenditures for which represented approximately
29% of our total revenues in fiscal 2004. 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 developing
product line extensions, increasing market penetration of our existing products
and acquiring brands. In March 2002, we acquired the SELSUN BLUE line of
medicated dandruff shampoos, expanding our brand portfolio into another
attractive niche category. We will continue to seek opportunities to acquire
attractive brands in niche markets such as SELSUN BLUE. We intend to drive
growth through strong marketing and promotional programs, new product
development, acquisitions of new brands, development of strategic marketing
alliances and expansion of our international business.

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 23 brands in a variety of
different product categories, including topical analgesics, medicated dandruff
shampoos and conditioner, skin care products, toiletries and dietary
supplements. Our products are marketed under well-recognized brand names, such
as our portfolio of topical analgesic brands ICY HOT, ASPERCREME, FLEXALL,
SPORTSCREME, CAPZASIN and ARTHRITIS HOT, as well as GOLD BOND, SELSUN BLUE,
PHISODERM, DEXATRIM and GARLIQUE. Our presence in diverse product categories
allows us to reduce our exposure to changing consumer demand or weakness in any
single category.

         SIGNIFICANT PRESENCE IN NICHE MARKETS. We acquire and develop brands
that compete in 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 niche markets that are frequently outside the
core product areas of larger consumer products and

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pharmaceutical companies. Our focus on niche markets provides us with the
opportunity to develop strong brand equity, identify and respond to consumer
trends in these markets and leverage our strong selling and distribution
capabilities.

         HIGH MARGINS AND EFFICIENT OPERATING STRUCTURE. In each of the past
three fiscal years, our gross margins have exceeded 70%. We are able to achieve
these 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 tightly control our
expenses, which strengthens our operating margins. Our high margins and
resulting strong cash flow allow us to weather temporary fluctuations in our
product markets that could otherwise more adversely affect our business.

         PROVEN ADVERTISING AND PROMOTION STRATEGY. We aggressively seek to
build brand awareness and usage of our larger brands through extensive and
cost-effective advertising strategies that emphasize the competitive strengths
of our products. We rely principally on television and radio advertising and to
a lesser extent 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 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 29% of our
total revenues in fiscal 2004. 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., Walgreen
Co. and The Kroger Co. In fiscal 2004, sales to our top ten customers
constituted approximately 68% of our total sales, which allows us to target our
selling efforts to our key customers and tailor specific programs to meet their
needs. Through targeted sales and by utilizing our established network,
including our approximately 55 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
base brands while obtaining an increased market presence through product line
extensions, which is demonstrated by our $3.1 million investment in product
development in fiscal 2004. In fiscal 2003, we completed a new 10,000 square
foot research and development facility and expanded our product development
staff. 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 successful product line extensions include GOLD
BOND ULTIMATE Healing Skin Therapy Lotion and the ICY HOT Medicated Sleeve.

         ENHANCED FINANCIAL POSITION. We have strengthened our balance sheet as
a significant portion of our cash flows in fiscal 2004, 2003 and 2002 have been
used to reduce our debt. For example, since the acquisition of SELSUN BLUE in
March 2002, we have paid down approximately $49.5 million in debt as of November
30, 2004. In addition, we completed a debt refinancing transaction in February
2004 that generated a reduction of interest expense of approximately $5.5
million in fiscal 2004. Our total debt outstanding as of November 30, 2004 was
$200.0 million. We also believe that our financial risk profile has been
substantially reduced due to the successful integration of our acquisition of
SELSUN BLUE and strong positive cash flow.

BUSINESS STRATEGY

         Our strategy to achieve future growth is to generate new sales through
strong marketing and promotional programs, new product development, acquisitions
of new brands, development of strategic marketing alliances and expansion of our
international business.

         BRAND MANAGEMENT AND GROWTH. We will 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 the expansion of our product development
staff and our completed construction of a new research and product development
facility. 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 these under-performing brands and redeploy the resulting cash
assets. For example, in fiscal 2000, we sold the Ban(R) (a registered trademark
of Kao Corporation) product line of antiperspirants and deodorants in response
to major shifts in the competitive environment in this product category and the
resulting prospect of declining sales.

         STRATEGIC ACQUISITIONS AND MARKETING ALLIANCES. 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

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distribution network and 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. We will
continue to seek opportunities to acquire attractive brands in niche markets.
Additionally, we intend to seek alliances that leverage complementary strengths.

         EXPANSION OF INTERNATIONAL BUSINESS. In fiscal 2004, our international
revenues were $24.2 million, or approximately 9% of total revenues. We believe
that our acquisition of SELSUN BLUE, which is marketed internationally as
SELSUN, and our hiring of experienced international personnel may allow us to
expand our international presence. We plan to focus our efforts on expanding
SELSUN'S international presence in existing key markets, such as Canada, Mexico,
Brazil, the United Kingdom ("U.K.") and Australia, as well as new markets in
Central Europe and the Middle East. We also intend to continue to leverage
SELSUN's international marketing and distribution network to attempt to launch
certain of our other brands in countries where they are not currently sold.

DEVELOPMENTS DURING FISCAL 2004

         Fiscal 2004 was highlighted by the development and marketing of new
product line extensions; the refinancing of our indebtedness; the class action
settlement of all claims relating to DEXATRIM containing phenylpropanolamine
("PPA"); and the continued development of our international business,
principally our SELSUN product line.

         In fiscal 2004, we introduced the following product line extensions:
the ICY HOT Medicated Sleeve, DEXATRIM All in One bar, SELSUN BLUE Conditioner,
PAMPRIN All Day, BULLFROG SuperBlock Spray Lotion, PHISODERM Clear Confidence
Self Heating Daily Scrub and Herbal Astringent and GOLD BOND Therapeutic Foot
Cream.

         On February 26, 2004, we issued and sold $75.0 million of Floating Rate
Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125.0 million of
7.0% Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated
Notes"), the proceeds of which were used to purchase all of our outstanding
8.875% senior subordinated notes and repay the outstanding debt under our prior
credit facility.

         Also, on February 26, 2004, we entered into a new Senior Secured
Revolving Credit Facility (the "Revolving Credit Facility") with a syndicate of
commercial banks led by Bank of America, N.A., as agent, that enables us to
borrow up to a total of $50.0 million under the Revolving Credit Facility.

         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, both federal and
state. 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.

         At the end of fiscal 2004, we had completed the transition of SELSUN'S
international manufacturing and marketing operations from its prior owner,
Abbott Laboratories ("Abbott"), to us in approximately 80 foreign countries,
including markets whose combined sales represent approximately 94% of SELSUN
international sales. Abbott will continue to manufacture SELSUN for us for the
European, Middle East and certain Latin American markets for an additional
period ending July 2005 and will also serve as our distributor for SELSUN in
certain other foreign countries.

RECENT DEVELOPMENTS

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

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PRODUCTS

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


CATEGORY AND BRANDS                  PRODUCT DESCRIPTION
-------------------                  -------------------

TOPICAL ANALGESICS

ICY HOT                              Dual action muscular and arthritis pain
                                     reliever
ASPERCREME                           Odor-free arthritis pain reliever
FLEXALL                              Aloe-vera based pain reliever
CAPZASIN                             Deep penetrating, odor-free arthritis pain
                                     reliever
SPORTSCREME                          Odor-free muscular pain reliever
ARTHRITIS HOT                        Value-priced arthritis pain reliever

MEDICATED SKIN CARE PRODUCTS

GOLD BOND                            Medicated powder, cream, lotion, first aid
                                     and foot care products
PHISODERM                            Medicated acne treatment products and skin
                                     cleansers

MEDICATED DANDRUFF SHAMPOOS
SELSUN BLUE                          Medicated dandruff shampoos and conditioner

DIETARY SUPPLEMENTS

DEXATRIM                             Diet pills and bars
GARLIQUE                             Cholesterol health supplement
MELATONEX                            Sleep aid
NEW PHASE                            Menopausal supplement
REJUVEX                              Menopausal supplement
OMNIGEST EZ                          Digestive aid

OTHER OTC AND TOILETRY PRODUCTS

    INTERNAL ANALGESICS

    PAMPRIN                          Menstrual pain reliever
    PREMSYN PMS                      Premenstrual pain reliever

    SEASONAL

    BULLFROG                         Sunscreens and sunblocks
    SUN-IN                           Spray-on hair lightener
    ULTRASWIM                        Chlorine-removing shampoo

    ORAL CARE

    HERPECIN-L                       Cold sore lip balm
    BENZODENT                        Denture pain relief cream

    OTHER

    MUDD                             Facial deep cleanser

TOPICAL ANALGESICS

         Our topical analgesic portfolio experienced significant growth in
fiscal 2004 led by six distinctly positioned brands and the successful ICY HOT
Sleeve introduction. Our flagship brand, ICY HOT, achieved category leadership
behind the continued strength of our ICY HOT Patch business and the incremental
volume generated by the ICY HOT Sleeve. Developed by us with a patent pending,
the ICY HOT Sleeve is designed to provide flexible, joint hugging pain relief to
the knee, elbow, wrist and ankle. The ICY HOT Sleeve received heavy media
support and advertising featuring NBA super-star Shaquille O'Neal.

         ASPERCREME provides odor-free pain relief for sufferers of arthritis
and other joint and muscle pain. In the first quarter of fiscal 2005, we will
launch a maximum strength, odor-free patch under our ASPERCREME brand. The
ASPERCREME Back and Body Patch will provide arthritis sufferers an odor-free
alternative in the growing patch segment. CAPZASIN is an arthritis pain reliever
that contains capsaicin, the active ingredient that doctors recommend most for
arthritis sufferers. SPORTSCREME is targeted at serious athletes as well as
"weekend warriors". FLEXALL is marketed toward those who seek an aloe-vera based
pain reliever for

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conditions such as chronic back pain or muscle strain. ARTHRITIS HOT rounds out
the portfolio and is positioned against private label products at a value price.

         We support our topical analgesic brands with extensive national
television and radio advertising as well as targeted consumer promotions.

MEDICATED SKIN CARE PRODUCTS

         The GOLD BOND brand competes in numerous product categories with
specially formulated products for both adults and babies including body powder,
foot care, first aid and therapeutic hand and body lotions. 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.

         In the third quarter of fiscal 2003, we launched GOLD BOND ULTIMATE
Healing Skin Therapy Lotion in a 5.5 oz. tube. In the third quarter of fiscal
2004, we added a 14 oz. pump to the product line, which enjoyed broad acceptance
by retailers given the success of the original 5.5 oz. size. 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 & E. The
GOLD BOND ULTIMATE line will expand 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 seeks to provide freshness, odor protection and moisture control and
features the signature ULTIMATE fragrance. During the first quarter of fiscal
2004, we also expanded our presence in the foot care category with the
successful launch of GOLD BOND Therapeutic Foot Cream, an intensive moisturizing
treatment that helps heal dry, rough and cracked heels and feet.

         The GOLD BOND product line is heavily supported by national television,
print and radio advertising throughout most of the year as well as with proven
consumer promotions such as sampling and coupons to further drive awareness and
trial. We believe GOLD BOND continues to represent a solid opportunity for
growth both through our existing medicated product lines and the introduction of
line extensions under the ULTIMATE line.

         PHISODERM is a facial-care brand with an acne and adult line of
cleansers, scrubs and other differentiated products. The brand has a strong
heritage, but competes in the highly competitive adult facial care and teen acne
categories. In an effort to reverse declining sales over the past two years, in
fiscal 2005, the brand will focus its efforts behind an exciting new line of
products introduced as pH2O by PHISODERM. pH2O by PHISODERM is positioned to
leverage the strong brand heritage of PHISODERM with an updated entry into the
adult facial care category. We will support pH2O with national television, print
advertising and consumer promotions targeted to women aged 20 to 49 years old.

MEDICATED DANDRUFF SHAMPOOS

         SELSUN BLUE'S domestic net sales have increased more than 50% since we
acquired the brand in March 2002. We attribute the resurgence of this 50 year
old medicated shampoo brand to the development and implementation of an
effective advertising approach, expansion of the brand's appeal to a broader
consumer base, increased media and promotional support and expanded
distribution. In total, virtually all aspects of the brand image have been
enhanced since 2002, including the product, packaging, advertising, media and
retail distribution.

         SELSUN BLUE offers four formulations: medicated, with a unique cooling
clean feel; moisturizing, with aloe and moisturizers; 2-in-1, with a patented
conditioning system; and pH balanced for color treated hair. Each formula blends
the active medication (selenium sulfide) with extra hair care properties to
provide alternative formulas for individuals who need a medicated dandruff
shampoo.

         We believe that growth opportunities remain for SELSUN BLUE both
domestically and internationally. We support the SELSUN BLUE line with extensive
national television and radio advertising as well as targeted consumer
promotions.

DIETARY SUPPLEMENTS

         DEXATRIM, acquired in December 1998, is a leading brand in the diet
pill category. We currently offer two versions of DEXATRIM: DEXATRIM Natural, a
drug-free, all natural, dietary supplement available in green tea, caffeine-free
and extra energy versions, and DEXATRIM Results, a nutrition based weight
control product which contains vitamins, minerals and antioxidants. In 2004, we
introduced the DEXATRIM All in One diet bar, which seeks to combine the benefits
of a diet, energy and nutrition bar in one convenient product. The DEXATRIM All
in One bar is available in five flavors: Chocolate Toffee Crunch, White
Chocolate Raspberry, Lemon Bar Crisp, Chocolate Peanut Butter and Oatmeal
Cinnamon Crisp. In 2005, DEXATRIM will launch DEXATRIM

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Max, a diet pill containing Vitamin B Complex, Ginseng, Chromium and EGCG from
Green Tea. DEXATRIM Max will be introduced to consumers through television
advertising and Sunday newspaper coupons.

         We compete in the dietary supplements category with our SUNSOURCE line
of products. We focus the marketing of our SUNSOURCE dietary supplements in two
key areas: cardiovascular and menopausal health. GARLIQUE garlic tablets support
cardiovascular health and are positioned as an odor-free, one-per-day supplement
now available in caplets. NEW PHASE is a menopausal supplement that helps
relieve the common discomforts of menopause, as well as providing support for
strong bones and a healthy heart. In the first quarter of 2005, we will extend
the NEW PHASE franchise with the launch of an extra strength formula that
contains more of the ingredient that helps relieve the common symptoms of
menopause and includes Green Tea for energy. 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

INTERNAL ANALGESICS

         We compete in the menstrual analgesic category with two brands, PAMPRIN
and PREMSYN PMS. PAMPRIN, featuring three distinct formulas, seeks to provide
complete relief of a woman's menstrual symptoms, while PREMSYN PMS has one
formula designed to address specific symptoms of premenstrual syndrome. The
target consumer for our menstrual analgesic business is women aged 18 to 49, and
secondarily teen girls as they first enter the category. For PAMPRIN in 2004, we
initiated a complete brand relaunch, which included streamlining the product
offering, new packaging to improve shelf presence and launching the first new
product line extension in ten years, PAMPRIN All Day. With naproxen sodium as
its active ingredient, PAMPRIN All Day seeks to provide up to 12 hours of relief
from cramps, backache and headache in one caplet. We supported the launch of
PAMPRIN All Day with a network, cable and spot television advertising campaign.
In addition to continued advertising support for PAMPRIN All Day, we will
support PAMPRIN Multi Symptom with television advertising in 2005.

SEASONAL

         The majority of sales of our seasonal brands, BULLFROG, SUN-IN and
ULTRASWIM, typically occur during the first two quarters of the fiscal year.
BULLFROG is a line of high quality, high SPF waterproof sunblocks. We launched
SuperBlock Lotion Spray in 2004 to meet consumer demand for a spray lotion. In
2005, we will launch a complete line of childrens' sunblocks - BULLFROG Kids UV
Defender. All three formulas under the Kids UV Defender umbrella will stay true
to BULLFROG'S waterproof and high SPF heritage. The line will feature durable
gel, fast dry spray and spray lotion formulas. This launch will be supported
with print and radio advertising targeted towards mothers of children age 4 to
12. The base BULLFROG business will be supported with local and national radio
as well as through event sponsorships and targeted sampling programs. SUN-IN, a
hair lightener, is available in two varieties of spray-on and a highlighting gel
and is supported by print advertising in teen magazines, an interactive web site
and promotional prepacks. ULTRASWIM is our niche line of swimmers' shampoos and
conditioner. In addition to promotional prepacks, we support this brand through
print advertising targeted at competitive and fitness swimmers to communicate
that ULTRASWIM removes more chlorine from hair than ordinary shampoos.

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. We support HERPECIN-L with
national television advertising.

OTHER

         Other brands include MUDD, a line of specialty masque products.

INTERNATIONAL BUSINESS

         Our international business, which represented approximately 9% of our
total revenues in fiscal 2004, has been concentrated in Canada, an export market
driven from our operations in the U.K. and in international countries in which
SELSUN is sold.

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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, as well as new markets in Central Europe and the Middle East. We also
intend to leverage SELSUN'S international marketing and distribution network to
launch some of our other brands in countries where they are not currently being
sold including Brazil and Mexico. In certain international markets, we sell
SELSUN through a distributor and receive a royalty based on a percentage of
distributor sales. Abbott, from whom we acquired SELSUN in March 2002, will
continue to manufacture SELSUN for us for the European, Middle East and certain
Latin American markets for a period ending July 2005. Abbott will also continue
to serve as our distributor for SELSUN in certain foreign countries under
separate distribution agreements. We have entered into distributor agreements
with third party distributors for SELSUN in various international markets other
than Canada and the U.K. in which we engage national brokers.

EUROPE

         Our European business is conducted through Chattem Global Consumer
Products Limited ("Chattem Global"), our newly established Irish subsidiary,
located in Limerick, Ireland, and prior to November 1, 2004 Chattem (U.K.)
Limited ("Chattem (U.K.)"), a wholly-owned subsidiary located in Basingstoke,
Hampshire, England. This unit also services distributors in various other
worldwide locations. 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, SUN-IN, MUDD and ULTRASWIM. Cornsilk(R)
is sold by Chattem (U.K.) under a licensing arrangement with the owner of its
registered trademark, Del Laboratories, 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.

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 SELSUN, GOLD BOND, PAMPRIN, SUN-IN,
ULTRASWIM, PHISODERM, ASPERCREME, FLEXALL and DEXATRIM.

UNITED STATES EXPORT

         Our United States export division services various distributors
primarily located in Europe, the Caribbean and Latin America. We distribute
SELSUN, GOLD BOND, DEXATRIM, PHISODERM and certain of our topical analgesic
products into these markets.

MARKETING, SALES AND DISTRIBUTION

ADVERTISING AND PROMOTION

         We aggressively seek to build brand awareness and usage through
extensive and cost effective advertising strategies that emphasize the 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 29% of total revenues in fiscal 2004.

         We will 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 rely principally on television and radio advertising and to a lesser
extent 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 new 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

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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 2004, our ten largest customers represented approximately 68% of
total revenues, and our 20 largest customers represented approximately 81% of
total revenues, which allows us to target our selling efforts to our key
customers and customize programs to meet their needs. Our fiscal 2004 sales to
Wal-Mart Stores, Inc. accounted for approximately 34% of total revenues. No
other customer accounts for more than 10% of our total revenues. Boots, a U.K.
retailer, accounts for more than 10% of international sales. 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 55 people serves all direct buying accounts on an
individual basis. Our internal sales force accounts for more than 95% of
domestic sales. 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 90% 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 people and our
customers to 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. For a transition
period that ended in 2004, Abbott marketed, sold and distributed SELSUN products
for us in certain foreign countries until we satisfied various foreign
regulatory requirements, new distributor arrangements were in place and any
applicable marketing permits were transferred. Abbott will continue to serve as
our distributor for SELSUN in certain foreign countries. 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 currently shipped from a leased warehouse 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 outside 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

         We currently manufacture approximately 60% of the sales volume of our
products at our two Chattanooga, Tennessee, facilities. The balance of our
products are manufactured by third party contract manufacturers including our
GOLD BOND medicated powders, foot swabs and first aid wipes, ICY HOT patches and
sleeves, HERPECIN-L, the PHISODERM CLEAR CONFIDENCE Clear Swab and our dietary
supplements, including DEXATRIM and the DEXATRIM All in One bar. 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 small 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.

         We currently are manufacturing all of our North American SELSUN BLUE
products at our Chattanooga, Tennessee, facilities. Abbott will continue to
manufacture SELSUN for us for the European, Middle East and certain Latin
American markets until July 2005. We have entered into third party manufacturing
agreements to source many of the international markets previously supplied by
Abbott.

         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

                                        9
<PAGE>
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 pamabrom,
pyrilamine maleate and compap, active ingredients used in our PAMPRIN and
PREMSYN 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
PREMSYN PMS products represented approximately 4% of our consolidated total
revenues in fiscal 2004. 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, selenium sulfide 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.

PRODUCT 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 increased emphasis on new product development as evidenced
by the expansion of our product development staff and our completion of a new
10,000 square foot research and product development facility in fiscal 2003. We
currently employ approximately 27 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
$3.1 million in fiscal 2004.

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 OTC pharmaceutical companies such as
Pfizer, Inc. and Johnson & Johnson, consumer products companies such as Procter
& Gamble Co. and dietary supplements companies such as Nature's Bounty, Inc. and
Pharmaton Natural Health Products, many of which have considerably greater
financial and other resources and are not as highly leveraged. 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 except for PHISODERM, which we license from Valmont, Inc.
under a perpetual royalty free license. In fiscal 2004, 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, PHISODERM
and ASPERCREME.

         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 purchase our GOLD BOND Antifungal Foot
Swabs and PHISODERM CLEAR CONFIDENCE Clear Swab, which incorporate a patented
swab delivery system, under a non-exclusive supply agreement with the patent
holder. 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.

                                       10
<PAGE>
GOVERNMENT REGULATION


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

         o    the FDA;

         o    the Federal Trade Commission (the "FTC");

         o    the Drug Enforcement Administration (the "DEA");

         o    the Consumer Product Safety Commission (the "CPSC");

         o    the United States Postal Service;

         o    the Environmental Protection Agency; and

         o    the Occupational Safety and Health Administration.

         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
dietary supplements including vitamins, minerals and herbs, as well as food
additives, OTC and prescription drugs, medical devices and cosmetics. In
addition, the FTC has primary jurisdiction to regulate the advertising of OTC
drugs, dietary supplements, functional toiletries and skin care products.

         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 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, that define categories of
safe and effective OTC drugs. The monographs group drug products 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 and topical acne drug
products. 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 not covered 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.

         All of our OTC drug products are regulated pursuant to the FDA
monograph system. Most 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 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 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, each of which would involve additional
costs and may be prohibitive.

                                       11
<PAGE>
         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 product formulation or labeling claims, unless we obtain
pre-marketing approval from the FDA. Similarly, we may only market the
prescription form of SELSUN dandruff shampoo (SELSUN Lotion, 2.5%) according to
the conditions and terms described in the FDA-approved NDA. In 2004, we launched
PAMPRIN All Day containing the menstrual pain reliever naproxen sodium. The
Perrigo Company 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.

         The FDA regulates the quality of all finished drug products under GMPs.
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 possibly discontinue selling certain products until we, or our
suppliers, comply with these orders. As a result, our business could be
adversely affected.

         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 PREMSYN PMS products. While we
addressed all of the FDA questions in detail, the final monograph for menstrual
drug products, which has not yet been issued, will determine if the FDA
considers pyrilamine maleate safe and effective for menstrual relief products.
If pyrilamine maleate 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. Sales of our PAMPRIN Menstrual Pain Relief and
PREMSYN PMS products represented approximately 4% of our consolidated total
revenues in fiscal 2004. We have been actively monitoring the process and do not
believe that either PAMPRIN Menstrual Pain Relief or PREMSYN 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. We are also aware of the FDA's concern about the
potential toxicity due to concomitant use of OTC and prescription drugs that
contain the ingredient acetaminophen, an ingredient also found in PAMPRIN
Menstrual Pain Relief and PREMSYN PMS. We are participating in an industry-wide
effort to reassure the FDA that the current recommended dosing regimen is safe
and effective and that proper labeling and public education by both OTC and
prescription drug companies are the best policies to abate the FDA's concern.
There can be no assurance as to what action, if any, the FDA may take with
respect to acetaminophen.

         On September 30, 2004, Merck & Co., Inc. withdrew from the market its
selective COX-2 prescription analgesic Vioxx(R) as a result of cardiovascular
adverse events alleged to have occurred after long-term use (up to 3 years) of
Vioxx in older adults. These data have increased regulatory scrutiny of related
non-steroidal anti-inflammatory drugs (NSAIDs) sold on prescription,
particularly other selective COX-2 drugs. Though less likely, infrequent, or
rare, cardiovascular morbidity might also occur after long-term use of
non-selective NSAIDs, such as naproxen sodium, or ibuprofen. Naproxen sodium
(220mg/caplet) is the active ingredient in PAMPRIN All Day. Naproxen sodium
(220mg) was the subject of an FDA approved Rx-to-OTC switch application
sponsored by Procter & Gamble Co. that allows its over-the-counter sale as an
analgesic. This FDA approval attested to its safety and efficacy when used for
less than 10 days in the relief of minor aches and pains at approved doses of
220mg. Naproxen sodium is now widely used as a simple OTC analgesic for pain
relief. PAMPRIN All Day is indicated for the relief of menstrual cramps,
headache and back pain in women of childbearing age who are otherwise healthy.
Pre-menstrual and menstrual discomfort typically lasts five days and thus is
self-limiting. The FDA will conduct a public FDA Advisory Committee meeting in
mid-February 2005 to discuss safety data related to selective COX-2 NSAIDs sold
on prescription. Because naproxen sodium at prescription doses (550mg bid) was
used as a control group in some company-sponsored clinical trials of selective
COX-2s, it is possible that naproxen sodium might be discussed incidentally to
the primary data analysis and interpretation. In the unlikely event that
naproxen sodium at OTC doses was found to have unacceptable risk in less than 10
days of use, we would be required to reformulate PAMPRIN All Day.

         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 and could also reformulate them using ingredients
included in the FDA monograph. Sales of our SPORTSCREME and ASPERCREME products
represented approximately 7% of our consolidated total revenues in fiscal 2004.

         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 effort coordinated by Consumer Healthcare Products Association ("CHPA")
to establish with the FDA a protocol of additional research that will allow the
patches to be marketed under the final monograph even if the final monograph
does not explicitly allow them. The CHPA submission to FDA was made on October
15, 2003. Thereafter, in April 2004, we launched the ICY HOT Sleeve, a flexible,
non-occlusive fabric patch with menthol levels consistent with the OTC
monograph. If additional research is required either as a preliminary to final
FDA monograph approval and/or as a requirement of future individual product
sale, we may need to 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-2006 and perhaps thereafter.
If neither action described above is successful and the final monograph excludes
such products, we will have to file an NDA in order to continue to market the
ICY HOT Patch, ICY HOT Sleeve or similar delivery systems under our other
topical analgesic brands. In such case, we would have to remove the existing
products from the market one year from the effective date of the final
monograph, pending FDA review and approval of an NDA. The preparation of an NDA
would likely take us six to 18

                                       12
<PAGE>
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 patches and ICY HOT
Sleeve products represented approximately 11% of our consolidated total revenues
in fiscal 2004.

         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 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.

         DSHEA provides for specific nutritional labeling requirements for
dietary supplements. DSHEA permits substantiated, truthful and non-misleading
statements of nutritional support to be made in labeling such as 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. The FDA distinguishes between permitted
structure/function claims for dietary supplements that do not require FDA
pre-approval and disease-related claims that require prior FDA approval. A
dietary supplement label must include a disclaimer that the FDA has not
evaluated a particular structure/function claim.

         An article 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 pursuant only 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.

         In the future, manufacturers of dietary supplements may be mandated by
the FDA to comply with post-marketing responsibilities similar to those applied
to OTC drugs. Such regulations may include mandatory adverse event reporting
requirements as part of new GMPs regulations.

         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.

         As discussed above, the FDA has promulgated regulations relating to the
manufacturing process for drugs, which are known as current GMPs. We anticipate
that the FDA will promulgate GMPs, which are specific to dietary supplements and
require at least some of the quality control provisions contained in the GMPs
for drugs, which are more rigorous than the GMPs for foods. We source all of our
dietary supplement products from outside suppliers, including DEXATRIM, DEXATRIM
All in One bars, NEW PHASE, GARLIQUE, MELATONIX, REJUVEX 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 possibly discontinue selling certain products until we, or our
suppliers, comply with these orders. As a result, our business could be
adversely affected.

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<PAGE>
         In 1994, the Nonprescription Drug Manufacturers Association (now CHPA)
initiated a large scale study in conjunction with the Yale University School of
Medicine to investigate a possible association, if any, of stroke in women aged
18 to 49 using PPA, formerly the active ingredient in certain of our DEXATRIM
products (the "Yale Study"). PPA is also used in other OTC medications, which
were also part of the study. In May 2000, the results of the Yale Study were
filed with the FDA. The investigators concluded that the results of the Yale
Study suggest that PPA increases the risk of hemorrhagic stroke. The FDA
indicated at that time that no immediate action was required and scheduled an
FDA advisory panel to meet in October 2000 to discuss the results of this study.

         In October 2000, a Nonprescription Drugs Advisory Committee
commissioned by the FDA to review the safety of PPA, determined that there is an
association between PPA and hemorrhagic stroke and recommended that PPA not be
considered generally recognized as safe for OTC use as a nasal decongestant or
for weight control. In response to a request from the FDA to voluntarily cease
marketing DEXATRIM with PPA, we announced on November 7, 2000 our decision to
immediately cease shipping DEXATRIM with PPA and to accept product returns from
any retailers who decide to discontinue marketing DEXATRIM with PPA. We have
been subject to a number of lawsuits arising from our DEXATRIM with PPA product
most of which are being resolved through the class action settlement of all
DEXATRIM PPA claims described below. See "Legal Proceedings".

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

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

         The FDA 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.

         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. Sales of our BULLFROG
Superblock products represented approximately 1% of our consolidated total
revenues in fiscal 2004.

                                       14
<PAGE>
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
expenditures 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.

LEGAL PROCEEDINGS

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

         On April 13, 2004, we entered into a class action settlement agreement
with representatives of the plaintiffs' settlement class, which provided for a
national class action settlement of all DEXATRIM PPA claims, both federal and
state. On November 12, 2004, Judge Barbara J. Rothstein of the United States
District Court for the Western District of Washington entered a final order and
judgment certifying the class and granting approval of the DEXATRIM PPA
settlement. After the final judgment was entered, two parties who had objected
to the settlement filed appeals challenging and seeking to set aside the final
judgment. We have reached a preliminary agreement with one of these parties
pursuant to which that party's appeal will be dismissed.

         The DEXATRIM PPA settlement includes claims against us involving
alleged injuries by DEXATRIM products containing PPA that were alleged to have
occurred after December 21, 1998, the date we acquired the DEXATRIM brand. In
accordance with the terms of the class action settlement agreement, we
previously published notice of the settlement and details as to the manner in
which claims could be submitted. The deadline for submission of claims was July
7, 2004. A total of 391 claims were submitted prior to the claims deadline. Of
these 391 claims, 173 alleged stroke as an injury and 218 alleged other
non-stroke injuries. These claims will be valued pursuant to the agreed upon
settlement matrix that is designed to evaluate and determine the settlement
value of each claim. A total of 16 claimants elected to opt out of the class
settlement and may continue to pursue claims for damages against us in separate
lawsuits. We have settled two of the opt out claims. In addition, we have
learned that two of the remaining opt out claims have injury dates prior to
December 21, 1998, for which we will seek indemnification from The DELACO
Company ("DELACO"), successor to Thompson Medical Company, Inc., which owned the
DEXATRIM brand prior to December 21, 1998.

         In accordance with the terms of the class action settlement agreement,
$60.9 million has been funded into a settlement trust from our first three
layers of insurance coverage, as described below. In addition, on July 14, 2004,
we entered into a settlement agreement with Sidmak Laboratories, Inc.
("Sidmak"), the manufacturer of DEXATRIM products containing PPA, pursuant to
which Sidmak has agreed to contribute $10.0 million into the settlement trust.
To the extent the amount in the settlement trust is insufficient to fully fund
the settlement, we will be required to make additional contributions to the
settlement trust in the future. As described below, we have entered into a
settlement agreement with Interstate with regard to its $25.0 million of
coverage in excess of the insurance funds available in the settlement trust. We
currently expect to use our cash on hand and proceeds of the Interstate policy
to fund any required additional contributions to the settlement trust. If we are
required to fund significant other liabilities related to the PPA litigation
beyond the settlement trust and outside of our available insurance coverage from
Interstate, either pursuant to the terms of the settlement, as a result of the
opt out cases or otherwise, we will have significantly fewer sources of funds
with which to satisfy such liabilities, and we may be unable to do so.

         We are also named as a defendant in approximately 206 lawsuits relating
to DEXATRIM containing PPA which involve alleged injuries by DEXATRIM products
containing PPA manufactured and sold prior to our acquisition of DEXATRIM on
December 21, 1998. In these lawsuits, we are being defended on the basis of
indemnification obligations assumed by DELACO. On February 12, 2004, DELACO
filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for
the Southern District of New York. Accordingly, it is uncertain whether DELACO
will be able to indemnify us for claims arising from products manufactured and
sold prior to our acquisition of DEXATRIM on December 21, 1998. However, DELACO
is seeking to resolve all DEXATRIM cases with injury dates prior to December 21,
1998 as part of a liquidating Chapter 11 bankruptcy plan. We understand that
DELACO's product liability insurance carriers and other sources are expected to
fund this plan. As part of DELACO's bankruptcy plan, if finally approved, we
expect the bankruptcy court to release us from liability in DEXATRIM cases with
injury dates prior to December 21, 1998, although there can be no assurances in
this regard.

                                       15
<PAGE>
         If DELACO achieves resolution of the pre-December 21, 1998 cases
through its bankruptcy plan, we expect that the administrative process for
DELACO's settlement will be similar to the process in our class action. We have
filed a claim in DELACO's bankruptcy case in order to preserve our claims for
indemnification against DELACO. As part of DELACO's Chapter 11 plan, we expect
that after resolution of creditors' claims, DELACO will seek to liquidate and
distribute all of its assets and will dissolve as a company.

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

         We have reached an agreement with Kemper Indemnity Insurance Company
("Kemper") to settle its lawsuit that sought to rescind our policy for $50.0
million of excess coverage for product liability claims. After giving effect to
the settlement with Kemper, we have available for the claims against us related
to the PPA litigation, through our first three layers of insurance coverage,
approximately $60.9 million of the $77.0 million of product liability coverage
provided by these insurance policies. The $60.9 million of available coverage
consists of $37.5 million of insurance under the Kemper policy and approximately
$23.4 million under policies with two other insurance companies. As indicated
above, this $60.9 million of coverage has been funded into a settlement trust in
accordance with the terms of the class action settlement agreement.

         We have also entered into a term sheet of settlement with Interstate
with regard to Interstate's lawsuit to rescind its $25.0 million of excess
coverage for product liability claims relating to DEXATRIM products containing
PPA. In accordance with the term sheet of settlement agreement, Interstate will
provide coverage of DEXATRIM PPA claims that are covered by its policy after
$78.5 million has been paid toward covered claims. Once the $78.5 million
threshold is met, Interstate will pay 100% of the next $4.0 million of claims
covered by its policy; 75% of the next $8.5 million of such claims; and 50% of
the last $12.5 million of such claims. We are responsible for any claims not
covered by the Interstate policy either because the alleged injury did not occur
before May 31, 2001, or the claim was first made against us after May 31, 2004.
In addition, under the term sheet of settlement, we and Interstate will dismiss
all claims and counterclaims filed against each other, and we will release all
claims against Interstate relating to the excess coverage product liability
insurance.

         During the first nine months of fiscal 2004, we incurred settlement,
legal and administrative costs and expenses associated with the DEXATRIM
litigation totaling $4.5 million. Prior to the fourth quarter, we were unable to
reasonably estimate the amount of liability related to the DEXATRIM litigation,
due to the significant assumptions and uncertainty involved in estimating the
value of cases involved. As a result of the final approval of the DEXATRIM PPA
settlement on November 12, 2004 and the term sheet of settlement reached with
Interstate on December 13, 2004, as of November 30, 2004 we were able to
estimate the probable loss related to the DEXATRIM litigation. Based on the
estimated litigation settlement costs relating to our DEXATRIM products, we
recorded a litigation settlement charge of $11.3 million in the fourth quarter
of fiscal 2004 of which $9.5 million is included in accrued liabilities in our
November 30, 2004 Consolidated Balance Sheet. We currently do not expect to
record any additional charges relative to the settlement of the PPA litigation.

         As of November 30, 2004, we were named as a defendant in four lawsuits
alleging that the plaintiff was injured as a result of the ingestion of DEXATRIM
containing ephedrine. In addition, three individuals who allege injury caused by
DEXATRIM containing ephedrine filed opt out notices in the PPA class action
settlement. We have reached a preliminary settlement with respect to two of
these pending lawsuits and the three opt out claims. Upon finalization of the
settlement agreements, the two settled lawsuits will be dismissed. Each of these
settlements will be funded by insurance coverage provided by our captive
insurance subsidiary.

         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 additional lawsuits being filed against us alleging damages
related to the use or purchase of DEXATRIM containing ephedrine.

                                       16
<PAGE>
         We previously were named in a class action filed in the United States
District Court for the Southern District of New York seeking certification of a
class consisting of New York residents who have purchased DEXATRIM Results or
DEXATRIM Natural since January 2000. The class action lawsuit sought
compensatory and punitive damages arising out of allegedly false advertising in
connection with the sale of DEXATRIM Results and DEXATRIM Natural products. None
of the plaintiffs in this action alleged personal injury as a result of the
ingestion of a DEXATRIM product. On March 29, 2004, a stipulation was submitted
to the court dismissing the case on jurisdictional grounds. Pursuant to the
stipulation, the plaintiffs may re-file the class action in New York state
court. These plaintiffs have not refiled this lawsuit as of February 7, 2005.

         We have been named as a defendant in a putative class action suit filed
in the Superior Court of the State of California for the County of Los Angeles
on February 11, 2004. The lawsuit seeks certification of classes consisting of
residents of the United States, or residents of the State of California, who
have purchased our BULLFROG sun care products during the past four years. The
lawsuit seeks injunctive relief and compensatory damages under the California
Business and Professions Code against us arising out of alleged deceptive,
untrue or misleading advertising, and breach of warranty, in connection with the
manufacturing, labeling, advertising, promotion and sale of BULLFROG products.
The plaintiff has stipulated that the amount in controversy with respect to
plaintiffs' individual claim and each member of the proposed class does not
exceed $75,000. We filed an answer on June 28, 2004 and intend to defend
vigorously the lawsuit.

         We have been named as a defendant in a putative class action suit filed
in the Superior Court of the State of California, County of Los Angeles, on
January 13, 2005. The lawsuit seeks injunctive relief, compensatory damages and
attorney fees against us under the California Business and Professions Code,
arising out of alleged deceptive, untrue or misleading advertising and breach of
express warranty in connection with the manufacturing, labeling, advertising,
promotion and sale of certain DEXATRIM Natural products. The lawsuit seeks
certification of a class consisting of all persons who purchased DEXATRIM
Natural in California during the four year period prior to the filing of the
lawsuit and up to the date of any judgment obtained. The plaintiff has
stipulated that the amount in controversy with respect to plaintiff's individual
claim and each member of the proposed class in the action does not exceed
$75,000. We intend to defend vigorously the 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.

PRODUCT LIABILITY AND INSURANCE

         We currently maintain product liability insurance, principally through
third party insurers, that provides coverage for product liability claims
including those asserted in the DEXATRIM PPA litigation. We previously reached
an agreement with Kemper to settle Kemper's lawsuit that sought to rescind our
policy for $50.0 million of excess coverage for product liability claims. After
giving effect to the settlement with Kemper, we have available through our first
three layers of insurance coverage, approximately $60.9 million of the $77.0
million of product liability coverage provided by these policies. These $60.9
million of available funds consist of $37.5 million of insurance under the
Kemper policy and approximately $23.4 million under policies with two other
insurance companies. This $60.9 million of coverage has been funded into a
settlement trust in accordance with the terms of the class action settlement
agreement.

         We have also entered into a term sheet of settlement agreement with
Interstate with regard to Interstate's lawsuit to rescind its $25.0 million of
excess coverage for product liability claims relating to DEXATRIM products
containing PPA. In accordance with the term sheet of settlement, Interstate will
provide coverage of DEXATRIM PPA claims that are covered by its policy after
$78.5 million has been paid toward covered claims. Once the $78.5 million
threshold is met, Interstate will pay 100% of the next $4.0 million of claims
covered by its policy; 75% of the next $8.5 million of such claims; and 50% of
the last $12.5 million of such claims. We are responsible for any claims not
covered by the Interstate policy either because the alleged injury did not occur
before May 31, 2001,or the claim was first made against us after
May 31, 2004.

         We maintain a significantly lower level of insurance coverage for all
other potential claims relating to our products including DEXATRIM products
containing ephedrine. Our existing product liability insurance coverage for all
of our other products, including DEXATRIM products containing ephedrine,
consists of $10.0 million of coverage through our captive insurance subsidiary,
of which approximately $5.4 million is funded as of February 7, 2005, and a
total of $40.0 million of excess coverage through third party insurers.

         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

                                       17
<PAGE>
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.

         The potential concerns relating to ephedrine in DEXATRIM Natural and
DEXATRIM Results have decreased the availability, limited the available coverage
and increased the cost of product liability insurance to us. 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.

EMPLOYEES

         We employ approximately 413 persons on a full-time basis and 9 persons
on a part-time basis in the United States. In addition, we employ approximately
22 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.

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.

WE HAVE INCURRED CHARGES AND FACE UNCERTAINTIES IN THE COST OF THE SETTLEMENT OF
THE NUMEROUS LAWSUITS AGAINST US ALLEGING INJURY FROM THE USE OF DEXATRIM
PRODUCTS.

         During the first nine months of fiscal 2004, we incurred settlement,
legal and administrative costs and expenses associated with the DEXATRIM
litigation totaling $4.5 million. Based on the estimated litigation settlement
costs relating to our DEXATRIM products, we recorded a litigation settlement
charge of $11.3 million in the fourth quarter of fiscal 2004. If we are required
to fund significant other liabilities related to the PPA litigation beyond the
settlement trust and outside of our available insurance coverage from
Interstate, either pursuant to the terms of the settlement, as a result of the
opt out cases or otherwise, or if the DELACO bankruptcy does not resolve the
cases with injury dates prior to December 21, 1998 as we expect, we will have
significantly fewer sources of funds with which to satisfy such liabilities, and
we may be unable to do so.

WE MAY FACE ADDITIONAL LAWSUITS ALLEGING INJURY FROM THE USE OF DEXATRIM
PRODUCTS CONTAINING EPHEDRINE, WHICH WE DISCONTINUED MANUFACTURING AND SHIPMENT
IN SEPTEMBER 2002, OR FROM OTHER PRODUCTS THAT WE CURRENTLY PRODUCE OR MAY
PRODUCE IN THE FUTURE.

         We are currently named as a defendant in four lawsuits alleging that
the plaintiffs were injured as a result of the ingestion of DEXATRIM containing
ephedrine. In addition, three individuals who allege injury caused by Dexatrim
containing ephedrine filed opt out notices in the PPA class action settlement.
We have reached a preliminary settlement with respect to two of these pending
lawsuits and the three opt out claims. 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 additional lawsuits being
filed against us alleging damages related to the use or purchase of DEXATRIM
containing ephedrine.

         Our available product liability coverage for the defense of lawsuits
alleging injury from the use of DEXATRIM products containing ephedrine, or from
other products that we currently produce or may produce in the future, consists
of $10.0 million of self-insured coverage through our captive insurance
subsidiary, of which approximately $5.4 million is funded as of February 7,
2005, and a total of $40.0 million of excess coverage through third party
insurers. In the future, if we face significant liabilities relating to the
DEXATRIM products which included ephedrine, our product liability insurance may
be insufficient, and we may not have sufficient resources to satisfy these
liabilities in excess of our insurance coverage.

         An inherent risk of our business is exposure to product liability
claims by users of our products. We may also experience significant product
liability exposure related to our other products in the future.

                                       18
<PAGE>
OUR PRODUCT LIABILITY INSURANCE COVERAGE MAY BE INSUFFICIENT TO COVER EXISTING
OR FUTURE PRODUCT LIABILITY CLAIMS.

         Our business inherently makes us the potential target of product
liability claims. We have product liability insurance, principally through third
party insurers, that provides coverage for product liability claims, including
those asserted in the DEXATRIM PPA litigation. At present, we maintain a
significantly lower level of insurance coverage for all other potential claims
relating to our products including DEXATRIM products containing ephedrine.

         We previously reached an agreement with Kemper to settle Kemper's
lawsuit that sought to rescind our policy for $50.0 million of excess coverage
for product liability claims. After giving effect to the settlement with Kemper,
we have available for the claims against us related to the PPA litigation,
through our first three layers of insurance coverage, subject to certain
limitations, approximately $60.9 million of the $77.0 million of product
liability coverage provided by these policies. The $60.9 million of available
funds consists of $37.5 million of insurance under the Kemper policy and
approximately $23.4 million under policies with two other insurance companies.
This $60.9 million of coverage has been funded into a settlement trust in
accordance with the terms of the class action settlement agreement.

         We have also entered into a term sheet of settlement with Interstate
with regard to Interstate's lawsuit to rescind its $25.0 million of excess
coverage for product liability claims relating to DEXATRIM products containing
PPA. In accordance with the term sheet of settlement, Interstate will provide
coverage of DEXATRIM PPA claims that are covered by its policy after $78.5
million has been paid toward covered claims. Once the $78.5 million threshold is
met, Interstate will pay 100% of the next $4.0 million of claims covered by its
policy; 75% of the next $8.5 million of such claims; and 50% of the last $12.5
million of such claims. We are responsible for any claims not covered by the
Interstate policy either because the alleged injury did not occur before May 31,
2001, or the claim was first made against us after May 31, 2004. In
addition, under the term sheet of settlement, we and Interstate will dismiss all
claims and counterclaims filed against each other, and we will release all
claims against Interstate relating to the excess coverage product liability
insurance.

         We maintain a significantly lower level of insurance coverage for all
other potential claims relating to our products, including DEXATRIM products
containing ephedrine. Our product liability insurance coverage for all of our
other products, including DEXATRIM products containing ephedrine, consists of
$10.0 million of coverage through our captive insurance subsidiary, of which
approximately $5.4 million is funded as of February 7, 2005, and a total of
$40.0 million of excess coverage through third party insurers.

         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.

         The potential concerns relating to ephedrine in DEXATRIM Natural and
DEXATRIM Results have decreased the availability, limited the available coverage
and increased the cost of product liability insurance to us. 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.

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:

         o    not accurately identifying suitable products or brands for
              acquisition;

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

         o    the diversion of management's attention from other business
              concerns; and

         o    incurring substantial additional indebtedness.

                                       19
<PAGE>
         Any future acquisitions, or potential acquisitions, may result in
substantial costs, disrupt our operations or materially adversely affect our
operating results.

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 OTC pharmaceutical companies such as Pfizer, Inc. and
Johnson & Johnson, consumer products companies such as Procter & Gamble Co. and
dietary supplements companies such as Nature's Bounty, Inc. and Pharmaton
Natural Health Products, 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 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, distribution, processing, formulation, 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 distribution of our OTC products, our prescription
strength SELSUN products and our dietary supplements. The FDA also has primary
jurisdiction to regulate any advertising that we might use for the prescription
strength form of SELSUN. In addition, the FTC may regulate the promotion and
advertising of our drug products, particularly OTC versions and dietary
supplements.

         All of our OTC drug products are regulated pursuant to the FDA's
monograph system. The monographs, both tentative and final, set out the active
ingredients and labeling indications that are permitted for certain broad
categories of OTC drug products such as topical analgesics. Where the FDA has
finalized a particular monograph, it has concluded that a properly labeled
product formulation is generally recognized as safe and effective and not
misbranded. A tentative final monograph indicates that the FDA has not made a
final determination about products in a category to establish safety and
efficacy for a product and its uses. However unless there is a serious safety or
efficacy issue, the FDA will typically exercise enforcement discretion and
permit companies to sell products conforming to a tentative final monograph
until the final monograph is published. Products that comply with either final
or tentative final monograph standards do not require pre-market approval from
the FDA.

         Most of our products are regulated pursuant to tentative final
monographs. We face the risk that the FDA may finalize a monograph and exclude a
formulation including dosage form or a labeling claim that would negatively
affect one or more of our products. If we desire to continue to sell a product
that is outside the scope of a monograph, we would reformulate the product, if
possible, to comply with the final monograph or submit an NDA to have our
existing formulation approved by the FDA. The submission of an NDA could require
the preparation and submission of clinical tests, which may 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 conform our product to the conditions
described in a final monograph or submit an NDA and obtain approval in a timely
manner, we would be required to discontinue selling the affected product.
Changes in monographs could also require us to revise our labeling, modify our
production process or provide additional scientific data, each of which would
involve additional costs, which may be prohibitive.

         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 effort coordinated by CHPA to establish with the FDA a protocol of
additional research that will allow the patches to be marketed under the final
monograph even if the final monograph does not explicitly allow them. The CHPA
submission to FDA was made on October 15, 2003. Thereafter, in April 2004, we
launched the ICY HOT Sleeve, a flexible, non-occlusive fabric patch with menthol
levels consistent with the OTC monograph. If additional

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<PAGE>
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 CDER, we believe that the monograph is unlikely
to become final and take effect before mid- 2006 and perhaps thereafter. If
neither action described above is successful and the final monograph excludes
such products, we will have to file an NDA in order to continue to market the
ICY HOT Patch, ICY HOT Sleeve or similar delivery systems under our other
topical analgesic brands. In such case, we would have to remove the existing
products from the market as of one year from the effective date of the final
monograph, pending FDA review and approval of an NDA. The preparation of an NDA
would likely take us six to 18 months and would be expensive. It typically takes
the FDA at least 12 months to rule on an NDA once it is submitted. Sales of our
ICY HOT patches and ICY HOT Sleeve products represented approximately 11% of our
consolidated total revenues in fiscal 2004.

         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 Menstrual
Pain Relief and PREMSYN PMS products. While we addressed all of the FDA
questions in detail, the final monograph for menstrual drug products, which has
not yet been issued, will determine if the FDA considers pyrilamine maleate safe
and effective for menstrual relief products. If pyrilamine maleate 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.
Sales of our PAMPRIN Menstrual Pain Relief and PREMSYN PMS products represented
approximately 4% of our consolidated total revenues in fiscal 2004. We have been
actively monitoring the process and do not believe that either PAMPRIN Menstrual
Pain Relief or PREMSYN 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. We are also aware of
the FDA's concern about the potential toxicity due to concomitant use of OTC and
prescription drugs that contain the ingredient acetaminophen, an ingredient also
found in PAMPRIN Menstrual Pain Relief and PREMSYN PMS. We are participating in
an industry-wide effort to reassure the FDA that the current recommended dosing
regimen is safe and effective and that proper labeling and public education by
both OTC and prescription drug companies are the best policies to abate the
FDA's concern. There can be no assurance as to what action, if any, the FDA may
take with respect to acetaminophen.

         On September 30, 2004, Merck & Co., Inc. withdrew from the market its
selective COX-2 prescription analgesic Vioxx(R) as a result of cardiovascular
adverse events alleged to have occurred after long-term use (up to 3 years) of
Vioxx in older adults. These data have increased regulatory scrutiny of related
non-steroidal anti-inflammatory drugs (NSAIDs) sold on prescription,
particularly other selective COX-2 drugs. Though less likely, infrequent, or
rare, cardiovascular morbidity might also occur after long-term use of
non-selective NSAIDs, such as naproxen sodium, or ibuprofen. Naproxen sodium
(220mg/caplet) is the active ingredient in PAMPRIN All Day. Naproxen sodium
(220mg) was the subject of an FDA approved Rx-to-OTC switch application
sponsored by Procter & Gamble Co. that allows its over-the-counter sale as an
analgesic. This FDA approval attested to its safety and efficacy when used for
less than 10 days in the relief of minor aches and pains at approved doses of
220mg. Naproxen sodium is now widely used as a simple OTC analgesic for pain
relief. PAMPRIN All Day is indicated for the relief of menstrual cramps,
headache and back pain in women of childbearing age who are otherwise healthy.
Pre-menstrual and menstrual discomfort typically lasts five days and thus is
self-limiting. The FDA will conduct a public FDA Advisory Committee meeting in
mid-February 2005 to discuss safety data related to selective COX-2 NSAIDs sold
on prescription. Because naproxen sodium at prescription doses (550mg bid) was
used as a control group in some company-sponsored clinical trials of selective
COX-2s, it is possible that naproxen sodium might be discussed incidentally to
the primary data analysis and interpretation. In the unlikely event that
naproxen sodium at OTC doses was found to have unacceptable risk in less than 10
days of use, we would be required to reformulate PAMPRIN All Day.

         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 and could also reformulate them using ingredients
included in the FDA monograph. Sales of our SPORTSCREME and ASPERCREME products
represented approximately 7% of our consolidated total revenues in fiscal 2004.

         In accordance with the FDC Act and FDA regulations, our manufacturing
processes and those of our third party manufacturers must also comply with the
FDA's current GMPs. The FDA inspects our facilities and those of our third party
manufacturers periodically to determine if we and our third party manufacturers
are complying with GMPs.

         If we or our third party manufacturers fail to comply with federal,
state or foreign regulations, we could be required to:

         o    suspend manufacturing operations;

         o    change product formulations;

         o    suspend the sale of products with non-complying specifications;

         o    initiate product recalls;

         o    prepare and submit an NDA or abbreviated NDA; or

         o    change product labeling, packaging or advertising or take other
              corrective action.

         Any of these actions could materially and adversely affect our
financial results.

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<PAGE>
         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. Sales of our BULLFROG
Superblock products represented approximately 1% of our consolidated total
revenues in fiscal 2004.

OUR SUCCESS DEPENDS ON OUR ABILITY TO ANTICIPATE AND RESPOND IN A TIMELY MANNER
TO CHANGING CONSUMER DEMANDS.

         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 meet consumer demands, 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 RELY ON A FEW LARGE CUSTOMERS, PARTICULARLY WAL-MART STORES, INC., FOR A
SIGNIFICANT PORTION OF OUR SALES.

         In fiscal 2004, Wal-Mart Stores, Inc. represented approximately 34% of
our total revenues, our ten largest customers represented approximately 68% of
our total revenues and our 20 largest customers represented approximately 81% of
our total revenues. 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.

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 AND DEXATRIM BRANDS.

         We use third party manufacturers to make products representing
approximately 40% of our fiscal 2004 sales volume, including our GOLD BOND
medicated powders and foot spray, GOLD BOND antifungal foot swabs and first aid
wipes, the ICY HOT patches and sleeves, PHISODERM CLEAR CONFIDENCE Clear Swab,
HERPECIN-L, and our line of dietary supplements including DEXATRIM and the
DEXATRIM All in One bar and, internationally, our line of SELSUN medicated
dandruff shampoos. In many cases, third party manufacturers are not obligated
under contracts that fix the term of their commitments, and they may discontinue
production upon 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

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<PAGE>
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, which could harm our reputation and our
business.

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' perception 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. As a result of
the decline in DEXATRIM sales, we incurred a $20.0 million impairment charge on
indefinite-lived assets in the fourth quarter of fiscal 2004.

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 2004, 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, PHISODERM
and ASPERCREME. 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 60% of our sales volume in fiscal 2004 were from products
manufactured in 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:

         o  changes in state and local government regulations;

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

         o  natural disasters, such as fires and earthquakes;

                                       23
<PAGE>
         o  power outages;

         o  nuclear facility incidents;

         o  spread of infectious diseases;

         o  hazardous material incidents; or

         o  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 PREMSYN 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 PREMSYN 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. While we do not currently know of any facts or
circumstances that would adversely affect the supply of pamabrom, pyrilamine
maleate, compap, or selenium sulfide, 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 2004, approximately 9% of our total revenues were
attributable to our international business. Our acquisition of SELSUN BLUE has
greatly expanded our international business. We anticipate that our ownership of
SELSUN BLUE will create the opportunity to introduce certain of our other brands
in countries where they are not currently sold. We expect to 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:

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

         o    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;

         o    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;

         o    potential trade restrictions and exchange controls;

         o    differences in protection of our intellectual property rights; and

         o    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 as a result of the SELSUN BLUE acquisition, our
exposure to fluctuations in foreign exchange rates has increased.

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<PAGE>
WE HAVE A SIGNIFICANT AMOUNT OF DEBT THAT COULD ADVERSELY AFFECT OUR BUSINESS
AND GROWTH PROSPECTS.

         As of November 30, 2004, our total long-term debt was $200.0 million.
In the future we may incur significant additional debt. Our debt could have
significant adverse effects on our business including:

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

         o    limiting our ability to capitalize on significant business
              opportunities;

         o    making us more vulnerable to economic downturns;

         o    limiting our ability to withstand competitive pressures; and

         o    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.

THE TERMS OF OUR OUTSTANDING DEBT OBLIGATIONS LIMIT CERTAIN OF OUR ACTIVITIES.

         The terms of our indentures under which our $75.0 million Floating Rate
Notes and $125.0 million Fixed Rate Notes are issued and our Revolving Credit
Facility impose operating and financial restrictions on us including
restrictions on:

         o    incurrence of additional indebtedness;

         o    dividends and restricted payments;

         o    investments;

         o    loans and guarantees;

         o    creation of liens;

         o    transactions with affiliates;

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

         o    certain mergers, consolidations and transfers of assets.

         The terms of our Revolving 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.

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. Under these
laws, 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. In addition, compliance with more stringent environmental laws and
regulations could involve significant costs.

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<PAGE>
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 A. Alexander Taylor II,
our president and chief operating officer. If we were to lose any key senior
executive, our business could be materially adversely affected.

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 you of your
ability to receive a premium on your 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:

         o    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;

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

         o    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, including variations in our quarterly operating results, our leveraged
financial position, potential sales of additional shares of our common stock,
general trends in the consumer products industry, changes by securities analysts
in their estimates or investment ratings, the relative illiquidity of our common
stock, news regarding PPA-related product liability litigation and other
potential product liability litigation and stock market conditions generally.

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 repurchase our common stock and to repay our outstanding
indebtedness and have no current intention of paying dividends to holders of our
common stock.

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<PAGE>
FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-K and the documents incorporated by
reference herein contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-K, or in documents incorporated by reference into this Form 10-K,
regarding our strategy, future operations, financial position and results of
operations, projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "potential," "hope," "intends," "continue," "may," "plans," "will,"
"should," "could," "would," and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee that we actually will achieve the
plans, intentions or expectations disclosed in our forward-looking statements,
and you should not place undue reliance on our forward-looking statements.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements that we
make. We have included important factors in the cautionary statements included
in this Form 10-K, particularly under the heading "Risk Factors," that we
believe could cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking statements do not
reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures, or investments that we may be a party to or make. We do not
assume any obligation to update any forward-looking statement.

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.

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 Exchange Commission.








                                       27
<PAGE>
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:
<TABLE><CAPTION>

                                        TOTAL AREA   TOTAL BUILDINGS                                    SQUARE
                                          (ACRES)     (SQUARE FEET)          USE                         FEET
                                          -------     -------------          ---                         ----
<S>                                        <C>          <C>           <C>                              <C>
Owned Properties:

    Chattanooga, Tennessee                  12.0         117,600       Manufacturing                    77,000
                                                                       Office & Administration          40,600

    Chattanooga, Tennessee                   8.3          78,500       Manufacturing & Warehousing      58,300
                                                                       Office                           10,200
                                                                       Product Development Center       10,000

Leased Properties:

    Chattanooga, Tennessee (1)               5.1         139,000       Warehousing                     103,800
                                                                       Warehousing & Manufacturing      35,200

    Chattanooga, Tennessee (2)               5.0          50,000       Warehousing                      49,300
                                                                       Office                              700

    Mississauga, Ontario, Canada (3)         0.3          15,069       Warehousing                      10,569
                                                                       Office & Administration           3,000
                                                                       Packaging                         1,500

    Basingstoke, Hampshire, England (4)      0.5          21,900       Warehousing                      13,900
                                                                       Office & Administration           6,500
                                                                       Packaging                         1,500

    Limerick, Ireland (5)                     --           2,100       Office & Administration           2,100
</TABLE>

NOTES:

(1)  Leased on a month-to-month basis for a monthly rental of approximately
     $38,000. A twelve month termination notice is required.

(2)  Leased on a month-to-month basis for a monthly rental of approximately
     $13,000.

(3)  Leased on a month-to-month basis for a monthly rental of approximately
     $8,500.

(4)  Leased under leases ending in 2005 and 2014 for a monthly rental of
     approximately $28,000.

(5)  Leased under a lease ending in 2009 for a monthly rental of approximately
     $2,600.

         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 "Legal Proceedings" in Item 1 of this Form 10-K and Note 13 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.

                                       28
<PAGE>
                                     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 National 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 National Market for the periods
indicated.

                                                          HIGH        LOW
                                                          ----        ---

Fiscal 2004:

        First Quarter                                   $ 23.33    $ 15.40

        Second Quarter                                    28.65      23.71

        Third Quarter                                     30.65      26.08

        Fourth Quarter                                    36.22      30.31


Fiscal 2003:

        First Quarter                                   $ 22.46    $ 13.16

        Second Quarter                                    16.41      11.50

        Third Quarter                                     19.85      11.55

        Fourth Quarter                                    16.53      12.61

ISSUER PURCHASES OF EQUITY SECURITIES
<TABLE><CAPTION>
                                                         Total Number of Shares   Maximum Dollar Value that
                          Total Number   Average Price    Purchased as Part of    may yet be Purchased under
                           of Shares         Paid          Publicly Announced           the Plans or
      Period               Purchased     Per Share (1)    Plans or Programs (2)         Programs (2)
-----------------------   ------------   -------------    ---------------------      -----------------
<C>                          <C>          <C>                     <C>                 <C>
9/1/04-9/30/04                600          $   31.22               600                 $  14,966,470
10/1/04-10/31/04               --                --                 --                    14,966,470
11/1/04-11/30/04               --                --                 --                    14,966,470
   Total Fourth Quarter       600          $   31.22               600                    14,966,470
</TABLE>

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

(2)  Our stock buyback program authorizing the purchase of up to $10.0 million
     of our common stock was announced in January 2003. In January 2004 and
     2005, our board of directors increased the total authorization to
     repurchase our common stock under our stock buyback program to $20.0
     million and $30.0 million, respectively. There is no expiration date
     specified for our stock buyback program.

HOLDERS

         As of February 7, 2005, there were approximately 286 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 Floating Rate Notes and 7% Subordinated Notes were
issued and by the terms of our Revolving Credit Facility. (See Note 5 of Notes
to Consolidated Financial Statements in Item 8 "Financial Statements and
Supplementary Data".)



                                       29
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

         This selected financial data should be read in conjunction with
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. The following data for fiscal 2000
and 2001 has been restated to give effect to the adoption of the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145") on December 1, 2002 and Emerging Issues Task
Force ("EITF") Issue Nos. 00-14 and 00-25 (codified by EITF Issue No. 01-9) on
December 1, 2001.
<TABLE><CAPTION>

                                                                                YEAR ENDED NOVEMBER 30,
                                                                                -----------------------
                                                           2004           2003           2002           2001           2000
                                                           ----           ----           ----           ----           ----
                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>            <C>            <C>            <C>            <C>
INCOME STATEMENT DATA:
Total revenues                                          $ 258,155      $ 233,749      $ 223,116      $ 181,166      $ 218,038
Operating costs and expenses                              228,037        177,811        171,228        147,988        179,158
                                                        ---------      ---------      ---------      ---------      ---------
Income from operations                                     30,118         55,938         51,888         33,178         38,880
Other expense, net                                        (27,709)       (20,307)       (21,406)        (8,221)       (40,682)
                                                        ---------      ---------      ---------      ---------      ---------
Income (loss) before income taxes and
  change in accounting principle                            2,409         35,631         30,482         24,957         (1,802)
Provision for (benefit from) income taxes                     795         12,260         11,582          9,614           (685)
                                                        ---------      ---------      ---------      ---------      ---------
Income (loss) before change in accounting principle         1,614         23,371         18,900         15,343         (1,117)
Cumulative effect of change in accounting principle,
  net of income tax benefit                                  --             --           (8,877)          --             (542)
                                                        ---------      ---------      ---------      ---------      ---------
Net income (loss)                                       $   1,614      $  23,371      $  10,023      $  15,343      $  (1,659)
                                                        =========      =========      =========      =========      =========
PER SHARE DATA:
Income (loss) per diluted share before change
  in accounting principle                               $     .08      $    1.19      $     .98      $     .85      $    (.06)
Change in accounting principle                               --             --             (.46)          --             (.03)
                                                        ---------      ---------      ---------      ---------      ---------
Total diluted                                           $     .08      $    1.19      $     .52      $     .85      $    (.09)
                                                        =========      =========      =========      =========      =========
BALANCE SHEET DATA:
    (At end of year)
Total assets                                            $ 371,724      $ 363,385      $ 353,469      $ 299,673      $ 402,076
                                                        =========      =========      =========      =========      =========
Long-term debt, less current maturities                 $ 200,000      $ 204,676      $ 217,458      $ 204,740      $ 304,077
                                                        =========      =========      =========      =========      =========
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATION
------------

         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.

                                       30
<PAGE>
OVERVIEW

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

         o    Topical analgesics such as ICY HOT and ASPERCREME;

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

         o    SELSUN BLUE medicated dandruff shampoos and conditioner;

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

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

         Our products typically target niche markets that are often outside the
core product areas of larger companies where we believe we can achieve and
sustain significant market penetration through innovation and strong advertising
and promotion support. Many of our products are among the U.S. market leaders in
their respective categories. For example, our portfolio of topical analgesic
brands and our GOLD BOND medicated body powders have the leading U.S. market
share in these categories. We support our brands through extensive and
cost-effective advertising and promotion, the expenditures for which represented
approximately 29% of our total revenues in fiscal 2004. We sell our products
nationally through mass merchandiser, drug and food channels principally
utilizing our own sales force.

         Our net income margin (net income/total revenues) was 0.6%, 10.0% and
4.5% for fiscal 2004, 2003 and 2002, respectively. Our net income (excluding
debt extinguishment, impairment and litigation settlement charges) margin (net
income (excluding debt extinguishment, impairment and litigation settlement
charges)/total revenues) was 13.3% for fiscal 2004. We believe that disclosure
of net income (excluding debt extinguishment, impairment and litigation
settlement charges) margin provides investors with useful information regarding
our financial performance and allows for easier comparison with net income
margin without the effect of the charges in prior periods. A reconciliation of
net income (excluding debt extinguishment, impairment and litigation settlement
charges) to net income for fiscal 2004 is presented in the following table:


                                                             For the Year
                                                                Ended
                                                           November 30, 2004
                                                           -----------------
                                                         (dollars in thousands)
Net income                                                     $    1,614
Add:
       Loss on early extinguishment of debt                        12,958
       Impairment of indefinite-lived intangible assets            20,000
       Litigation settlement charges                               15,836
       Benefit from income taxes                                  (16,102)
                                                               ----------
Net income (excluding debt extinguishment,
  impairment and litigation settlement charges)                $   34,306
                                                               ==========
Net income (excluding debt extinguishment,
  impairment and litigation settlement charges)
  per common share (diluted)                                   $     1.70
                                                               ==========

Net income (excluding debt extinguishment,
  impairment and litigation settlement charges)
  margin                                                            13.3%
                                                               ==========

         EBITDA, earnings before interest, taxes, depreciation and amortization,
is a key non-GAAP financial measure used by us to measure operating performance
but may not be comparable to similarly titled measures reported by other
companies. The most directly comparable GAAP financial measure is net income.
EBITDA and EBITDA (excluding impairment and litigation settlement charges) are
used by us to supplement net income as an indicator of operating performance and
not as an alternative to measures defined and required by U.S. generally
accepted accounting principles. We consider EBITDA an important indicator of our
operational strength and performance, including our ability to pay interest,
service debt and fund capital expenditures.

                                       31
<PAGE>
EBITDA should be considered in addition to, but not as a substitute for,
operating income, net income and other measures of financial performance
reported in accordance with U.S. generally accepted accounting principles.
EBITDA is also one measure used in the calculation of certain ratios to
determine our compliance with the terms of our Revolving Credit Facility.

         A reconciliation of EBITDA and EBITDA (excluding impairment and
litigation settlement charges) to net income is presented in the following
table:
<TABLE><CAPTION>
                                                                   FOR THE YEAR ENDED NOVEMBER 30,
                                            ------------------------------------------------------------------------------
                                                                                          INCREASE (DECREASE)
                                                                               -------------------------------------------
                                                                                      AMOUNT               PERCENTAGE
                                                                               --------------------   --------------------
                                                                                 2004        2003       2004        2003
                                                                                  VS.         VS.        VS.         VS.
                                              2004        2003       2002        2003        2002       2003        2002
                                              ----        ----       ----        ----        ----       ----        ----
                                                                        (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>        <C>         <C>         <C>         <C>         <C>
Net income                                  $  1,614    $ 23,371   $ 10,023    $(21,757)   $ 13,348    (93.1)%     133.2%
Add:
  Cumulative effect of change in
    accounting principle                         --          --       8,877         --       (8,877)      nm          nm
  Provision for income taxes                     795      12,260     11,582     (11,465)        678    (93.5)        5.9
  Interest expense, net (1)                   27,709      20,307     21,406       7,402      (1,099)    36.5        (5.1)
  Depreciation and amortization less
    amounts included in interest               5,293       4,969      4,163         324         806      6.5        19.4
                                            --------    --------   --------    ---------   --------
EBITDA                                      $ 35,411    $ 60,907   $ 56,051    $(25,496)   $  4,856    (41.9)        8.7
                                            ========    ========   ========    =========   ========
  Impairment of indefinite-lived
    intangible assets                         20,000          --         --      20,000          --       nm          nm
    Litigation settlement charges             15,836          --         --      15,836          --       nm          nm
                                            --------    --------   --------    --------    --------
EBITDA (excluding impairment and
  litigation settlement charges)            $ 71,247    $ 60,907   $ 56,051    $ 10,340    $  4,856     17.0         8.7
                                            ========    ========   ========    ========    ========

EBITDA margin (EBITDA/total revenues)          13.7%       26.1%      25.1%
                                            ========    ========   ========
EBITDA (excluding impairment and
  litigation settlement charges) margin
  (EBITDA (excluding impairment and
  litigation settlement charges)/total
  revenues)                                    27.6%       26.1%      25.1%
                                            ========    ========   ========
</TABLE>

(1)  Fiscal 2004 includes a loss on early extinguishment of debt of $13.0
     million.

DEVELOPMENTS DURING FISCAL 2004

         In fiscal 2004, we introduced the following product line extensions:
the ICY HOT Medicated Sleeve, DEXATRIM All in One bar, SELSUN BLUE Conditioner,
PAMPRIN All Day, BULLFROG SuperBlock Spray Lotion, PHISODERM Clear Confidence
Self Heating Daily Scrub and Herbal Astringent and GOLD BOND Therapeutic Foot
Cream.

         On February 26, 2004, we issued and sold $75.0 million of Floating Rate
Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125.0 million of
7.0% Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated
Notes"), the proceeds of which were used to purchase all of our outstanding
8.875% senior subordinated notes and repay the outstanding debt under our prior
credit facility.

         Also, on February 26, 2004, we entered into a new Senior Secured
Revolving Credit Facility (the "Revolving Credit Facility") with a syndicate of
commercial banks led by Bank of America, N.A., as agent, that enables us to
borrow up to a total of $50.0 million under the Revolving Credit Facility.

         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, both federal and
state. 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.

         During the first nine months of fiscal 2004, we incurred settlement,
legal and administrative costs and expenses associated with the DEXATRIM
litigation totaling $4.5 million. Prior to the fourth quarter, we were unable to
reasonably estimate the amount of liability related to the DEXATRIM litigation,
due to the significant assumptions and uncertainty involved in estimating the
value of cases involved. As a result of the final approval of the DEXATRIM PPA
settlement on November 12, 2004 and the term sheet of

                                       32
<PAGE>
settlement reached with Interstate on December 13, 2004, as of November 30, 2004
we were able to estimate the probable loss related to the DEXATRIM litigation.
Based on the estimated litigation settlement costs relating to our DEXATRIM
products, we recorded a litigation settlement charge of $11.3 million in the
fourth quarter of fiscal 2004 of which $9.5 million is included in accrued
liabilities in our November 30, 2004 Consolidated Balance Sheet. We currently do
not expect to record any additional charges relative to the settlement of the
PPA litigation.

         At the end of fiscal 2004, we had completed the transition of SELSUN'S
international manufacturing and marketing operations from its prior owner,
Abbott Laboratories ("Abbott"), to us in approximately 80 foreign countries,
including markets whose combined sales represent approximately 94% of SELSUN
international sales. Abbott will continue to manufacture SELSUN for us for the
European, Middle East and certain Latin American markets for an additional
period ending July 2005 and will also serve as our distributor for SELSUN in
certain other foreign countries.

         As a result of a decline in sales and reforecasted expected future cash
flows in the fourth quarter, we reperformed the impairment test as prescribed by
SFAS 142 and we determined that a revaluation was required for our DEXATRIM
product line at November 30, 2004. We obtained an independent appraisal to
determine the fair value of the indefinite-lived intangible asset related to
this product line. As a result, we incurred an impairment charge of $20.0
million.

RECENT DEVELOPMENTS

         On December 13, 2004, we also entered into a term sheet of settlement
with Interstate with regard to Interstate's lawsuit to rescind its $25.0 million
of excess coverage for product liability claims relating to DEXATRIM products
containing PPA. In accordance with the term sheet of settlement, Interstate will
provide coverage of DEXATRIM PPA claims that are covered by its policy after
$78.5 million has been paid toward covered claims. Once the $78.5 million
threshold is met, Interstate will pay 100% of the next $4.0 million of claims
covered by its policy; 75% of the next $8.5 million of such claims; and 50% of
the last $12.5 million of such claims. We are responsible for any claims not
covered by the Interstate policy either because the alleged injury did not occur
before May 31, 2001, or the claim was first made against us after May 31, 2004.
In addition, under the term sheet of settlement, we and Interstate will dismiss
all claims and counterclaims filed against each other, and we will release all
claims against Interstate relating to the excess coverage product liability
insurance.

RESULTS OF OPERATIONS

         The following table sets forth, for income before change in accounting
principle and for the periods indicated, certain items from our Consolidated
Statements of Income expressed as a percentage of total revenues:

                                                        YEAR ENDED NOVEMBER 30,
                                                        -----------------------
                                                       2004      2003      2002
                                                       ----      ----      ----
TOTAL REVENUES                                        100.0%    100.0%    100.0%
                                                      -----     -----     -----
COSTS AND EXPENSES:
  Cost of sales                                        28.3      28.4      28.1
  Advertising and promotion                            29.0      30.2      30.6
  Selling, general and administrative                  17.1      17.5      18.0
  Impairment of indefinite-lived intangible assets      7.8       --        --
  Litigation settlement                                 6.1       --        --
                                                      -----     -----     -----
          Total costs and expenses                     88.3      76.1      76.7
                                                      -----     -----     -----
INCOME FROM OPERATIONS                                 11.7      23.9      23.3
                                                      -----     -----     -----
OTHER INCOME (EXPENSE):
  Interest expense                                     (5.9)     (8.8)     (9.5)
  Investment and other income (expense), net            0.1       0.1      (0.1)
  Loss on early extinguishment of debt                 (5.0)      --        --
                                                      -----     -----     -----
          Total other income (expense)                (10.8)     (8.7)     (9.6)
                                                      -----     -----     -----
INCOME BEFORE INCOME TAXES AND CHANGE IN
  ACCOUNTING PRINCIPLE                                  0.9      15.2      13.7
PROVISION FOR INCOME TAXES                              0.3       5.2       5.2
                                                      -----     -----     -----
INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE            0.6%     10.0%      8.5%
                                                      =====     =====     =====

CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in accordance with U.S.
generally accepted accounting principles requires management to use estimates.
Several different estimates or methods can be used by management that might
yield different results. The following are the significant estimates used by
management in the preparation of the November 30, 2004 consolidated financial
statements:

                                       33
<PAGE>
ALLOWANCE FOR DOUBTFUL ACCOUNTS

         As of November 30, 2004, 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.

REVENUE RECOGNITION

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

         In accordance with industry practice, we allow our customers to return
unsold sun care products (i.e. BULLFROG and SUN IN lines of products) at the end
of the sun care season. We record the sales at the time the products are shipped
and title transfers. At the time of shipment, we also record a reduction in
sales and an allowance on our balance sheet for anticipated returns based upon
an estimated return level. The level of returns may fluctuate from our estimates
due to several factors including weather conditions, customer inventory levels
and competitive conditions. Each percentage point change in our return rate
would impact our net sales by approximately $0.2 million. During fiscal 2004, we
reduced our estimate of seasonal returns by approximately $0.9 million, which
resulted in an increase to net sales in our consolidated financial statements,
as compared to approximately $0.3 million and $0.4 million increases in our
estimates in fiscal 2003 and 2002, respectively. During fiscal 2004 and 2003, we
also reduced our estimate of non-seasonal returns by approximately $0.8 million
and $0.7 million, respectively, which resulted in an increase to net sales in
our consolidated financial statements, as compared to an approximately $0.7
million increase in our estimate in fiscal 2002.

         We routinely enter into agreements with our customers to participate in
promotional programs. These programs generally take the form of coupons,
temporary price reductions, scan downs, display activity and participations in
advertising vehicles provided uniquely by the customer. The ultimate cost of
these programs is often variable based on the number of units actually sold.
Estimated unit sales of a product under a promotional program are used to
estimate the total cost of the program, which is recorded as a reduction of
sales. Actual results can differ from the original estimate. We also consider
customer delays in requesting promotional program payments when evaluating the
required accrual. Many customers audit programs significantly after the date of
performance to determine the actual amount due and make a claim for
reimbursement at that time. As a result, changes in the unit sales trends under
promotional programs as well as the timing of payments could result in changes
in the accrual. During fiscal 2004 and 2003, we reduced our estimate of
promotional accruals by approximately $1.6 million and $2.3 million,
respectively, which resulted in an increase to net sales or a decrease in
advertising and promotion expense in our consolidated financial statements, as
compared to an increase in our estimate of approximately $4.0 million in fiscal
2002.

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. We revised our annual estimated income tax rate
during fiscal 2004 to 33% as a result of the implementation of a number of
foreign and state tax planning initiatives, which include our determination
during the third quarter of fiscal 2004 to reinvest indefinitely all
undistributed earnings of Chattem (Canada), a wholly-owned subsidiary.

         Undistributed earnings of Chattem (Canada) amounted to approximately
$1.8 million during fiscal 2004. These earnings are considered to be reinvested
indefinitely and, accordingly, no provision for U.S. federal and state income
taxes has

                                       34
<PAGE>
been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, we would be subject to U.S. income taxes (subject to an
adjustment for foreign tax credits).

         For additional information regarding our significant accounting
policies, see Note 2 of Notes to Consolidated Financial Statements.

FISCAL 2004 COMPARED TO FISCAL 2003

         To facilitate discussion of our operating results for the years ended
November 30, 2004 and 2003, we have included the following selected data from
our Consolidated Statements of Income:

                                            FOR THE YEAR ENDED NOVEMBER 30,
                                            -------------------------------
                                                             INCREASE (DECREASE)
                                                             -------------------
                                         2004       2003     AMOUNT   PERCENTAGE
                                         ----       ----     ------   ----------
                                               (DOLLARS IN THOUSANDS)
Domestic net sales                   $ 234,003  $ 209,874  $  24,129     11.5%
International revenues (including
  royalties)                            24,152     23,875        277      1.2
Total revenues                         258,155    233,749     24,406     10.4
Cost of sales                           73,103     66,386      6,717     10.1
Advertising and promotion expense       74,929     70,622      4,307      6.1
Selling, general and administrative
  expense                               44,169     40,803      3,366      8.2
Impairment of indefinite-lived
  intangible assets                     20,000         --     20,000      nm
Litigation settlement charges           15,836         --     15,836      nm
Interest expense                        15,049     20,431     (5,382)   (26.3)
Loss on early extinguishment of debt    12,958         --     12,958      nm
Net income                               1,614     23,371    (21,757)   (93.1)

DOMESTIC NET SALES

         Domestic net sales for fiscal 2004 increased $24.1 million or 11.5% as
compared to fiscal 2003. For a description of each brand included in the
category, see "Products" in Item 1 of this Form 10-K. 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)
                                                             -------------------
                                        2004       2003      AMOUNT   PERCENTAGE
                                        ----       ----      ------   ----------
                                               (DOLLARS IN THOUSANDS)
Topical analgesics                   $  76,300  $  58,594  $  17,706     30.2%
Medicated skin care products            60,495     56,528      3,967      7.0
Dietary supplements                     33,011     37,420     (4,409)   (11.8)
Medicated dandruff shampoos and
  conditioner                           31,309     28,351      2,958     10.4
Other OTC and toiletry products         32,888     28,981      3,907     13.5
                                     ---------  ---------  ---------
         Total                       $ 234,003  $ 209,874  $  24,129     11.5
                                     =========  =========  =========

         Net sales growth in the topical analgesics category was led by a 57%
increase in sales of ICY HOT, which was primarily driven by the continued
strength of the ICY HOT Back Patch and the newly introduced ICY HOT Medicated
Sleeve. Net sales growth in this category also resulted from 34% and 12% sales
increases in CAPZASIN and ASPERCREME, respectively. The overall sales growth in
this category was partially offset by a decline in sales of FLEXALL as
competition from inside and outside the category increased and media support was
curtailed.

         Net sales growth in the medicated skin care products category resulted
from a 14% increase in the GOLD BOND franchise. GOLD BOND sales growth was
attributable to 46%, 27% and 24% increases from the lotion, foot care and cream
lines, respectively, and was partially offset by declines in the first aid
portion of the business. The increase in sales from the GOLD BOND lotion line of
products was attributable to the successful launch of GOLD BOND ULTIMATE Healing
Skin Therapy Lotion in the third quarter of fiscal 2003. Sales growth in the
medicated skin care products category was also offset by a 15% decrease in
PHISODERM sales due to increased competition.

         Net sales for the dietary supplements category declined primarily due
to a 47% decrease in DEXATRIM diet pill sales. Sales of DEXATRIM were impacted
by the overall decline in the diet pill market resulting in part from negative
ephedrine publicity and the impact of low carbohydrate diet products. The
decline in net sales of DEXATRIM diet pills was partially offset by sales of

                                       35
<PAGE>
the DEXATRIM All in One bar, which was introduced in the first quarter of fiscal
2004. The DEXATRIM All in One bar sales were lower than expected for fiscal
2004, as the category has proved to be more promotional and seasonal than we
expected.

         Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased
due to an effective advertising campaign and sales of SELSUN BLUE conditioner,
which was launched in the first quarter of fiscal 2004.

         The increase in net sales for the other OTC and toiletry products
category was due primarily to sales increases of PAMPRIN and BULLFROG. The
increase in sales of PAMPRIN was primarily attributable to the introduction of
PAMPRIN All Day in the first quarter of fiscal 2004. The increase in sales of
BULLFROG was primarily attributable to expanded distribution and increased sales
of pre-pack displays.

         Domestic sales variances were principally the result of changes in unit
sales volumes with the exception of PAMPRIN, PREMSYN PMS, PHISODERM, FLEXALL,
ASPERCREME, CAPZASIN and SPORTSCREME, for which we implemented a unit sales
price increase.

INTERNATIONAL REVENUES

         For fiscal 2004, international revenues increased $0.3 million or 1.2%
as compared to fiscal 2003 due principally to increases in SELSUN sales in
Canada, Europe and Latin America and favorable foreign currency translation.
International sales variances were principally the result of changes in unit
sales volumes.

COST OF SALES

         Cost of sales as a percentage of total revenues was 28.3% for fiscal
2004 as compared to 28.4% for fiscal 2003. Cost of sales in fiscal 2004
increased $6.7 million due primarily to sales of the DEXATRIM All in One bar,
the ICY HOT Back Patch and the ICY HOT Medicated Sleeve, all of which have lower
profit margins than most of our other products.

ADVERTISING AND PROMOTION EXPENSE

         Advertising and promotion expenses in fiscal 2004 increased $4.3
million or 6.1% as compared to fiscal 2003 and were 29.0% of total revenues for
2004 compared to 30.2% for the comparable period of fiscal 2003. Support for new
product introductions drove an increase in advertising and promotion
expenditures in the current period for ICY HOT, PAMPRIN, DEXATRIM All in One
bar, SELSUN BLUE and the GOLD BOND lotion and foot care lines.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

         Selling, general and administrative expenses increased $3.4 million or
8.2% as compared to fiscal 2003. Selling, general and administrative expenses
were 17.1% and 17.5% of total revenues for fiscal 2004 and 2003, respectively.
An increase in sales was primarily responsible for the increase in selling
expense. In addition, freight expenses increased due to the increase in fuel
costs. The increase in general and administrative expenses was largely a result
of increased incentive compensation and new product development expenses as well
as expenses related to compliance with the Sarbanes-Oxley Act of 2002.

IMPAIRMENT OF INDEFINITE-LIVED INTANGIBLE ASSETS

         As a result of a decline in sales and reforecasted expected future cash
flows in the fourth quarter, we reperformed the impairment test as prescribed by
SFAS 142 and we determined that a revaluation was required for our DEXATRIM
product line at November 30, 2004. We obtained an independent appraisal to
determine the fair value of the indefinite-lived intangible asset related to
this product line. As a result, we incurred an impairment charge of $20.0
million.

LITIGATION SETTLEMENT CHARGES

         Litigation settlement charges were $15.8 million in fiscal 2004. This
expense was attributable to legal, administrative and estimated settlement costs
related to our DEXATRIM litigation.

INTEREST EXPENSE

         Interest expense decreased $5.4 million or 26.3% in fiscal 2004 as
compared to fiscal 2003. The decrease was largely the result of lower interest
rates and a reduction in outstanding debt as a result of our debt refinancing
completed during the first

                                       36
<PAGE>
quarter of fiscal 2004. Until our indebtedness is reduced substantially,
interest expense will continue to represent a significant percentage of our
total revenues.

LOSS ON EARLY EXTINGUISHMENT OF DEBT

         During fiscal 2004, we retired $204.5 million principal amount of our
8.875% senior subordinated notes and the remaining outstanding balance of our
$60.0 million senior secured credit facility, which resulted in a loss on early
extinguishment of debt of $13.0 million.

FISCAL 2003 COMPARED TO FISCAL 2002

         To facilitate discussion of our operating results for the years ended
November 30, 2003 and 2002, we have included the following selected data from
our Consolidated Statements of Income:

                                             FOR THE YEAR ENDED NOVEMBER 30,
                                             -------------------------------
                                                             INCREASE (DECREASE)
                                                             -------------------
                                        2003       2002      AMOUNT   PERCENTAGE
                                        ----       ----      ------   ----------
                                               (DOLLARS IN THOUSANDS)
Domestic net sales                   $ 209,874  $ 202,074  $   7,800      3.9%
International revenues (including
  royalties)                            23,875     21,042      2,833     13.5
Total revenues                         233,749    223,116     10,633      4.8
Cost of sales                           66,386     62,757      3,629      5.8
Advertising and promotion expense       70,622     68,259      2,363      3.5
Selling, general and administrative
  expense                               40,803     40,212        591      1.5
Interest expense                        20,431     21,292       (861)    (4.0)
Investment and other income
  (expense), net                           124       (114)       238    208.8
Income before change in accounting
  principle                             23,371     18,900      4,471     23.7
Cumulative effect of change in
  accounting principle                     --       8,877     (8,877)      nm
Net income                              23,371     10,023     13,348    133.2

DOMESTIC NET SALES

         Domestic net sales for fiscal 2003 increased $7.8 million or 3.9% as
compared to fiscal 2002. For a description of each brand included in the
category, see "Products" in Item 1 of this Form 10-K. 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)
                                                             -------------------
                                      2003       2002       AMOUNT    PERCENTAGE
                                      ----       ----       ------    ----------
                                              (DOLLARS IN THOUSANDS)
Topical analgesics                 $  58,594  $  61,219   $  (2,625)     (4.3)%
Medicated skin care products          56,528     51,355       5,173      10.1
Dietary supplements                   37,420     41,968      (4,548)    (10.8)
Medicated dandruff shampoos           28,351     15,076      13,275      88.1
Other OTC and toiletry products       28,981     32,456      (3,475)    (10.7)
                                   ---------  ---------   ----------
         Total                     $ 209,874  $ 202,074   $   7,800       3.9
                                   =========  =========   ==========

         With the exception of ICY HOT, sales declines were recorded for our
topical analgesic portfolio (ICY HOT, FLEXALL, ASPERCREME, SPORTSCREME,
CAPZASIN, and ARTHRITIS HOT) as competition from inside and outside the category
increased. Sales of ICY HOT grew principally due to the introduction of the ICY
HOT Back Patch.

         Net sales growth in the medicated skin care products category was led
by an increase of approximately 17% in the GOLD BOND franchise. GOLD BOND sales
growth was attributable to the successful launch of two new first aid items and
the Antifungal Foot Swab in the first quarter and GOLD BOND ULTIMATE Healing
Skin Therapy Lotion in the third quarter of fiscal 2003. In addition, GOLD BOND
sales growth came from the lotion and foot care lines. The increase was
partially offset by a decrease of approximately 7% in PHISODERM net sales
compared to the prior year when the brand was relaunched and the PHISODERM CLEAR
CONFIDENCE Acne Body Wash, PHISODERM CLEAR CONFIDENCE Acne Facial Mask and
PHISODERM CLEAR CONFIDENCE Acne Clear Swab products were initially shipped to
retailers.

                                       37
<PAGE>
         Net sales for the dietary supplement category declined primarily due to
a 28.2% drop in DEXATRIM sales from fiscal 2002. Sales of DEXATRIM were impacted
by the overall decline in the diet pill market driven by negative ephedrine
publicity. The decline in net sales of DEXATRIM was partially offset by
increased sales of GARLIQUE and NEW PHASE. The increase in net sales of GARLIQUE
and NEW PHASE was primarily attributable to effective media campaigns and in the
case of NEW PHASE increased distribution.

         Domestic net sales of SELSUN BLUE medicated dandruff shampoo, which was
acquired in March 2002, continued to benefit from a strong advertising campaign
and increased retail distribution.

         The decrease in net sales of other OTC products was due primarily to
sales declines of PAMPRIN and PREMSYN PMS, as a result of intense competition.

         Domestic sales variances were principally the result of changes in unit
sales volumes with the exception of NEW PHASE, which experienced a unit sales
price increase.

INTERNATIONAL REVENUES

         For fiscal 2003, international revenues, including royalties of $1.2
million from the sales of SELSUN, increased $2.8 million or 13.5% as compared to
fiscal 2002. Our Canadian and U.K. subsidiaries experienced a 19.5% and 2.6%
sales increase, respectively, primarily as a result of SELSUN sales. Other
international revenues increased 27.4% almost entirely as a result of the
acquisition of SELSUN BLUE in the second quarter of fiscal 2002. Sales variances
for international operations were principally the result of changes in unit
sales volumes.

COST OF SALES

         Cost of sales as a percentage of total revenues was 28.4% for fiscal
2003 as compared to 28.1% for fiscal 2002. In fiscal 2003, cost of sales
increased as a result of higher material costs and manufacturing overhead
partially offset by decreased costs resulting from the transition of the North
American manufacturing of SELSUN BLUE to our facility in Chattanooga.

ADVERTISING AND PROMOTION EXPENSE

         Advertising and promotion expenses increased $2.4 million or 3.5% as
compared to fiscal 2002 and were 30.2% of total revenues for fiscal 2003
compared to 30.6% for fiscal 2002. Increases in advertising and promotion
expenditures in fiscal 2003 were recorded for ICY HOT, FLEXALL, SPORTSCREME, the
recently introduced GOLD BOND products, NEW PHASE, SELSUN BLUE, BULLFROG, and
HERPECIN-L. Decreases in advertising and promotion expenditures were recognized
for the balance of the topical analgesic brands, PHISODERM, DEXATRIM, MUDD,
PAMPRIN, GARLIQUE, and the other GOLD BOND products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

         Selling, general and administrative expenses increased $0.6 million or
1.5% as compared to fiscal 2002. Selling, general and administrative expenses
were 17.5% and 18.0% of total revenues for fiscal 2003 and 2002, respectively.
The increase in selling, general and administrative expenses was largely a
result of international severance costs and legal expenses related to the
DEXATRIM with PPA and the Kemper litigation.

INTEREST EXPENSE

         Interest expense decreased $0.9 million or 4.0% as compared to fiscal
2002. The decrease was largely the result of lower outstanding balances under
our Credit Facility. Until our indebtedness is reduced substantially, interest
expense will continue to represent a significant percentage of our total
revenues.

INVESTMENT AND OTHER INCOME

         Investment and other income increased $0.2 million or 208.8% as
compared to fiscal 2002 primarily due to a fiscal 2002 charge of approximately
$0.4 million related to the write-off of equipment offset by a decline in
interest income in fiscal 2003. The use of cash and cash equivalents to make
principal payments on our Credit Facility and lower interest rates on short-term
investments contributed to the decrease in interest income.

INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE

         Income before change in accounting principle increased $4.5 million or
23.7% as compared to fiscal 2002. This increase primarily resulted from lower
costs and expenses as a percentage of revenues and increased revenues.

                                       38
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

         In the first quarter of fiscal 2002, we adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires us
to perform certain fair-value-based tests of the carrying value of our
indefinite-lived intangible assets upon adoption and thereafter at least
annually and to discontinue amortization of our indefinite-lived intangible
assets. Upon adoption of SFAS 142, we obtained independent appraisals to
determine the fair value of these assets as of December 1, 2001 and recorded a
write-down of $8.9 million, net of income tax benefit of $5.4 million, as a
cumulative effect of change in accounting principle and discontinued the
amortization of our indefinite-lived intangible assets. The write-down was
primarily related to our SUNSOURCE product line, which experienced a decline in
sales volume since its initial purchase in 1997, and to a lesser degree our
DEXATRIM product line, which discontinued the marketing of one of its products
in November 2000.

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 $44.7 million and $31.5 million was provided by operations in
fiscal 2004 and 2003, respectively. Cash flows from operating activities in
fiscal 2004 were impacted by an increase in the tax benefit realized from stock
option exercises as compared to the corresponding period of fiscal 2003 and an
increase in accounts payable and accrued liabilities offset by an increase in
accounts receivable and inventories and a decrease in deferred income taxes. The
increase in accounts payable and accrued liabilities related primarily to legal,
administrative and settlement costs associated with our Dexatrim litigation. The
increase in accounts receivable related primarily to an increase in sales, an
increase in international receivables and a decrease in the allowance for
returns. The increase in inventories reflects the building of inventory to
support new product launches in the first quarter of fiscal 2005. In addition, a
loss on early extinguishment of debt of $13.0 million and an impairment charge
of $20.0 million related to our DEXATRIM product line were recorded during
fiscal 2004.

         Investing activities used cash of $5.5 million and $4.4 million in
fiscal 2004 and 2003, respectively. The increase in usage of cash was primarily
due to reduced spending on capital expenditures, an increase in the cash
surrender value of our executive life insurance policies and the change in the
funding status of our pension plan from a liability as of November 30, 2003 to
an asset as of November 30, 2004. In fiscal 2003, capital expenditures related
primarily to equipment and facility modifications to produce SELSUN BLUE
domestically and construction of our new product development building.

         Financing activities used cash of $26.2 million and $16.1 million in
fiscal 2004 and 2003, respectively. The increase in cash used in financing
activities in the current period was attributable to a net repayment of
long-term debt of $12.3 million, an increase in debt issuance costs and debt
retirement costs of $13.6 million related to the refinancing transactions, a
payment of $1.4 million for a premium on the interest rate cap agreement and
$5.0 million used to repurchase shares offset by proceeds from the exercise of
stock options of $6.1 million.

         As of November 30, 2004, our total debt consisted of our Floating Rate
Notes of $75.0 million and 7.0% Subordinated Notes of $125.0 million. As of
November 30, 2004 and February 7, 2005, we had no borrowings outstanding under
our Revolving Credit Facility with available borrowings up to $50.0 million.
Borrowings under our Revolving Credit Facility bear interest at LIBOR plus
applicable percentages of 1.75% to 2.50% or a base rate (the higher of the
federal funds rate plus 0.5% or the prime rate) plus applicable percentages of
0.25% to 1.0% (5.50% as of November 30, 2004). The applicable percentages are
calculated based on our leverage ratio. The Floating Rate Notes bear interest at
a three-month LIBOR plus 3.00% per year (4.78% as of November 30, 2004). On
March 8, 2004, we entered into an interest rate cap agreement effective June 1,
2004 with decreasing annual notional principal amounts of $15.0 million
beginning March 1, 2006 and cap rates ranging from 4.0% to 5.0% over the life of
the agreement. We paid a $1.4 million premium to enter into the interest rate
cap agreement, which will be amortized over the life of the agreement. The
current portion of the premium on the interest rate cap agreement of $0.1
million is included in prepaid expenses and other current assets, and the
long-term portion of $0.8 million is included in other noncurrent assets. The
amortized value of the premium on the interest rate cap was compared to its fair
value as of November 30, 2004, and a charge of $0.3 million, net of tax, was
recorded to other comprehensive income. The interest rate cap agreement
terminates on March 1, 2010.

         In January 2004, our board of directors increased the total
authorization to repurchase our common stock under our stock buyback program to
$20.0 million. During fiscal 2004, we repurchased 190,700 shares for $5.0
million. The remaining availability under the board authorization was $15.0
million as of November 30, 2004. In January 2005, the board of directors
increased the total authorization to repurchase our common stock under the
buyback program to $30.0 million. We are limited in our ability to repurchase
shares due to restrictions under the terms of our Revolving Credit Facility and
the indentures pursuant to which the Floating Rate Notes and 7.0% Subordinated
Notes were issued.

                                       39
<PAGE>
         We believe that cash provided by operating activities, our cash and
cash equivalents balance and funds available under our Revolving Credit Facility
will be sufficient to fund our 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 obtain additional financing.


CONTRACTUAL OBLIGATIONS

         The following data summarizes our contractual obligations as of
November 30, 2004. We had no commercial obligations as of November 30, 2004:
<TABLE><CAPTION>
                                                   PAYMENTS DUE BY
                                                   ---------------
CONTRACTUAL OBLIGATIONS:      TOTAL   WITHIN 1 YEAR   2-3 YEARS    4-5 YEARS   AFTER 5 YEARS
-----------------------       -----   -------------   ---------    ---------   -------------
                                                (DOLLARS IN THOUSANDS)
<S>                        <C>          <C>           <C>          <C>           <C>
  Long-term debt           $ 200,000    $      --     $      --    $      --     $ 200,000
  Operating leases             2,203          516           716          405           566
  Purchase commitments         1,688        1,394           294           --            --
                           ---------    ---------     ---------    ---------     ---------
  Total                    $ 203,891    $   1,910     $   1,010    $     405     $ 200,566
                           =========    =========     =========    =========     =========
</TABLE>

         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. We do not have significant agreements for the purchase of inventory or
other goods specifying minimum quantities or set prices that exceed our expected
requirements for three months.

FOREIGN OPERATIONS

         Historically, our primary foreign operations have been conducted
through our Canadian and United Kingdom ("U.K.") subsidiaries. As of November 1,
2004, our European business is conducted through Chattem Global Consumer
Products Limited, a wholly-owned subsidiary located in Limerick, Ireland. The
functional currencies of these subsidiaries are Canadian dollars, British pounds
and Euros, respectively. Fluctuations in exchange rates can impact operating
results, including total revenues and expenses, when translations of the
subsidiary financial statements are made in accordance with SFAS No. 52,
"Foreign Currency Translation". For fiscal 2004 and 2003, these subsidiaries
accounted for 7% and 8% of total revenues, respectively, and 4% and 3% of total
assets, respectively. It has not been our practice to hedge our assets and
liabilities in Canada, the U.K. and Ireland or our intercompany transactions due
to the inherent risks associated with foreign currency hedging transactions and
the timing of payments between us and our foreign subsidiaries. Following our
acquisition of SELSUN BLUE, which is sold in approximately 80 foreign countries,
our international business operations have expanded significantly, which will
increase our exposure to fluctuations in foreign exchange rates. During fiscal
2004, a portion of these foreign sales was reflected as royalties, which have
been paid to us in U.S. dollars. In addition, Abbott has continued to supply a
portion of our international product where appropriate and bill us in U.S.
dollars. Beginning April 1, 2004, we were billed in local currencies.
Historically, gains or losses from foreign currency transactions have not had a
material impact on our operating results. Gains of $0.2 million for each year
ended November 30, 2004 and 2003, respectively, resulted from foreign currency
transactions and are included in selling, general and administrative expenses in
the Consolidated Statements of Income.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). We adopted SFAS 143 on December 1, 2002.
SFAS 143 establishes accounting standards for the recognition and measurement of
an asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. The adoption of SFAS 143 did not have
an impact on our financial position, results of operations or cash flows.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). We adopted SFAS 145 on December 1, 2002. SFAS 145
requires us to include gains and losses on extinguishments of debt as income or
loss from continuing operations rather than as extraordinary items as previously
required under SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt". We are also required to reclassify any gain or loss on extinguishment of
debt previously classified as an extraordinary item in prior periods presented.
SFAS 145 also provides accounting standards for certain lease modifications that
have economic effects

                                       40
<PAGE>
similar to sale-leaseback transactions and various other technical corrections.
The application of SFAS 145 resulted in the classification of the loss on early
extinguishment of debt of $13.0 million in fiscal 2004 as a component of income
before income tax and change in accounting principle.

         In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS 146
on January 1, 2003. SFAS 146 supercedes EITF Issue No. 94-3. SFAS 146 requires
that the liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, not at the date of an entity's
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The
application of SFAS 146 did not have a material impact on our financial
position, results of operations or cash flows.

         In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 supercedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and provides guidance on the recognition and disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees. The initial recognition and measurement provisions of
FIN 45 are effective for guarantees issued or modified after December 31, 2002
and are to be applied prospectively. The disclosure requirements are effective
for financial statements for interim or annual periods ending after December 15,
2002. We had no instruments or guarantees that required additional or enhanced
disclosure under FIN 45 at November 30, 2004 and 2003, except as disclosed in
Note 14, and no guarantees issued or modified after December 31, 2002 that
required recognition and measurement in accordance with the provisions of FIN
45. The adoption of FIN 45 did not have an impact on our financial position,
results of operations or cash flows.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee compensation.
SFAS 148 also amends Accounting Principles Board ("APB") Opinion No. 28,
"Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The transition
guidance and annual disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002. We implemented the interim disclosure
provision in our first fiscal quarter of 2003. The adoption of SFAS 148 did not
have an impact on our financial position, results of operations or cash flows.

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

         In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is generally effective for derivative instruments,
including derivative instruments embedded in certain contracts, entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of SFAS 149 did not have an impact on our financial
position, results of operations or cash flows.

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

         In November 2004, the EITF reached a consensus on Issue No. 03-13,
"Applying the Conditions in Paragraph 42 of FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" in Determining Whether to
Report

                                       41
<PAGE>
Discontinued Operations" ("EITF 03-13"). Under the consensus, the approach for
assessing whether cash flows of the component have been eliminated from the
ongoing operations of the entity focuses on whether continuing cash flows are
direct or indirect cash flows. Cash flows of the component would not be
eliminated if the continuing cash flows to the entity are considered direct cash
flows. The consensus should be applied to a component of an enterprise that is
either disposed of or classified as held for sale in fiscal periods beginning
after December 15, 2004. The adoption of EITF 03-13 is not expected to have an
impact on our financial position, results of operations or cash flows.

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS 123R supercedes APB Opinion No.
25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows". SFAS 123 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. This statement is effective for our interim periods
beginning after June 15, 2005. We are currently evaluating the provisions of
SFAS 123R to determine its impact on our future financial statements.

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

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. 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. 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. The risks, uncertainties
and assumptions of the forward-looking statements include, but are not limited
to, the lack of availability, limits of coverage and expense related to product
liability insurance, the reduction of available insurance coverage as proceeds
are used to fund any product liability settlements or awards; the possibility of
other product liability claims, including claims relating to the prior existence
of ephedrine in DEXATRIM products or arising from the FDA's rule banning the
sale of dietary supplements containing ephedrine; our ability to fund
liabilities from product liability claims greater than our insurance coverage or
outside the scope of insurance coverage; the possible effect of the negative
public perception resulting from product liability claims on sales of DEXATRIM
products without PPA or ephedrine; the impact of brand acquisitions and
divestitures; the impact of gains or losses resulting from product acquisitions
or divestitures; product demand and market acceptance risks; product development
risks, such as delays or difficulties in developing, producing and marketing new
products or line extensions; the impact of competitive products, pricing and
advertising; our ability to sell and market SELSUN internationally where we have
only limited experience and infrastructure; constraints resulting from our
financial condition, including the degree to which we are leveraged, debt
service requirements and restrictions under indentures and loan agreements;
government regulations; risks of loss of material customers; public perception
regarding our products; dependence on third party manufacturers; environmental
matters; and other risks described in our Securities and Exchange Commission
filings.

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 consists of our Floating
Rate Notes and our Revolving Credit Facility. The aggregate balance outstanding
under the Floating Rate Notes as of November 30, 2004 was $75.0 million. The
Floating Rate Notes bear interest at a three-month LIBOR plus 3.00% per year
(4.78% as of November 30, 2004). Loans under our Revolving Credit Facility bear
interest at LIBOR plus applicable percentages of 1.75% to 2.50% or a base rate
(the higher of the federal funds rate plus 0.5% or the prime rate) plus
applicable percentages of 0.25% to 1.0%. The applicable percentages are
calculated based on our leverage ratio. As of November 30, 2004, no amounts had
been borrowed under the Revolving Credit

                                       42
<PAGE>
Facility, and the variable rate on the Revolving Credit Facility was 5.50%. The
7.0% Subordinated Notes are fixed interest rate obligations. On March 8, 2004,
we entered into an interest rate cap agreement effective June 1, 2004 with
decreasing annual notional principal amounts of $15.0 million beginning March 1,
2006 and cap rates ranging from 4.0% to 5.0% over the life of the agreement. The
amortized value of the premium on the interest rate cap was compared to its fair
value as of November 30, 2004, and a charge of $0.3 million, net of tax, was
recorded to other comprehensive income. The interest rate cap agreement
terminates on March 1, 2010. The impact on our results of operations of a
one-point rate change on the balance currently outstanding of our Floating Rate
Notes for the next twelve months would be approximately $0.5 million, net of
tax.

         We are subject to risk from changes in the foreign exchange rates
relating to our Canadian, U.K. and Irish subsidiaries. Assets and liabilities of
these subsidiaries are translated to U.S. dollars at year-end exchange rates.
Income and expense items are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate component
of shareholders' equity. Gains and losses, which result from foreign currency
transactions, are included in the Consolidated Statements of Income. Abbott has
continued to supply a portion of our international product where appropriate and
bill us in U.S. dollars. Beginning April 1, 2004, we were billed in local
currencies. The potential loss resulting from a hypothetical 10.0% adverse
change in the quoted foreign currency exchange rate amounts to approximately
$1.0 million as of November 30, 2004.

         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.

















                                       43
<PAGE>
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.
and subsidiaries as of November 30, 2004 and 2003, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended November 30, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chattem, Inc. and
subsidiaries at November 30, 2004 and 2003 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
November 30, 2004, in conformity with U.S. generally accepted accounting
principles.

As described in Notes 2 and 4 to the consolidated financial statements,
effective December 1, 2001, the Company changed its method of accounting for
goodwill and other intangible assets.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Chattem Inc.'s
internal control over financial reporting as of November 30, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated January 31, 2005, expressed an unqualified opinion thereon.


                                                         /s/ ERNST & YOUNG LLP


Chattanooga, Tennessee
January 31, 2005



                                       44
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2004 AND 2003
(IN THOUSANDS)


ASSETS                                                      2004         2003
                                                          --------     --------

CURRENT ASSETS:
  Cash and cash equivalents                               $ 40,193     $ 26,931
  Accounts receivable, less allowances of $1,682
    in 2004 and $3,594 in 2003                              32,098       25,478
  Inventories                                               21,690       17,559
  Refundable income taxes                                    4,702        4,431
  Deferred income taxes                                      4,308        3,441
  Prepaid expenses and other current assets                  3,683        3,376
                                                          --------     --------
      Total current assets                                 106,674       81,216
                                                          --------     --------

PROPERTY, PLANT AND EQUIPMENT, NET                          28,765       28,722
                                                          --------     --------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased
    product rights, net                                    225,560      245,847
  Debt issuance costs, net                                   5,174        5,504
  Other                                                      5,551        2,096
                                                          --------     --------
      Total other noncurrent assets                        236,285      253,447
                                                          --------     --------

         TOTAL ASSETS                                     $371,724     $363,385
                                                          ========     ========


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.

                                       45
<PAGE>
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2004 AND 2003
(IN THOUSANDS)


LIABILITIES AND SHAREHOLDERS' EQUITY                        2004         2003
                                                          --------     --------

CURRENT LIABILITIES:
  Current maturities of long-term debt                    $    --      $  7,750
  Accounts payable and other                                13,341       10,924
  Accrued liabilities                                       23,763       15,979
                                                          --------     --------
      Total current liabilities                             37,104       34,653
                                                          --------     --------

LONG-TERM DEBT, less current maturities                    200,000      204,676
                                                          --------     --------

DEFERRED INCOME TAXES                                       25,732       26,796
                                                          --------     --------

OTHER NONCURRENT LIABILITIES                                 1,776        1,689
                                                          --------     --------

COMMITMENTS AND CONTINGENCIES  (Note 13)

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value,
  authorized 1,000, none issued                                --           --
  Common shares, without par value, authorized
   50,000, issued 19,882 in 2004
   and 19,161 in 2003                                       85,949       77,815
  Retained earnings                                         23,888       22,274
                                                          --------     --------
                                                           109,837      100,089
  Unamortized value of restricted common shares issued      (2,386)      (2,058)
  Cumulative other comprehensive income, net of taxes:
    Interest rate cap adjustment                              (316)         --
    Foreign currency translation adjustment                    (23)        (820)
    Minimum pension liability adjustment                       --        (1,640)
                                                          --------     --------
      Total shareholders' equity                           107,112       95,571
                                                          --------     --------

          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      $371,724     $363,385
                                                          ========     ========


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.

                                       46
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
                                                               2004           2003           2002
                                                            ---------      ---------      ---------
<S>                                                         <C>            <C>            <C>
TOTAL REVENUES:
  Net sales                                                 $ 257,534      $ 232,527      $ 220,789
  Royalties                                                       621          1,222          2,327
                                                            ---------      ---------      ---------
    Total revenues                                            258,155        233,749        223,116
                                                            ---------      ---------      ---------

COSTS AND EXPENSES:
  Cost of sales                                                73,103         66,386         62,757
  Advertising and promotion                                    74,929         70,622         68,259
  Selling, general and administrative                          44,169         40,803         40,212
  Impairment of indefinite-lived intangible assets             20,000           --             --
  Litigation settlement                                        15,836           --             --
                                                            ---------      ---------      ---------
    Total costs and expenses                                  228,037        177,811        171,228
                                                            ---------      ---------      ---------

INCOME FROM OPERATIONS                                         30,118         55,938         51,888
                                                            ---------      ---------      ---------

OTHER INCOME (EXPENSE):
  Interest expense                                            (15,049)       (20,431)       (21,292)
  Investment and other income (expense), net                      298            124           (114)
  Loss on early extinguishment of debt                        (12,958)          --             --
                                                            ---------      ---------      ---------
    Total other income (expense)                              (27,709)       (20,307)       (21,406)
                                                            ---------      ---------      ---------

INCOME BEFORE INCOME TAXES AND CHANGE IN
  ACCOUNTING PRINCIPLE                                          2,409         35,631         30,482

PROVISION FOR INCOME TAXES                                        795         12,260         11,582
                                                            ---------      ---------      ---------

INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE                    1,614         23,371         18,900

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE, NET OF INCOME TAX BENEFIT                           --             --           (8,877)
                                                            ---------      ---------      ---------

NET INCOME                                                  $   1,614      $  23,371      $  10,023
                                                            =========      =========      =========

 NUMBER OF COMMON SHARES:
    Weighted average outstanding, basic                        19,379         18,925         18,607
                                                            =========      =========      =========
    Weighted average and potential dilutive outstanding        20,225         19,632         19,344
                                                            =========      =========      =========

 NET INCOME PER COMMON SHARE:
  Basic:
    Income before change in accounting principle            $     .08      $    1.23      $    1.02
    Change in accounting principle                               --             --             (.48)
                                                            ---------      ---------      ---------
      Total basic                                           $     .08      $    1.23      $     .54
                                                            =========      =========      =========
  Diluted:
    Income before change in accounting principle            $     .08      $    1.19      $     .98
    Change in accounting principle                               --             --             (.46)
                                                            ---------      ---------      ---------
      Total diluted                                         $     .08      $    1.19      $     .52
                                                            =========      =========      =========
</TABLE>

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.

                                       47
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
                                                                          Unamortized
                                                                           Value of                             Minimum
                                                                          Restricted               Foreign      Pension
                                                               Retained     Common     Interest    Currency    Liability
                                                    Common     Earnings     Shares     Rate Cap  Translation  Adjustment,
                                                    Shares     (Deficit)    Issued    Adjustment  Adjustment      Net       Total
                                                    ------     ---------    ------    ----------  ----------      ---       -----
<S>                                                <C>         <C>         <C>         <C>         <C>         <C>         <C>
Balance, November 30, 2001:                        $ 67,828    $(11,120)   $   (859)   $    --     $ (2,231)   $ (1,000)   $ 52,618
  Comprehensive income:                                 --          --          --          --          --          --          --
    Net income                                          --       10,023         --          --          --          --       10,023
    Foreign currency translation adjustment             --          --          --          --          472         --          472
    Minimum pension liability adjustment                --          --          --          --          --        1,000       1,000
                                                                                                                           --------
      Total comprehensive income                        --          --          --          --          --          --       11,495
                                                                                                                           --------
  Compensation on unexercised stock options             175         --          --          --          --          --          175
  Stock options exercised                             7,345         --          --          --          --          --        7,345
  Tax benefit realized from stock option plans        4,453         --          --          --          --          --        4,453
  Stock repurchases                                  (1,650)        --          --          --          --          --       (1,650)
  Issuance of 3.8 common shares for
    non-employee directors' compensation                 36         --          --          --          --          --           36
 Issuance of 50 shares of restricted common
   stock at a value of $22.515 per share              1,126         --       (1,126)        --          --          --          --
  Amortization of value of restricted
    common shares issued                                --          --          272         --          --          --          272
                                                   --------    --------    --------    --------    --------    --------    --------
Balance, November 30, 2002                           79,313      (1,097)     (1,713)        --       (1,759)        --       74,744

  Comprehensive income (loss):
    Net income                                          --       23,371         --          --          --          --       23,371
    Foreign currency translation adjustment             --          --          --          --          939         --          939
    Minimum pension liability adjustment                --          --          --          --          --       (1,640)     (1,640)
                                                                                                                           --------
      Total comprehensive income                        --          --          --          --          --          --       22,670
                                                                                                                           --------
  Stock options exercised                             1,555         --          --          --          --          --        1,555
  Tax benefit realized from stock option plans        1,259         --          --          --          --          --        1,259
  Stock repurchases                                  (5,351)        --          --          --          --          --       (5,351)
  Issuance of 2.1 common shares for non-employee
    directors' compensation                              39         --          --          --          --          --           39
 Issuance of 69 shares of restricted common
   stock at a value of $14.50 per share               1,000         --       (1,000)        --          --          --          --
  Amortization of value of restricted common
    shares issued                                       --          --          655         --          --          --          655
                                                   --------    --------    --------    --------    --------    --------    --------
Balance, November 30, 2003                           77,815      22,274      (2,058)        --         (820)     (1,640)     95,571
  Comprehensive income (loss):
    Net income                                          --        1,614         --          --          --          --        1,614
    Interest rate cap adjustment                        --          --          --         (316)        --          --         (316)
    Foreign currency translation adjustment             --          --          --          --          797         --          797
    Minimum pension liability adjustment                --          --          --          --          --        1,640        1,640
                                                                                                                           --------
      Total comprehensive income                        --          --          --          --          --          --        3,735
                                                                                                                           --------
  Stock options exercised                             6,148         --          --          --          --          --        6,148
  Tax benefit realized from stock option plans        5,568         --          --          --          --          --        5,568
  Stock repurchases                                  (5,034)        --          --          --          --          --       (5,034)
  Issuance of 2.8 common shares for non-employee
    directors' compensation                              53         --          --          --          --          --           53
 Issuance of 70 shares of restricted common
   stock at a value of $19.98 per share               1,399         --       (1,399)        --          --          --          --
  Amortization of value of restricted common
    shares issued                                       --          --        1,071         --          --          --        1,071
                                                   --------    --------    --------    --------    --------    --------    --------
Balance, November 30, 2004                         $ 85,949    $ 23,888    $ (2,386)   $   (316)   $    (23)   $    --     $107,112
                                                   ========    ========    ========    ========    ========    ========    ========
</TABLE>
              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.

                                       48
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
                                                                             2004           2003           2002
                                                                          ---------      ---------      ---------
<S>                                                                       <C>            <C>            <C>
OPERATING ACTIVITIES:
  Net income                                                              $   1,614      $  23,371      $  10,023
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                                             6,131          6,584          5,816
    Deferred income taxes                                                    (1,931)         6,627          8,165
    Loss on early extinguishment of debt                                     12,958           --             --
    Impairment of indefinite-lived assets                                    20,000           --             --
    Cumulative effect of change in accounting principle, net                   --             --            8,877
    Tax benefit realized from stock option exercises                          5,568          1,259          4,453
    Stock option expense                                                       --             --              175
    Other, net                                                                 (249)           (66)           269
    Changes in operating assets and liabilities, net of acquisitions:
      Accounts receivable                                                    (6,620)           195         (4,813)
      Inventories                                                            (4,131)         1,210         (4,509)
      Refundable income taxes                                                  (271)          (389)        (1,644)
      Prepaid expenses and other current assets                                (200)          (617)           764
      Accounts payable and accrued liabilities                               11,841         (6,723)         7,732
                                                                          ---------      ---------      ---------
        Net cash provided by operating activities                            44,710         31,451         35,308
                                                                          ---------      ---------      ---------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                                 (3,239)        (5,527)        (3,785)
  Purchases of patents, trademarks and other product rights                      (7)          (400)       (75,040)
  (Increase) decrease in other assets                                        (2,245)         1,479           (657)
                                                                          ---------      ---------      ---------
         Net cash used in investing activities                               (5,491)        (4,448)       (79,482)
                                                                          ---------      ---------      ---------

FINANCING ACTIVITIES:
  Repayment of long-term debt                                              (212,288)       (12,250)       (25,000)
  Proceeds from long-term debt                                              200,000           --           45,000
  Proceeds from borrowings under revolving credit facility                   25,000           --             --
  Repayments of revolving credit facility                                   (25,000)          --             --
  Repurchase of common shares                                                (5,034)        (5,351)        (1,650)
  Proceeds from exercise of stock options                                     6,148          1,555          7,346
  Increase in debt issuance costs                                            (5,743)           (25)        (1,146)
  Debt retirement costs                                                      (7,861)          --             --
  Premium on interest rate cap agreement                                     (1,375)          --             --
                                                                          ---------      ---------      ---------
        Net cash (used in) provided by financing activities                 (26,153)       (16,071)        24,550
                                                                          ---------      ---------      ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                    196             75            103
                                                                          ---------      ---------      ---------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the year                                           13,262         11,007        (19,521)
  At beginning of year                                                       26,931         15,924         35,445
                                                                          ---------      ---------      ---------
  At end of year                                                          $  40,193      $  26,931      $  15,924
                                                                          =========      =========      =========

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Additions to trademarks and other product rights by
    assumption of certain liabilities                                     $    --        $    --        $   1,178
  Issuance of 70 shares of restricted common stock at
    a value of $19.98 per share in 2004, 69 shares at
    a value of $14.50 per share in 2003 and 50 shares at
    a value of $22.515 per share in 2002                                  $   1,399      $   1,000      $   1,126
</TABLE>

              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.

                                       49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALL MONETARY AND SHARE AMOUNTS ARE EXPRESSED IN THOUSANDS. UNLESS OTHERWISE
INDICATED, THE NUMBER OF SHARES OF OUR COMMON STOCK AND RELATED PER SHARE
COMPUTATIONS INCLUDED IN THESE FINANCIAL STATEMENTS AND NOTES THERETO HAVE BEEN
ADJUSTED TO REFLECT THE TWO-FOR-ONE SPLIT OF THE COMMON STOCK ON NOVEMBER 29,
2002.

(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, Inc. and its wholly-owned subsidiaries. Our wholly-owned foreign
subsidiaries report as of and for the twelve months ended October 31 to
facilitate timely reporting of the consolidated financial statements. 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.

         INVENTORIES

         Inventory costs include materials, labor and factory overhead.
Inventories in the U.S. are valued at the lower of last-in, first-out ("LIFO")
cost or market while international inventories are valued at the lower of
first-in, first-out ("FIFO") cost or market.

         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 2004, 2003 and 2002 was $3,302, $3,493 and
$3,061, 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.
Prior to the adoption of SFAS 142 (see below), trademarks were amortized over 40
years.

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
other Intangible Assets" ("SFAS 142"). The provisions of SFAS 142, which were
adopted by us on December 1, 2001, require us to discontinue the amortization of
the cost of intangible assets with indefinite lives and also require certain
fair-value-based tests of the carrying value of indefinite-lived intangible
assets upon adoption and thereafter 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
indicated that finite-lived assets should have been evaluated for possible
impairment, we used 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
<PAGE>
         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 $843, $1,501 and
$1,251 in 2004, 2003 and 2002, respectively. Accumulated amortization of these
costs was $569 and $5,741 at November 30, 2004 and 2003, respectively. Due to
our refinancing transactions (described in Note 5) in 2004,tender premiums and
related fees of $7,861 were paid and net debt issuance costs of $5,097 were
written off and charged to loss on early extinguishment of debt in the
Consolidated Statements of Income. In addition, new debt issuance costs of
$5,743 were capitalized. Due to prepayments on the Credit Facility (as defined
in Note 5) in 2003 and 2002, net debt issuance costs of $145 and $489,
respectively, were written off and charged to interest expense included in the
Consolidated Statements of Income.

         PRODUCT DEVELOPMENT

         Product development costs relate primarily to the development of new
products and are expensed as incurred. Such expenses were $3,051, $2,696 and
$2,126 in 2004, 2003 and 2002, 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 2004, 2003 and 2002 was $54,263, $50,462 and $48,953, respectively.
At November 30, 2004 and 2003, we reported $1,168 and $1,334, respectively, of
advertising paid for in 2004 and 2003, which will run or did run in the next
fiscal year. These amounts are included in prepaid expenses and other current
assets in the 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 and (losses) which result from foreign currency
transactions amounted to $194, $220 and $(69) for the years ended November 30,
2004, 2003 and 2002, respectively, and are included in the Consolidated
Statements of 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 the years ended November 30, 2004, 2003 and 2002:

                   ALLOWANCE FOR DOUBTFUL ACCOUNTS

         As of November 30, 2004, 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.

                   REVENUE RECOGNITION

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

                                       51
<PAGE>
         In accordance with industry practice, we allow our customers to return
unsold sun care products (i.e. BULLFROG and SUN IN lines of products) at the end
of the sun care season. We record the sales at the time the products are shipped
and title transfers. At the time of shipment, we also record a reduction in
sales and an allowance on our balance sheet for anticipated returns based upon
an estimated return level. The level of returns may fluctuate from our estimates
due to several factors including weather conditions, customer inventory levels
and competitive conditions. Each percentage point change in our return rate
would impact our net sales by approximately $150. During fiscal 2004, we reduced
our estimate of seasonal returns by approximately $934, which resulted in an
increase to net sales in our consolidated financial statements, as compared to
approximately $323 and $446 increases in our estimates in fiscal 2003 and 2002,
respectively. During fiscal 2004 and 2003, we also reduced our estimate of
non-seasonal returns by approximately $765 and $692, respectively, which
resulted in an increase to net sales in our consolidated financial statements,
as compared to an approximately $720 increase in our estimate in fiscal 2002.

         We routinely enter into agreements with our customers to participate in
promotional programs. These programs generally take the form of coupons,
temporary price reductions, scan downs, display activity and participations in
advertising vehicles provided uniquely by the customer. The ultimate cost of
these programs is often variable based on the number of units actually sold.
Estimated unit sales of a product under a promotional program are used to
estimate the total cost of the program, which is recorded as a reduction of
sales. Actual results can differ from the original estimate. We also consider
customer delays in requesting promotional program payments when evaluating the
required accrual. Many customers audit programs significantly after the date of
performance to determine the actual amount due and make a claim for
reimbursement at that time. As a result, changes in the unit sales trends under
promotional programs as well as the timing of payments could result in changes
in the accrual. During fiscal 2004 and 2003, we reduced our estimate of
promotional accruals by approximately $1,642 and $2,251, respectively, which
resulted in an increase to net sales or a decrease in advertising and promotion
expense in our consolidated financial statements, as compared to an increase in
our estimate of approximately $3,995 in fiscal 2002.

                   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. We revised our annual estimated income tax rate
during fiscal 2004 to 33% as a result of the implementation of a number of
foreign and state tax planning initiatives, which include our determination
during the third quarter of fiscal 2004 to reinvest indefinitely all
undistributed earnings of Chattem (Canada), a wholly-owned subsidiary.

         Undistributed earnings of Chattem (Canada) amounted to approximately
$1,788 during fiscal 2004. These earnings are considered to be reinvested
indefinitely and, accordingly, no provision for U.S. federal and state income
taxes has been provided thereon. Upon distribution of those earnings in the form
of dividends or otherwise, we would be subject to U.S. income taxes (subject to
an adjustment for foreign tax credits).

         DERIVATIVE FINANCIAL INSTRUMENTS

         We entered into an interest rate cap agreement effective June 1, 2004
as a means of managing our interest rate exposure and not for trading purposes.
The agreement has the effect of converting a portion of our variable rate
obligations to fixed rate obligations (see Note 5).

         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 34%, 34% and 28% of consolidated sales in 2004, 2003 and 2002,
respectively. No other customer exceeded 10% of our consolidated sales during
the period. Boots, a U.K. retailer, accounts for more than 10% of our
international sales. Our ten largest customers represented approximately 68% of
total revenues during fiscal 2004.

                                       52
<PAGE>
         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
PREMSYN 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
PREMSYN PMS products in fiscal 2004 represented approximately 4% 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 $7,482, $6,310 and $5,868 for the years
ended November 30, 2004, 2003 and 2002, respectively, are included in selling
expenses in our Consolidated Statements of Income.

         STOCK-BASED COMPENSATION

         We account for our stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
follow the disclosure option of SFAS 123, as amended by SFAS 148 (see below).

         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 Stock Incentive
Plan, which was adopted by our board of directors on January 21, 2003 and was
approved by our shareholders at the April 16, 2003 annual shareholders' meeting,
provides for the issuance of up to 1,500 shares of common stock. Options vest
ratably over four years and are exercisable for a period of up to ten years from
the date of grant.

         For SFAS 123 purposes, as amended by SFAS 148, the fair value of each
option grant has been estimated as of the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
in 2004, 2003 and 2002: expected dividend yield of 0%, expected volatility of
58%, 60% and 64%, respectively, risk-free interest rates of 4.35%, 4.33% and
4.22%, respectively, and expected lives of approximately five years in 2004 and
six years in 2003 and 2002, respectively.

         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 the years ended November 30, 2004, 2003
and 2002 as indicated below:

                                                 2004        2003        2002
                                               --------    --------    --------
         Net income (loss):

           As reported                          $ 1,614    $ 23,371    $ 10,023
           Recognized stock-based
            compensation costs, net                 --          --          109
           Fair value method compensation
            costs, net                           (4,465)     (2,879)     (1,808)
                                               --------    --------    --------
           Pro forma                           $ (2,851)   $ 20,492    $  8,324
                                               ========    ========    ========

         Net income (loss) per share, basic:

           As reported                         $    .08    $   1.23    $    .54
           Pro forma                           $   (.15)   $   1.08    $    .45

         Net income (loss) per share, diluted:

           As reported                         $    .08    $   1.19    $    .52
           Pro forma                           $   (.15)   $   1.04    $    .43

         RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform to the
current period's presentation.

                                       53
<PAGE>
         RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). We adopted SFAS 143 on December 1, 2002.
SFAS 143 establishes accounting standards for the recognition and measurement of
an asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. The adoption of SFAS 143 did not have
an impact on our financial position, results of operations or cash flows.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). We adopted SFAS 145 on December 1, 2002. SFAS 145
requires us to include gains and losses on extinguishments of debt as income or
loss from continuing operations rather than as extraordinary items as previously
required under SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt". We are also required to reclassify any gain or loss on extinguishment of
debt previously classified as an extraordinary item in prior periods presented.
SFAS 145 also provides accounting standards for certain lease modifications that
have economic effects similar to sale-leaseback transactions and various other
technical corrections. The application of SFAS 145 resulted in the
classification of the loss on early extinguishment of debt of $12,958 in fiscal
2004 as a component of income before income taxes and change in accounting
principle.

         In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS 146
on January 1, 2003. SFAS 146 supercedes Emerging Issues Task Force ("EITF")
Issue No. 94-3. SFAS 146 requires that the liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred, not
at the date of an entity's commitment to an exit or disposal plan. SFAS 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The application of SFAS 146 did not have a material impact on
our financial position, results of operations or cash flows.

         In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 supercedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and provides guidance on the recognition and disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees. The initial recognition and measurement provisions of
FIN 45 are effective for guarantees issued or modified after December 31, 2002
and are to be applied prospectively. The disclosure requirements are effective
for financial statements for interim or annual periods ending after December 15,
2002. We had no instruments or guarantees that required additional or enhanced
disclosure under FIN 45 at November 30, 2004 and 2003, except as disclosed in
Note 14, and no guarantees issued or modified after December 31, 2002 that
required recognition and measurement in accordance with the provisions of FIN
45. The adoption of FIN 45 did not have an impact on our financial position,
results of operations or cash flows.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee compensation.
SFAS 148 also amends Accounting Principles Board ("APB") Opinion No. 28,
"Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The transition
guidance and annual disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002. We implemented the interim disclosure
provision in our first fiscal quarter of 2003. The adoption of SFAS 148 did not
have an impact on our financial position, results of operations or cash flows.

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

         In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments

                                       54
<PAGE>
and Hedging Activities." SFAS 149 is generally effective for derivative
instruments, including derivative instruments embedded in certain contracts,
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS 149 did not have an impact
on our financial position, results of operations or cash flows.

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

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

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS 123R supercedes APB Opinion No.
25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows". SFAS 123 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. This statement is effective for our interim periods
beginning after June 15, 2005. We are currently evaluating the provisions of
SFAS 123R to determine its impact on our future financial statements.

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















                                       55
<PAGE>
(3)  SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

     COMPUTATION OF EARNINGS PER SHARE

     The following table presents the computation of per share earnings for the
years ended November 30, 2004, 2003 and 2002, respectively:
<TABLE><CAPTION>
                                                                      For the year ended November 30,
                                                               --------------------------------------------
                                                                   2004            2003            2002
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
NET INCOME:
  Income before change in accounting principle                 $      1,614    $     23,371    $     18,900
  Change in accounting principle                                         --              --          (8,877)
                                                               ------------    ------------    ------------
      Net income                                               $      1,614    $     23,371    $     10,023
                                                               ============    ============    ============

NUMBER OF COMMON SHARES:
  Weighted average outstanding                                       19,379          18,925          18,607
  Issued upon assumed exercise of outstanding stock options             786             651             644
  Effect of issuance of restricted common shares                         60              56              93
                                                               ------------    ------------    ------------
  Weighted average and potential dilutive outstanding (1)            20,225          19,632          19,344
                                                               ============    ============    ============

NET INCOME PER COMMON SHARE:
  Basic:
    Income before change in accounting principle               $        .08    $       1.23    $       1.02
    Change in accounting principle                                       --              --            (.48)
                                                               ------------    ------------    ------------
      Total basic                                              $        .08    $       1.23    $        .54
                                                               ============    ============    ============
  Diluted:
    Income before change in accounting principle               $        .08    $       1.19    $        .98
    Change in accounting principle                                       --              --            (.46)
                                                               ------------    ------------    ------------
      Total diluted                                            $        .08    $       1.19    $        .52
                                                               ============    ============    ============
</TABLE>


(1)  Because their effects are anti-dilutive, excludes shares issuable under
stock option plans and restricted stock issuance whose grant price was greater
than the average market price of common shares outstanding as follows: 303
shares in 2004, 104 shares in 2003 and 86 shares in 2002.


     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 2004, 2003 and 2002 is presented below:
<TABLE><CAPTION>
                                                         2004                          2003                          2002
                                              -------------------------     -------------------------     -------------------------
                                                              Weighted                      Weighted                      Weighted
                                                Shares         Average        Shares         Average        Shares         Average
                                                Under         Exercise        Under         Exercise        Under         Exercise
                                                Option          Price         Option          Price         Option          Price
                                              ----------     ----------     ----------     ----------     ----------     ----------
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Outstanding at beginning of year                   2,444     $     9.72          1,913     $     7.05          2,952     $     5.43
  Granted                                            545          28.33            816          14.58            430          12.74
  Exercised                                         (839)          7.33           (273)          5.70         (1,335)          5.50
  Cancelled                                         (118)         15.22            (12)          4.94           (134)          5.08
                                              ----------                    ----------                    ----------

Outstanding at end of year                         2,032     $    15.38         2,444      $     9.72          1,913     $     7.05
                                              ==========     ==========     ==========     ==========     ==========     ==========

Options exercisable at year-end                      418     $     9.99            579     $     7.15            359     $     6.41
                                              ==========     ==========     ==========     ==========     ==========     ==========

Weighted average fair value of options granted               $    13.86                    $     7.95                    $     7.12
                                                             ==========                    ==========                    ==========
</TABLE>

     Compensation expense for stock option grants with exercise prices below the
market price at the date of grant is recognized ratably over the vesting period.
In 1998, options were granted to purchase 350 shares, which were at market price

                                       56
<PAGE>
on the date of approval by the board of directors but at prices below the market
price on the date of shareholder approval. Compensation expense recorded for
this grant was $0 in 2004 and 2003, respectively, and $175 in 2002.

     A summary of the exercise prices for options outstanding under our
stock-based compensation plans at November 30, 2004 is presented below:
<TABLE><CAPTION>

                                                                                              Weighted Average
                                                         Weighted Average                        Exercise
   Range of          Shares Under     Weighted Average       Remaining          Shares        Price of Shares
Exercise Prices         Option         Exercise Price      Life in Years      Exercisable       Exercisable
---------------      ------------     ----------------   ----------------     -----------     ----------------
<S>                  <C>              <C>                <C>                  <C>             <C>
$ 2.44 - $ 4.25             28           $      4.08            2.51                25          $      4.14
$ 4.66 - $ 6.54            489                  4.95            6.41               154                 4.97
$ 6.88 - $ 7.81             35                  7.38            5.53                28                 7.26
$ 8.44 - $11.72             62                  8.67            7.26                 3                 8.44
$13.00 - $14.38             31                 13.78            7.16                13                13.47
$14.45 - $15.75            819                 14.51            8.35               180                14.49
$15.86 - $19.53             28                 18.47            6.71                 8                18.13
$20.48 - $26.58             40                 22.93            8.53                 7                20.74
$27.25 - $28.90            500                 28.38            9.41                 0                 0.00
                       -------                                                 -------
  Total                  2,032           $     15.38            7.94               418          $      9.99
                       =======           ===========         =======           =======          ===========
</TABLE>


     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, 2004 and 2003, no
shares of any series of preferred stock were issued and outstanding.

     STOCK SPLIT

     On October 29, 2002, our board of directors approved a two-for-one split of
our common stock to shareholders of record on November 15, 2002 with a
distribution date of November 29, 2002. As a result of the stock split, the
number of outstanding shares doubled.

     STOCK BUYBACK

     In January 2003 and 2004, the board of directors increased to $10,000 and
$20,000, respectively, the total authorization to repurchase our common stock
under the buyback program. Under these authorizations, 360.0 shares at a cost of
$5,351 were repurchased in 2003 and 190.7 shares at a cost of $5,034 were
repurchased in 2004. The repurchased shares were retired and returned to
unissued. As of November 30, 2004, $14,966 was available for share repurchases
under the board of directors current authorization; however, we are limited in
our ability to repurchase shares due to restrictions under the terms of our
Revolving Credit Facility and the indentures pursuant to which the Floating Rate
Notes and 7.0% Subordinated Notes were issued. In January 2005, the board of
directors increased the total authorization to repurchase our common stock under
the buyback program to $30,000.

     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. The rights will expire on February
11, 2010. As of November 30, 2004, 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 70, 69 and 50 restricted shares of common stock to certain
employees in fiscal 2004, 2003 and 2002, respectively. The market value of these
shares on the dates of issuance was $1,399, $1,000 and $1,126 in 2004, 2003 and
2002, respectively. These amounts are being amortized using the straight-line
method over respective four year periods from

                                       57
<PAGE>
the date of issuance as additional compensation expense. Amortization was
$1,071, $655 and $272 in 2004, 2003 and 2002, respectively, with the unamortized
value of $2,386 and $2,058 being included as a component of shareholders' equity
in the November 30, 2004 and 2003 Consolidated Balance Sheets, respectively. The
shares issued in 2004 and 2003 reduced the number of shares available for
issuance under our 2003 Stock Incentive Plan, while the shares issued in 2002
reduced the number of shares available for issuance under our 2000 Non-Statutory
Stock Option Plan.


(4)  PATENT, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
--------------------------------------------------------------------------------

     With our adoption of SFAS 142, we obtained independent appraisals to
determine the fair values of our intangible assets and compared their fair
values with their carrying values to determine the write-down of $8,877, net of
income tax benefit of $5,440, or $.46 per diluted share in fiscal 2002. These
charges, which are reported in our Consolidated Statements of Income as a
cumulative effect of change in accounting principle, relate to our SUNSOURCE
product line, which experienced a decline in sales volume since its initial
purchase in 1997, and to a lesser degree, our DEXATRIM product line, which
discontinued the marketing of one of its products in November 2000.

     As a result of a decline in sales and reforecasted expected future cash
flows in the fourth quarter, we reperformed the impairment test as prescribed by
SFAS 142 and we determined that a revaluation was required for our DEXATRIM
product line at November 30, 2004. We obtained an independent appraisal to
determine the fair value of the indefinite-lived intangible asset related to
this product line. As a result, we incurred an impairment charge of $20,000,
which is included in our Consolidated Statement of Income for the year ended
November 30, 2004. As of November 30, 2003, we determined that a revaluation
thereof was not required. The carrying value of trademarks, which are not
subject to amortization under the provisions of SFAS 142, was $224,797 and
$244,790 as of November 30, 2004 and November 30, 2003, respectively.

     The gross carrying amount of intangible assets subject to amortization at
both November 30, 2004 and November 30, 2003, which consist primarily of
non-compete agreements, was $2,400. The related accumulated amortization of
these intangible assets at November 30, 2004 and November 30, 2003, was $1,637
and $1,343, respectively. Amortization of our intangible assets subject to
amortization under the provisions of SFAS 142 was $294, $340 and $268 for the
years ended November 30, 2004, 2003 and 2002, respectively. Estimated annual
amortization expense for these assets for the years ended November 30, 2005,
2006, 2007, 2008 and 2009 is $290, $290, $123, $40 and $20, respectively.
Royalty expense related to other purchased product rights for 2004, 2003 and
2002 was $107, $128 and $513, respectively. Amortization and royalty expense are
included in advertising and promotion expense in the Consolidated Statements of
Income.


(5)  LONG-TERM DEBT
--------------------------------------------------------------------------------

     Long-term debt consisted of the following as of November 30, 2004 and 2003:

                                                           2004          2003
                                                        ----------    ----------
     Revolving Credit Facility due 2009
        at a variable rate of 5.50% as
        of November 30, 2004                            $       --    $       --
     Term loan payable to banks at variable
        rates of 3.42% and 3.39% as of
        February 26, 2004 (termination date)
        and November 30, 2003, respectively                     --         7,750
     8.875% Senior Subordinated Notes, plus
        unamortized premium of $138 for 2003                    --       204,676
     Floating Rate Senior Notes due 2010 at
        a variable rate of 4.78% as of
        November 30, 2004                                   75,000            --
     7.0% Senior Subordinated Notes due 2014               125,000            --
                                                        ----------    ----------
     Total long-term debt                                  200,000       212,426
     Less:  current maturities                                  --         7,750
                                                        ----------    ----------
     Total long-term debt, net of current maturities    $  200,000    $  204,676
                                                        ==========    ==========

     On February 26, 2004, we entered into a new Senior Secured Revolving Credit
Facility that matures February 26, 2009 (the "Revolving Credit Facility") with
Bank of America, N.A. that provided an initial borrowing capacity of $25,000 and
an additional $25,000, subject to successful syndication. On March 9, 2004, we
entered into a new commitment agreement with a syndicate of commercial banks led
by Bank of America, N.A., as agent, that enables us to borrow up to a total of
$50,000 under the Revolving Credit Facility. Borrowings under our Revolving
Credit Facility bear interest at LIBOR plus

                                       58
<PAGE>
applicable percentages of 1.75% to 2.50% or a base rate (the higher of the
federal funds rate plus 0.5% or the prime rate) plus applicable percentages of
0.25% to 1.0%. The applicable percentages are calculated based on our leverage
ratio. As of November 30, 2004, no amounts have been borrowed under the
Revolving Credit Facility, and the variable rate was 5.50%. Borrowings under our
Revolving Credit Facility are secured by substantially all of our assets, except
real property, and shares of capital stock of our domestic subsidiaries held by
us and by the assets of the guarantors (our domestic subsidiaries). The
Revolving Credit Facility contains covenants, representations, warranties and
other agreements by us that are customary in credit agreements and security
instruments relating to financings of this type. The significant financial
covenants include fixed charge coverage ratio, leverage ratio, senior secured
leverage ratio, net worth and brand value calculations. On February 7, 2005, we
had no borrowings outstanding under our Revolving Credit Facility.

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

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

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

     Also on February 26, 2004, we issued and sold $75,000 of Floating Rate
Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125,000 of 7.0%
Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated Notes"), the
proceeds of which were used to purchase our 8.875% Subordinated Notes and
refinance the Credit Facility as discussed above.

     The Floating Rate Notes bear interest at a three-month LIBOR plus 3.00% per
year (4.78% as of November 30, 2004). Interest payments are due quarterly in
arrears commencing on June 1, 2004. On March 8, 2004, we entered into an
interest rate cap agreement effective June 1, 2004 with decreasing annual
notional principal amounts of $15,000 beginning March 1, 2006 and cap rates
ranging from 4.0% to 5.0% over the life of the agreement. We paid a $1,375
premium to enter into the interest rate cap agreement, which will be amortized
over the life of the agreement. The current portion of the premium on the
interest rate cap agreement of $107 is included in prepaid expenses and other
current assets, and the long-term portion of $775 is included in other
noncurrent assets. The amortized value of the premium on the interest rate cap
was compared to its fair value as of November 30, 2004, and a charge of $316,
net of tax, was recorded to other comprehensive income. The fair value of the
interest rate cap agreement is valued by a third party. The interest rate cap
agreement terminates on March 1, 2010. Our domestic subsidiaries are guarantors
of the Floating Rate Notes. The guarantees of the Floating Rate Notes are
unsecured senior obligations of the guarantors and rank equally with all of the
current and future unsecured senior debt of the guarantors. The guarantees of
the Floating Rate Notes effectively rank junior to any secured debt of the
guarantors, including the guarantors' guarantee of our indebtedness under the
Revolving Credit Facility. At any time after March 1, 2005, we may redeem any of
the Floating Rate Notes upon not less than 30 nor more than 60 days' notice at
redemption prices (expressed in percentages of principal amount), plus accrued
and unpaid interest, if any, and liquidated damages, if any, to the applicable
redemption rate, if redeemed during the twelve-month periods beginning March 1,
2005 at 102.0%, March 1, 2006 at 101.0% and March 1, 2007 and thereafter at
100.0%. At any time prior to March 1, 2005, we may redeem up to 35.0% of the
aggregate principal amount of the Floating Rate Notes (including any additional
Floating Rate Notes) at a redemption price of 100.0% of the principal amount
thereof, plus a premium equal to the interest rate per annum on the Floating
Rate Notes applicable on the date on which notice of the redemption is given,
together with accrued and unpaid interest and liquidated damages, if any, with
the net cash proceeds of one or more qualified equity offerings; provided, that
(i) at least 65.0% of the aggregate principal amount of Floating Rate Notes
remains outstanding immediately after the occurrence of each redemption
(excluding Floating Rate Notes held by us and our subsidiaries); and (ii) the
redemption must occur within 90 days of the date of the closing of such
qualified equity offering.

                                       59
<PAGE>
     Interest payments on the 7.0% Subordinated Notes are due semi-annually in
arrears on March 1 and September 1, commencing on September 1, 2004. Our
domestic subsidiaries are guarantors of the 7.0% Subordinated Notes. The
guarantees of the 7.0% Subordinated Notes are unsecured senior subordinated
obligations of the guarantors. At any time after March 1, 2009, we may redeem
any of the 7.0% Subordinated Notes upon not less than 30 nor more than 60 days'
notice at redemption prices (expressed in percentages of principal amount), plus
accrued and unpaid interest, if any, and liquidation damages, if any, to the
applicable redemption rate, if redeemed during the twelve-month periods
beginning March 1, 2009 at 103.500%, March 1, 2010 at 102.333%, March 1, 2011 at
101.167% and March 1, 2012 and thereafter at 100.000%. At any time prior to
March 1, 2007, we may redeem up to 35% of the aggregate principal amount of the
7.0% Subordinated Notes (including any additional 7.0% Subordinated Notes) at a
redemption price of 107.0% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the applicable
redemption rate, with the net cash proceeds of one or more qualified equity
offerings; provided, that (i) at least 65.0% of the aggregate principal amount
of the 7.0% Subordinated Notes remains outstanding immediately after the
occurrence of such redemption (excluding 7.0% Subordinated Notes held by us and
our subsidiaries); and (ii) the redemption must occur within 90 days of the date
of the closing of such qualified equity offering.

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

     The future maturities of long-term debt outstanding as of November 30, 2004
are as follows:

     2005                           $       --
     2006                                   --
     2007                                   --
     2008                                   --
     2009                                   --
     Thereafter                        200,000
                                    ----------
                                    $  200,000
                                    ==========

      Cash interest payments during 2004, 2003 and 2002 were $14,092, $19,043
and $19,317.


(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, 2004, the estimated fair value of the Floating Rate Notes
exceeded their carrying value by approximately $1,570. The carrying value of the
7.0% Subordinated Notes exceeded their estimated fair market value by
approximately $288. The fair value was estimated based on quoted market prices
for the same or similar issues.


(7)  INCOME TAXES
--------------------------------------------------------------------------------

     The provision for income taxes from income before change in accounting
principle includes the following components for the years ending November 30,
2004, 2003 and 2002:

                                       2004           2003           2002
                                    ----------     ----------     ----------
     Current:
       Federal                      $    3,008     $    4,044     $    7,948
       State                                14            667            909
     Deferred                           (2,227)         7,549          2,725
                                    ----------     ----------     ----------
                                    $      795     $   12,260     $   11,582
                                    ==========     ==========     ==========

     As of November 30, 2004, we had a foreign tax credit of $1,501, which will
expire over ten years primarily in fiscal 2006 through 2013, and a state net
operating loss carryforwards of $15,667, which will begin to expire in 2022
through 2024 if unused. In 2004, 2003 and 2002 income tax benefits of $5,568,
$1,259 and $4,453, respectively, attributable to employee stock option
transactions were allocated to shareholders' equity.

                                       60
<PAGE>
     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, 2004 and 2003, are as follows:

                                                          2004          2003
                                                       ----------    ----------
     Deferred tax assets:
          Allowances and accruals                      $    3,695    $      496
          Inventory reserve                                   121           224
          Accrued promotional expenses                        442         1,033
          Allowance for product returns                       181           489
          State net operating loss carryforwards              610           610
          Accrued postretirement health care benefits         639           608
          Other                                             1,909         2,709
                                                       ----------    ----------
            Gross deferred tax assets                       7,597         5,559
            Valuation allowance                              (610)         (610)
                                                       ----------    ----------
              Net deferred tax assets                       6,987         6,377
                                                       ----------    ----------
     Deferred tax liabilities:
          Depreciation and amortization                    26,325        25,833
          Prepaid advertising                                 421           478
          Inventory                                           181           181
          Other                                             1,484         2,422
                                                       ----------    ----------
            Gross deferred tax liabilities                 28,411        28,914
                                                       ----------    ----------
              Net deferred liability                   $   21,424    $   23,355
                                                       ==========    ==========


     The deferred provision for income taxes excludes the tax effect of the
interest rate cap adjustment of $178, the foreign currency translation
adjustment of $448 and the minimum pension liability adjustment of $922, all of
which are included in the Consolidated Statement of Shareholders' Equity.

     We have recorded a valuation allowance to reflect the estimated amount of
deferred tax assets that may not be realized due to the expiration of state net
operating losses. We evaluate quarterly the realizability of our deferred assets
by assessing our valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of
realization are our forecast of future taxable income and available tax planning
strategies that could be implemented to realize the net deferred tax assets.

     The difference between the provision for income taxes and the amount
computed by multiplying income before income taxes and change in accounting
principle by the United States statutory rate for the years ended November 30,
2004, 2003 and 2002 is summarized as follows:

                                          2004           2003           2002
                                       ----------     ----------     ----------
     Expected federal tax provision    $      843     $   12,471     $   10,669
     State income taxes, net of
       federal income tax benefit              29            433            591
     Foreign permanently reinvested          (643)            --             --
     Other, net                               566           (644)           322
                                       ----------     ----------     ----------
                                       $      795     $   12,260     $   11,582
                                       ==========     ==========     ==========


     Undistributed earnings of Chattem (Canada), a wholly-owned subsidiary,
during fiscal 2004 amounted to approximately $1,788. These earnings are
considered to be reinvested indefinitely and, accordingly, no provision for U.S.
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, we would be subject to
U.S. income taxes (subject to an adjustment for foreign tax credits).

     Income taxes paid in 2004, 2003 and 2002 were $323, $4,345 and $4,137,
respectively. We received income tax refunds of $2,554, $434 and $1,044 during
2004, 2003 and 2002, respectively.


                                       61
<PAGE>
(8)  SUPPLEMENTAL FINANCIAL INFORMATION
--------------------------------------------------------------------------------

     Inventories consisted of the following at November 30, 2004 and 2003:

                                                      2004           2003
                                                   ----------     ----------
     Raw materials and work in process             $   10,728     $    9,740
     Finished goods                                    12,395          9,507
     Excess of current cost over LIFO value            (1,433)        (1,688)
                                                   ----------     ----------
        Total inventories                          $   21,690     $   17,559
                                                   ==========     ==========


     International inventories included above are valued on a lower of FIFO cost
or market and were $1,989 and $2,848 at November 30, 2004 and 2003,
respectively.

     Property, plant and equipment consisted of the following at November 30,
2004 and 2003:
                                                      2004           2003
                                                   ----------     ----------
     Land                                          $      886     $      886
     Buildings and improvements                         8,557          8,005
     Machinery and equipment                           50,421         49,610
     Construction in progress                           2,944            946
                                                   ----------     ----------
        Total property, plant and equipment            62,808         59,447
     Less - accumulated depreciation                  (34,043)       (30,725)
                                                   ----------     ----------
        Property, plant and equipment, net         $   28,765     $   28,722
                                                   ==========     ==========


     Accrued liabilities consisted of the following at November 30, 2004 and
2003:
                                                      2004           2003
                                                   ----------     ----------
     Interest                                      $    3,152     $    3,115
     Salaries, wages and commissions                    4,886          3,604
     Product advertising and promotion                  3,750          5,348
     Litigation settlements and legal fees             10,046          1,254
     Pension                                               --          1,040
     Other                                              1,929          1,618
                                                   ----------     ----------
        Total accrued liabilities                  $   23,763     $   15,979
                                                   ==========     ==========


(9)  ACQUISITION OF SELSUN BLUE
--------------------------------------------------------------------------------

     In March 2002, we acquired worldwide rights (except in India) to
manufacture, sell and market SELSUN BLUE, which is marketed internationally as
SELSUN, plus related intellectual property and certain manufacturing equipment
from Abbott Laboratories ("Abbott"). Abbott, or manufacturers under contract to
Abbott, manufactured SELSUN BLUE for us domestically until June 2003 and
internationally until the end of March 2004. We have entered into an amendment
to the manufacturing agreement with Abbott under which Abbott will continue to
manufacture SELSUN for us for the European, Middle East and several Latin
American markets for an additional period ending July 2005 at agreed upon rates,
which vary by market. Abbott will also continue to serve as our distributor for
SELSUN in certain foreign countries under separate distribution agreements. All
of our North American SELSUN BLUE product lines are presently being manufactured
at our Chattanooga facilities. During a transition period which ended March 28,
2004, Abbott also marketed, sold and distributed SELSUN products for us in
certain foreign countries until we could satisfy various foreign regulatory
requirements, new distributors were in place and any applicable marketing
permits were transferred. During the transition period, Abbott paid us an
initial royalty equal to 28% of international sales of SELSUN in these countries
with the royalty reduced to 14% of international sales in certain countries if
foreign regulatory requirements were satisfied prior to our assumption of sales
and marketing responsibility in such countries. During the transition period,
Abbott paid all costs and expenses related to the manufacture, marketing and
sales of SELSUN in these countries. As we assumed responsibility for the sales
and marketing effort in a country, the royalty arrangement with respect to such
country terminated. We then recorded these international sales directly as well
as the costs and expenses associated with these sales. Abbott has agreed to
extend the transition beyond March 28, 2004 in several countries where we are
still awaiting regulatory approval of the transfer. In certain international
markets, we sell SELSUN through a distributor and receive a royalty based on a
percentage of distributor sales.

                                       62
<PAGE>
     The following unaudited consolidated pro forma information assumes the
acquisition of SELSUN BLUE had occurred at the beginning of the periods
presented:

     PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)

                                                             For the Year Ended
                                                              November 30, 2002
                                                              -----------------
     Total revenues                                             $    233,847
     Income before change in accounting principle                     19,441
     Net income                                                       10,564

     Earnings per share - basic:
        Income before change in accounting principle                    1.04
        Net income                                                       .57

     Earnings per share - diluted:
        Income before change in accounting principle                    1.00
        Net income                                                       .55


(10) RETIREMENT PLANS
--------------------------------------------------------------------------------

     We have a noncontributory defined benefit pension plan ("the Plan"), which
covers substantially all employees. The Plan provides benefits based upon years
of service and the employee's compensation. Our contributions are based on
computations by independent actuaries. Plan assets at November 30, 2004 and 2003
were invested primarily in United States government and agency securities and
corporate debt and equity securities. In October 2000, our board of directors
adopted an amendment to the Plan that freezes benefits of the Plan and prohibits
new entrants to the Plan effective December 31, 2000. In 2004, a curtailment
loss of $88 resulted from benefits paid exceeding interest costs.

     Net periodic pension cost for the years ended November 30, 2004, 2003 and
2002 comprised the following components:

                                       2004           2003           2002
                                    ----------     ----------     ----------
     Service cost                   $       --     $       --     $       --
     Interest cost on projected
        benefit obligation                 609            606            564
     Actual return on plan assets       (2,626)          (629)        (1,700)
     Net amortization and deferral       2,038           (142)         1,120
     Curtailment loss                       88             --             --
                                    ----------     ----------     ----------
     Net pension cost (benefit)     $      109     $     (165)    $      (16)
                                    ==========     ==========     ==========


     The change in the projected benefit obligation resulted from the following
components for the years ended November 30, 2004 and 2003:

                                       2004           2003
                                    ----------     ----------
     Projected benefit obligation,
        beginning of year           $   10,236     $    9,054
     Interest cost                         609            606
     Actuarial loss                        830          1,182
     Benefits paid                        (802)          (606)
     Settlements                           125             --
                                    ----------     ----------
     Projected benefit obligation,
        end of year                 $   10,998     $   10,236
                                    ==========     ==========


     The change in Plan assets resulted from the following components for the
years ended November 30, 2004 and 2003:

                                       2004           2003
                                    ----------     ----------
     Fair value of plan assets,
        beginning of year           $    9,196     $    9,173
     Actual return on plan assets        2,626            629
     Employer contribution                  --             --
     Benefits paid                        (802)          (606)
                                    ----------     ----------
     Fair value of plan assets,
        end of year                 $   11,020     $    9,196
                                    ==========     ==========

                                       63
<PAGE>
     The following table sets forth the funded status of the Plan as of November
30, 2004 and 2003:

                                                      2004           2003
                                                   ----------     ----------
     Plan assets at fair market value              $   11,020     $    9,196
     Projected benefit obligation                      10,998         10,236
                                                   ----------     ----------
     Funded status                                         22         (1,040)
     Unrecognized net loss                              1,391          2,562
                                                   ----------     ----------
     Prepaid pension costs                              1,413          1,522
     Minimum pension liability adjustment -
        other comprehensive income                         --         (2,562)
                                                   ----------     ----------
     Net pension asset (liability) recognized
        in balance sheets at end of year           $    1,413     $   (1,040)
                                                   ==========     ==========


     The discount rate used in determining the actuarial present value of the
projected benefit obligation was 5.75% and 6.25% in 2004 and 2003, respectively.
The expected long-term rate of return on plan assets was 8% in 2004 and 2003,
respectively. The Plan's long-term return on assets is based on the
weighted-average of the 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 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:

     ASSET CLASS                                   RANGE
     -----------                                   -----
     Corporate & 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, 2004 and 2003
by asset class are as follows:

                                                        PLAN ASSETS AT
                                                         NOVEMBER 30,
                                                   -------------------------
     ASSET CLASS                                      2004           2003
     -----------                                   ----------     ----------
     Equity securities                                    70%            61%
     Debt securities                                      26             38
     Money Market                                          4              1
                                                   ----------     ----------
     Total                                               100%           100%
                                                   ==========     ==========


     As of November 30, 2004, we had 70 shares of our common stock in the Plan
with a fair value of $2,535.

     Using the Ibbotson data, the estimated weighted-average asset returns would
be 8.2% according to investment policy asset mix. The weighted-average asset
returns based on current asset mix (assuming equities are all in large cap) are
8.71% for fiscal 2004 and 8.32% for fiscal 2003.

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

                                                   ESTIMATED BENEFIT
                                                        PAYMENT
                                                   -----------------
     2005                                           $      546
     2006                                                  392
     2007                                                  504
     2008                                                  672
     2009                                                  622
     2010-2014                                           2,647


     No employer contributions are expected to be required to be paid in fiscal
2005.

                                       64
<PAGE>
     We have a defined contribution plan covering substantially all employees.
Eligible participants can contribute up to 15% of their annual compensation and
receive a 25% matching employer contribution on the first 6% of compensation
contributed by participants. The defined contribution plan expense was $223,
$206 and $190 in 2004, 2003 and 2002, respectively. In fiscal 2001, we enhanced
our savings investment plan to include an additional 3% employer contribution
made on behalf of eligible participants. This additional employer contribution
was $698, $672 and $608 in 2004, 2003 and 2002, respectively.


(11) ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS
--------------------------------------------------------------------------------

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

     Net periodic postretirement health care benefits cost for the years ended
November 30, 2004, 2003 and 2002 included the following components:

                                       2004           2003           2002
                                    ----------     ----------     ----------
     Service cost                   $       63     $       58     $       50
     Interest cost on accumulated
       postretirement benefit
       obligation                           80             80             72
     Amortization of prior service
       cost                                 15             15             15
     Amortization of net gain              (30)           (31)           (41)
                                    ----------     ----------     ----------
     Net periodic postretirement
       benefits cost                $      128     $      122     $       96
                                    ==========     ==========     ==========


     The change in the accumulated benefit obligation resulted from the
following components for the years ended November 30, 2004 and 2003:

                                                      2004           2003
                                                   ----------     ----------
     Accumulated benefit obligation,
       beginning of year                           $    1,316     $    1,106
     Service cost                                          63             58
     Interest cost                                         80             80
     Actuarial loss                                        70            104
     Benefits paid                                        (41)           (32)
                                                   ----------     ----------
     Accumulated benefit obligation,
       end of year                                 $    1,488     $    1,316
                                                   ==========     ==========


     The following table sets forth the funded status of the plan at November
30, 2004 and 2003:

                                                      2004           2003
                                                   ----------     ----------
     Accumulated benefit obligation                $    1,488     $    1,316
     Fair value of plan assets                             --             --
                                                   ----------     ----------
     Funded status                                     (1,488)        (1,316)
     Unrecognized prior service cost                       84            101
     Unrecognized actuarial gain                         (372)          (474)
                                                   ----------     ----------
     Accrued postretirement benefits cost          $   (1,776)    $   (1,689)
                                                   ==========     ==========


     The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 5.75% and 6.75% at November 30, 2004 and
2003, respectively.

     For measurement purposes in 2004 and 2003, the trend rate was assumed to be
12% decreasing 1% per year to an ultimate level of 5% by 2011. Due to premium
caps in place which limit our expense, a 1% increase in the assumed health care
cost trend rate would not affect the accumulated postretirement benefit
obligation as of November 30, 2004 or the aggregate of the service and interest
cost components of the net annual postretirement benefit cost for the year ended
November 30, 2004.


                                       65
<PAGE>
     The following benefit payments, which reflect expected future services, as
appropriate, are expected to be paid. Benefit payments are shown net of employee
contributions:
                                    Estimated
                                     Benefit
                                     Payment
                                    ----------
     2005                           $       71
     2006                                   73
     2007                                   77
     2008                                   88
     2009                                   95
     2010-2014                             516


     Employer contributions expected for fiscal 2005 are approximately $71.


(12) PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION
--------------------------------------------------------------------------------

     We currently operate in only one primary segment - OTC health care. This
segment includes topical analgesics, medicated skin care, dietary supplement,
medicated dandruff shampoo and other OTC products.

     Geographical segment information is as follows for the years ended November
30, 2004, 2003 and 2002:

                                       2004           2003           2002
                                    ----------     ----------     ----------
     Revenues:
       Domestic                     $  234,003     $  209,874     $  202,074
       International (1)                24,152         23,875         21,042
                                    ----------     ----------     ----------
         Total                      $  258,155     $  233,749     $  223,116
                                    ==========     ==========     ==========

     Long-Lived Assets (2)
       Domestic                     $  254,059     $  274,217     $  272,129
       International                       266            352            316
                                    ----------     ----------     ----------
         Total                      $  254,325     $  274,569     $  272,445
                                    ==========     ==========     ==========


(1)  International sales include export sales from United States operations and
     royalties from international sales of SELSUN. These royalties were $621,
     $1,222 and $2,327 for the years ended November 30, 2004, 2003 and 2002,
     respectively.

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

     Net sales of our domestic product categories within our single healthcare
business segment is as follows for the years ended November 30, 2004, 2003 and
2002:

                                       2004           2003           2002
                                    ----------     ----------     ----------
Revenues:
  Topical analgesics                $   76,300     $   58,594     $   61,219
  Medicated skin care products          60,495         56,528         51,355
  Dietary supplements                   33,011         37,420         41,968
  Medicated dandruff shampoos           31,309         28,351         15,076
  Other OTC and toiletry products       32,888         28,981         32,456
                                    ----------     ----------     ----------
    Total                           $  234,003     $  209,874     $  202,074
                                    ==========     ==========     ==========


(13) COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------

     GENERAL LITIGATION

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

                                       66
<PAGE>
     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, both federal and
state. On November 12, 2004, Judge Barbara J. Rothstein of the United States
District Court for the Western District of Washington entered a final order and
judgment certifying the class and granting approval of the DEXATRIM PPA
settlement. After the final judgment was entered, two parties who had objected
to the settlement filed appeals challenging and seeking to set aside the final
judgment. We have reached a preliminary agreement with one of these parties
pursuant to which that party's appeal will be dismissed.

     The DEXATRIM PPA settlement includes claims against us involving alleged
injuries by DEXATRIM products containing PPA that were alleged to have occurred
after December 21, 1998, the date we acquired the DEXATRIM brand. In accordance
with the terms of the class action settlement agreement, we previously published
notice of the settlement and details as to the manner in which claims could be
submitted. The deadline for submission of claims was July 7, 2004. A total of
391 claims were submitted prior to the claims deadline. Of these 391 claims, 173
alleged stroke as an injury and 218 alleged other non-stroke injuries. These
claims will be valued pursuant to the agreed upon settlement matrix that is
designed to evaluate and determine the settlement value of each claim. A total
of 16 claimants elected to opt out of the class settlement and may continue to
pursue claims for damages against us in separate lawsuits. We have settled two
of the opt out claims. In addition, we have learned that two of the remaining
opt out claims have injury dates prior to December 21, 1998, for which we will
seek indemnification from The DELACO Company ("DELACO"), successor to the
Thompson Medical Company, Inc., which owned the brand prior to December 21,
1998.

     In accordance with the terms of the class action settlement agreement,
$60,885 has been funded into a settlement trust from our first three layers of
insurance coverage, as described below. In addition, on July 14, 2004, we
entered into a settlement agreement with Sidmak Laboratories, Inc. ("Sidmak"),
the manufacturer of DEXATRIM products containing PPA, pursuant to which Sidmak
has agreed to contribute $10,000 into the settlement trust. To the extent the
amount in the settlement trust is insufficient to fully fund the settlement, we
will be required to make additional contributions to the settlement trust in the
future. As described below, we have entered into a term sheet of settlement with
Interstate Fire & Casualty Company ("Interstate") with regard to its $25,000 of
coverage in excess of the insurance funds available in the settlement trust. We
currently expect to use our cash on hand and proceeds of the Interstate policy
to fund any required additional contributions to the settlement trust. If we are
required to fund significant other liabilities related to the PPA litigation
beyond the settlement trust and outside of our available insurance coverage from
Interstate, either pursuant to the terms of the settlement, as a result of the
opt out cases or otherwise, we will have significantly fewer sources of funds
with which to satisfy such liabilities, and we may be unable to do so.

     We are also named as a defendant in approximately 206 lawsuits relating to
DEXATRIM containing PPA which involve alleged injuries by DEXATRIM products
containing PPA manufactured and sold prior to our acquisition of DEXATRIM on
December 21, 1998. In these lawsuits, we are being defended on the basis of
indemnification obligations assumed by DELACO. On February 12, 2004, DELACO
filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for
the Southern District of New York. Accordingly, it is uncertain whether DELACO
will be able to indemnify us for claims arising from products manufactured and
sold prior to our acquisition of DEXATRIM on December 21, 1998. However, DELACO
is seeking to resolve all DEXATRIM cases with injury dates prior to December 21,
1998 as part of a liquidating Chapter 11 bankruptcy plan. We understand that
DELACO's product liability insurance carriers and other sources are expected to
fund this plan. As part of DELACO's bankruptcy plan, if finally approved, we
expect the bankruptcy court to release us from liability in DEXATRIM cases with
injury dates prior to December 21, 1998, although there can be no assurances in
this regard.

     If DELACO achieves resolution of the pre-December 21, 1998 cases through
its bankruptcy plan, we expect that the administrative process for DELACO's
settlement will be similar to the process in our class action. We have filed a
claim in DELACO's bankruptcy case in order to preserve our claims for
indemnification against DELACO. As part of this Chapter 11 plan, we expect that
after resolution of creditors' claims, DELACO will seek to liquidate and
distribute all of its assets and will dissolve as a company.

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

     We have reached an agreement with Kemper Indemnity Insurance Company
("Kemper") to settle its lawsuit that sought to rescind our policy for $50,000
of excess coverage for product liability claims. After giving effect to the
settlement with Kemper,

                                       67
<PAGE>
we have available for the claims against us related to the PPA litigation,
through our first three layers of insurance coverage, approximately $60,885 of
the $77,000 of product liability coverage provided by these insurance policies.
The $60,885 of available coverage consists of $37,500 of insurance under the
Kemper policy and approximately $23,385 under policies with two other insurance
companies. As indicated above, this $60,885 of coverage has been funded into a
settlement trust in accordance with the terms of the class action settlement
agreement.

     We have also entered into a term sheet of settlement with Interstate with
regard to Interstate's lawsuit to rescind its $25,000 of excess coverage for
product liability claims relating to DEXATRIM products containing PPA. In
accordance with the term sheet of settlement, Interstate will provide coverage
of DEXATRIM PPA claims that are covered by its policy after $78,500 has been
paid toward covered claims. Once the $78,500 threshold is met, Interstate will
pay 100% of the next $4,000 of claims covered by its policy; 75% of the next
$8,500 of such claims; and 50% of the last $12,500 of such claims. We are
responsible for any claims not covered by the Interstate policy either because
the alleged injury did not occur before May 31, 2001,or the claim was first made
against us after May 31, 2004. In addition, under the term sheet of settlement,
we and Interstate will dismiss all claims and counterclaims filed against each
other, and we will release all claims against Interstate relating to the excess
coverage product liability insurance.

     During the first nine months of fiscal 2004, we incurred settlement, legal
and administrative costs and expenses associated with the DEXATRIM litigation
totaling $4,491. Prior to the fourth quarter, we were unable to reasonably
estimate the amount of liability related to the DEXATRIM litigation, due to the
significant assumptions and uncertainty involved in estimating the value of
cases involved. As a result of the final approval of the DEXATRIM PPA settlement
on November 12, 2004 and the term sheet of settlement reached with Interstate on
December 13, 2004, as of November 30, 2004 we were able to estimate the probable
loss related to the DEXATRIM litigation. Based on the estimated litigation
settlement costs relating to our DEXATRIM products, we recorded a litigation
settlement charge of $11,345 in the fourth quarter of fiscal 2004 of which
$9,519 is included in accrued liabilities in our November 30, 2004 Consolidated
Balance Sheet. We currently do not expect to record any additional charges
relative to the settlement of the PPA litigation.

     We maintain a significantly lower level of insurance coverage for all other
potential claims relating to our products including DEXATRIM products containing
ephedrine. For the current policy period, we are self-insured for product
liability insurance for all of our other products, including DEXATRIM products
containing ephedrine, for $10,000 through our captive insurance subsidiary, of
which approximately $5,388 is funded as of February 7, 2005. We also have
$40,000 of excess coverage through third party insurers.

     As of November 30, 2004, we were named as a defendant in four lawsuits
alleging that the plaintiff was injured as a result of the ingestion of DEXATRIM
containing ephedrine. In addition, three individuals who allege injury caused by
DEXATRIM containing ephedrine filed opt out notices in the PPA class action
settlement. In December 2004 and January 2005, we reached a preliminary
settlement with respect to two of the four pending lawsuits and the three opt
out claims. Upon finalization of the settlement agreements, the two settled
lawsuits will be dismissed. Each of these settlements will be funded by
insurance coverage provided by our captive insurance subsidiary.

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

     We previously were named in a class action filed in the United States
District Court for the Southern District of New York seeking certification of a
class consisting of New York residents who have purchased DEXATRIM Results or
DEXATRIM Natural since January 2000. The class action lawsuit sought
compensatory and punitive damages arising out of allegedly false advertising in
connection with the sale of DEXATRIM Results and DEXATRIM Natural products. None
of the plaintiffs in this action alleged personal injury as a result of the
ingestion of a DEXATRIM product. On March 29, 2004, a stipulation was submitted
to the court dismissing the case on jurisdictional grounds. Pursuant to the
stipulation, the plaintiffs may re-file the class action in New York state
court. These plaintiffs have not refiled this lawsuit as of February 7, 2005.

     We have been named as a defendant in a putative class action suit filed in
the Superior Court of the State of California for the County of Los Angeles on
February 11, 2004. The lawsuit seeks certification of classes consisting of
residents of the United States, or residents of the State of California, who
have purchased our BULLFROG sun care products during the past four years. The
lawsuit seeks injunctive relief and compensatory damages under the California
Business and Professions Code against us arising out of alleged deceptive,
untrue or misleading advertising, and breach of warranty, in connection with the
manufacturing, labeling, advertising, promotion and sale of BULLFROG products.
The plaintiff has stipulated that the amount in controversy with

                                       68
<PAGE>
respect to plaintiffs' individual claim and each member of the proposed class
does not exceed $75. We filed an answer on June 28, 2004 and intend to defend
vigorously the lawsuit.

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

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

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

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

     Negative publicity relating to the possible harmful effects of ephedrine
and the possibility of further regulatory action to restrict or prohibit the
sale of products containing ephedrine resulted in a return of products from
retailers in fiscal 2003 for which we initially provided a $750 allowance. At
this time, we believe we have received returns representing substantially all
DEXATRIM with ephedrine. In the fourth quarter of fiscal 2003, the unused
portion of the returns allowance for DEXATRIM containing ephedrine of $235 was
recorded as a reduction of cost of sales.

     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

                                       69
<PAGE>
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 and could also reformulate them using
ingredients included in the FDA monograph.

     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 effort coordinated by Consumer Healthcare Products Association ("CHPA")
to establish with the FDA a protocol of additional research that will allow the
patches to be marketed under the final monograph even if the final monograph
does not explicitly allow them. The CHPA submission to FDA was made on October
15, 2003. Thereafter, in April 2004, we launched the ICY HOT Sleeve, a flexible,
non-occlusive fabric patch with menthol levels consistent with the OTC
monograph. If additional research is required either as a preliminary to final
FDA monograph approval and/or as a requirement of future individual product
sale, we may need to 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-2006 and perhaps thereafter.
If neither action described above is successful and the final monograph excludes
such products, we will have to file an NDA in order to continue to market the
ICY HOT Patch, ICY HOT Sleeve or similar delivery systems under our other
topical analgesic brands. In such case, we would have to remove the existing
products from the market one year from the effective date of the final
monograph, pending FDA review and approval of an NDA. The preparation of an NDA
would likely take us six to 18 months and would be expensive. It typically takes
the FDA at least 12 months to rule on an NDA once it is submitted.

     We have responded to certain questions with respect to efficacy received
from the FDA in connection with clinical studies for pyrilamine maleate, one of
the active ingredients used in certain of the PAMPRIN and PREMSYN PMS products.
While we addressed all of the FDA questions in detail, the final monograph for
menstrual drug products, which has not yet been issued, will determine if the
FDA considers pyrilamine maleate safe and effective for menstrual relief
products. If pyrilamine maleate 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 or PREMSYN 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. We
are also aware of the FDA's concern about the potential toxicity due to
concomitant use of OTC and prescription drugs that contain the ingredient
acetaminophen, an ingredient also found in PAMPRIN and PREMSYN PMS. We are
participating in an industry-wide effort to reassure the FDA that the current
recommended dosing regimen is safe and effective and that proper labeling and
public education by both OTC and prescription drug companies are the best
policies to abate the FDA's concern. There can be no assurance as to what
action, if any, the FDA may take with respect to acetaminophen.

     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 the CHPA, presenting evidence that
titanium dioxide presents "no significant risk" to consumers.

                                       70
<PAGE>
     LEASES

     The minimum rental commitments under all noncancelable operating leases,
primarily real estate, in effect at November 30, 2004 are as follows:

     2005                           $      516
     2006                                  415
     2007                                  301
     2008                                  239
     2009                                  166
     Thereafter                            566
                                    ----------
                                    $    2,203
                                    ==========


     Rental expense was $1,960, $1,676 and $1,394 for 2004, 2003 and 2002,
respectively.

     We have entered into a supply agreement for the supply of selenium sulfide,
the active ingredient in SELSUN BLUE, which will expire in November 2005 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. In addition, we have also entered into a supply agreement for the
supply of SELSUN BLUE bottles with a minimum quantity to be purchased over the
life of the agreement, which will expire on August 31, 2006. As of November 30,
2004, our remaining purchase commitment obligations based on the last price paid
are approximately $1,394 and $294 for our 2005 and 2006 fiscal years,
respectively.



(14) 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, 2004 arose in conjunction with Chattem's issuance of
the Revolving Credit Facility, the Floating Rate Notes and 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, 2004 is $200,000.












                                       71
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2004
(In thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
ASSETS
------
CURRENT ASSETS:
  Cash and cash equivalents                            $     28,344    $      1,967    $      9,882    $         --    $     40,193
  Accounts receivable, less allowances of $1,682             26,727           8,733           5,376          (8,738)         32,098
  Interest receivable                                            --             619              --            (619)             --
  Inventories                                                16,681           3,020           1,989              --          21,690
  Refundable income taxes                                     4,702              --              --              --           4,702
  Deferred income taxes                                       4,308              --              --              --           4,308
  Prepaid expenses and other current assets                   3,489              --             194              --           3,683
                                                       ------------    ------------    ------------    ------------    ------------
    Total current assets                                     84,251          14,339          17,441          (9,357)        106,674
                                                       ------------    ------------    ------------    ------------    ------------

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

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product
    rights, net                                                 763         287,087              --         (62,290)        225,560
  Debt issuance costs, net                                    5,174              --              --              --           5,174
  Investment in subsidiaries                                249,999          33,000          68,477        (351,476)             --
  Note receivable                                                --          33,000              --         (33,000)             --
  Other                                                       4,681              --             870              --           5,551
                                                       ------------    ------------    ------------    ------------    ------------
    Total other noncurrent assets                           260,617         353,087          69,347        (446,766)        236,285
                                                       ------------    ------------    ------------    ------------    ------------
    TOTAL ASSETS                                       $    372,592    $    368,201    $     87,054    $   (456,123)   $    371,724
                                                       ============    ============    ============    ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Current maturities of long-term debt                 $         --    $         --    $         --    $         --    $         --
  Accounts payable and other                                 11,398              --           1,943              --          13,341
  Accrued liabilities                                        27,435           1,107           4,578          (9,357)         23,763
                                                       ------------    ------------    ------------    ------------    ------------
    Total current liabilities                                38,833           1,107           6,521          (9,357)         37,104
                                                       ------------    ------------    ------------    ------------    ------------

LONG-TERM DEBT, less current maturities                     200,000              --          33,000         (33,000)        200,000
                                                       ------------    ------------    ------------    ------------    ------------

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

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

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

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized
    1,000, none issued                                           --              --              --              --              --
  Common shares, without par value, authorized
    50,000, issued 19,882                                    85,949              --              --              --          85,949
  Share capital of subsidiaries                                  --         329,705          41,100        (370,805)             --
  Retained earnings                                          23,888          36,630           6,115         (42,745)         23,888
                                                       ------------    ------------    ------------    ------------    ------------
     Total                                                  109,837         366,335          47,215        (413,550)        109,837
                                                       ------------    ------------    ------------    ------------    ------------
  Unamortized value of restricted common shares issued       (2,386)             --              --              --          (2,386)
  Cumulative other comprehensive income, net of taxes:
    Interest rate cap adjustment                               (316)             --              --              --            (316)
    Foreign currency translation adjustment                     (23)             --             216            (216)            (23)
                                                       ------------    ------------    ------------    ------------    ------------
    Total shareholders' equity                              107,112         366,335          47,431        (413,766)        107,112
                                                       ------------    ------------    ------------    ------------    ------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $    372,592    $    368,201    $     87,054    $   (456,123)   $    371,724
                                                       ============    ============    ============    ============    ============
</TABLE>
                                       72
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2003
(In thousands)
<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>
ASSETS
------
CURRENT ASSETS:
  Cash and cash equivalents                            $     18,702    $      1,964   $      6,265    $         --    $     26,931
  Accounts receivable, less allowances of $3,594             21,729           7,089          3,749          (7,089)         25,478
  Inventories                                                12,670           2,040          2,849              --          17,559
  Refundable income taxes                                     4,414              --             17              --           4,431
  Deferred income taxes                                       3,441              --             --              --           3,441
  Prepaid expenses and other current assets                   4,401              --            142          (1,167)          3,376
                                                       ------------    ------------   ------------    ------------    ------------
    Total current assets                                     65,357          11,093         13,022          (8,256)         81,216
                                                       ------------    ------------   ------------    ------------    ------------

PROPERTY, PLANT AND EQUIPMENT, NET                           27,595             775            352              --          28,722
                                                       ------------    ------------   ------------    ------------    ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product
    rights, net                                               1,057         307,080             --         (62,290)        245,847
  Debt issuance costs, net                                    5,504              --             --              --           5,504
  Investment in subsidiaries                                235,928              --             --        (235,928)             --
  Other                                                       1,596              --            500              --           2,096
                                                       ------------    ------------   ------------    ------------    ------------
    Total other noncurrent assets                           244,085         307,080            500        (298,218)        253,447
                                                       ------------    ------------   ------------    ------------    ------------
      TOTAL ASSETS                                     $    337,037    $    318,948   $     13,874    $   (306,474)   $    363,385
                                                       ============    ============   ============    ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Current maturities of long-term debt                 $      7,750    $         --   $         --    $         --    $      7,750
  Accounts payable and other                                  9,804              --          1,120              --          10,924
  Accrued liabilities                                        21,417             628          2,190          (8,256)         15,979
                                                       ------------    ------------   ------------    ------------    ------------
    Total current liabilities                                38,971             628          3,310          (8,256)         34,653
                                                       ------------    ------------   ------------    ------------    ------------

LONG-TERM DEBT, less current maturities                     204,676              --             --              --         204,676
                                                       ------------    ------------   ------------    ------------    ------------

DEFERRED INCOME TAXES                                            56          26,788            (48)             --          26,796
                                                       ------------    ------------   ------------    ------------    ------------

OTHER NONCURRENT LIABILITIES                                  1,689              --             --              --           1,689
                                                       ------------    ------------   ------------    ------------    ------------

INTERCOMPANY ACCOUNTS                                        (3,926)          3,469            457              --              --
                                                       ------------    ------------   ------------    ------------    ------------

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized
    1,000, none issued                                           --              --             --              --              --
  Common shares, without par value, authorized
    50,000, issued 19,161                                    77,815              --             --              --          77,815
  Share capital of subsidiaries                                  --         263,704          6,504        (270,208)             --
  Retained earnings                                          22,274          24,359          3,998         (28,357)         22,274
                                                       ------------    ------------   ------------    ------------    ------------
    Total                                                   100,089         288,063         10,502        (298,565)        100,089
                                                       ------------    ------------   ------------    ------------    ------------
  Unamortized value of restricted common shares issued       (2,058)             --             --              --          (2,058)
  Cumulative other comprehensive income, net of taxes:
    Foreign currency translation adjustment                    (820)             --           (347)            347            (820)
    Minimum pension liability adjustment                     (1,640)             --             --              --          (1,640)
                                                       ------------    ------------   ------------    ------------    ------------
    Total shareholders' equity                               95,571         288,063         10,155        (298,218)         95,571
                                                       ------------    ------------   ------------    ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             $    337,037    $    318,948   $     13,874    $   (306,474)   $    363,385
                                                       ============    ============   ============    ============    ============
</TABLE>
                                       73
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2004
(In thousands)


<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>

TOTAL REVENUES                                         $    209,002    $     71,140    $     17,863    $    (39,850)   $    258,155
                                                       ------------    ------------    ------------    ------------    ------------

COSTS AND EXPENSES:
  Cost of sales                                              57,848           9,843           7,749          (2,337)         73,103
  Advertising and promotion                                  56,904          13,593           4,432              --          74,929
  Selling, general and administrative                        42,889             456             824              --          44,169
  Impairment of indefinite-lived intangible assets               --          20,000              --              --          20,000
  Litigation settlement                                      13,405              --           2,431              --          15,836
  Equity in subsidiary income                               (13,507)             --              --          13,507              --
                                                       ------------    ------------    ------------    ------------    ------------
    Total costs and expenses                                157,539          43,892          15,436          11,170         228,037
                                                       ------------    ------------    ------------    ------------    ------------

INCOME FROM OPERATIONS                                       51,463          27,248           2,427         (51,020)         30,118
                                                       ------------    ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest expense                                          (15,049)             --          (2,480)          2,480         (15,049)
  Investment and other income, net                              158           2,483           2,012          (4,355)            298
  Loss on early extinguishment of debt                      (12,958)             --              --              --         (12,958)
  Royalties                                                 (31,985)         (5,527)             --          37,512              --
  Corporate allocations                                       3,204          (3,088)           (116)             --              --
                                                       ------------    ------------    ------------    ------------    ------------
    Total other income (expense)                            (56,630)         (6,132)           (584)         35,637         (27,709)
                                                       ------------    ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAXES                            (5,167)         21,116           1,843         (15,383)          2,409

(BENEFIT FROM) PROVISION FOR INCOME TAXES                    (6,781)          6,968             608              --             795
                                                       ------------    ------------    ------------    ------------    ------------

NET INCOME                                             $      1,614    $     14,148    $      1,235    $    (15,383)   $      1,614
                                                       ============    ============    ============    ============    ============
</TABLE>









                                       74
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2003
(In thousands)


<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>

TOTAL REVENUES                                         $    177,155    $     72,293    $     17,952    $    (33,651)   $    233,749
                                                       ------------    ------------    ------------    ------------    ------------

COSTS AND EXPENSES:
  Cost of sales                                              49,106           9,810           7,470              --          66,386
  Advertising and promotion                                  54,652          10,497           5,473              --          70,622
  Selling, general and administrative                        39,258             254           1,291              --          40,803
  Equity in subsidiary income                               (29,980)             --              --          29,980              --
                                                       ------------    ------------    ------------    ------------    ------------
    Total costs and expenses                                113,036          20,561          14,234          29,980         177,811
                                                       ------------    ------------    ------------    ------------    ------------

INCOME FROM OPERATIONS                                       64,119          51,732           3,718         (63,631)         55,938
                                                       ------------    ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest expense                                          (20,431)             --              --              --         (20,431)
  Investment and other income, net                               44               3              77              --             124
  Royalties                                                 (27,331)         (5,952)           (368)         33,651              --
  Corporate allocations                                       3,735          (3,535)           (200)             --              --
                                                       ------------    ------------    ------------    ------------    ------------
    Total other income (expense)                            (43,983)         (9,484)           (491)         33,651         (20,307)
                                                       ------------    ------------    ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                                   20,136          42,248           3,227         (29,980)         35,631

(BENEFIT FROM) PROVISION FOR INCOME TAXES                    (3,235)         14,765             730              --          12,260
                                                       ------------    ------------    ------------    ------------    ------------

NET INCOME                                             $     23,371    $     27,483    $      2,497    $    (29,980)   $     23,371
                                                       ============    ============    ============    ============    ============
</TABLE>









                                       75
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING STATEMENTS OF INCOME

FOR THE YEAR ENDED NOVEMBER 30, 2002
(In thousands)


<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>

TOTAL REVENUES                                         $    174,344    $     63,024    $     18,115    $    (32,367)   $    223,116
                                                       ------------    ------------    ------------    ------------    ------------

COSTS AND EXPENSES:
  Cost of sales                                              48,964           6,821           6,972              --          62,757
  Advertising and promotion                                  53,543           9,141           5,575              --          68,259
  Selling, general and administrative                        36,793             268           3,151              --          40,212
  Equity in subsidiary income                               (19,017)             --              --          19,017              --
                                                       ------------    ------------    ------------    ------------    ------------
    Total costs and expenses                                120,283          16,230          15,698          19,017         171,228
                                                       ------------    ------------    ------------    ------------    ------------

INCOME FROM OPERATIONS                                       54,061          46,794           2,417         (51,384)         51,888
                                                       ------------    ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
  Interest expense                                          (21,292)             --              --              --         (21,292)
  Investment and other income, net                             (230)             66              50              --            (114)
  Royalties                                                 (27,635)         (4,409)           (323)         32,367              --
  Insurance premiums                                           (578)             --             578              --              --
  Corporate allocations                                       2,776          (2,678)            (98)             --              --
                                                       ------------    ------------    ------------    ------------    ------------
    Total other income (expense)                            (46,959)         (7,021)            207          32,367         (21,406)
                                                       ------------    ------------    ------------    ------------    ------------

INCOME BEFORE INCOME TAXES AND CHANGE IN
  ACCOUNTING PRINCIPLE                                        7,102          39,773           2,624         (19,017)         30,482

(BENEFIT FROM) PROVISION FOR INCOME TAXES                    (2,921)         13,724             779              --          11,582
                                                       ------------    ------------    ------------    ------------    ------------

INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE                 10,023          26,049           1,845         (19,017)         18,900

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE, NET OF INCOME TAX BENEFIT                           --          (8,877)             --              --          (8,877)
                                                       ------------    ------------    ------------    ------------    ------------

NET INCOME                                             $     10,023    $     17,172    $      1,845    $    (19,017)   $     10,023
                                                       ============    ============    ============    ============    ============
</TABLE>









                                       76
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2004
(In thousands)


<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>

OPERATING ACTIVITIES:
  Net income                                           $      1,614    $     14,148    $      1,235    $    (15,383)   $      1,614
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization                             6,089              --              42              --           6,131
    Deferred income tax provision                            (1,434)           (545)             48              --          (1,931)
    Loss on early extinguishment of debt                     12,958              --              --              --          12,958
    Impairment of indefinite-lived assets                        --          20,000              --              --          20,000
    Tax benefit realized from stock option plans              5,568              --              --              --           5,568
    Other, net                                                  (53)             --            (196)             --            (249)
    Equity in subsidiary income                             (15,383)             --              --          15,383              --
    Changes in operating assets and liabilities:
      Accounts receivable                                    (4,998)         (1,644)         (1,627)          1,649          (6,620)
      Interest receivable                                        --            (619)             --             619              --
      Inventories                                            (4,011)           (980)            860              --          (4,131)
      Refundable income taxes                                  (288)             --              17              --            (271)
      Prepaid expenses and other current assets               1,019              --             (52)         (1,167)           (200)
      Accounts payable and accrued liabilities                9,250             479           3,213          (1,101)         11,841
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash provided by operating activities            10,331          30,839           3,540              --          44,710
                                                       ------------    ------------    ------------    ------------    ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                 (3,390)             --             151              --          (3,239)
  Purchase of patents, trademarks and other product
    rights                                                       --              (7)             --              --              (7)
  Increase in note receivable                                    --         (33,000)             --          33,000              --
  Decrease in other assets, net                              (2,345)             --             100              --          (2,245)
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash (used in) provided by investing
          activities                                         (5,735)        (33,007)            251          33,000          (5,491)
                                                       ------------    ------------    ------------    ------------    ------------


FINANCING ACTIVITIES:
  Repayment of long-term debt                              (212,288)             --              --              --        (212,288)
  Proceeds from long-term debt                              200,000              --              --              --         200,000
  Proceeds from borrowing under revolver                     25,000              --              --              --          25,000
  Payments under revolver                                   (25,000)             --              --              --         (25,000)
  Repurchase of common shares                                (5,034)             --              --              --          (5,034)
  Proceeds from exercise of stock options                     6,148              --              --              --           6,148
  Increase in debt issuance costs                            (5,743)             --              --              --          (5,743)
  Debt retirement costs                                      (7,861)             --              --              --          (7,861)
  Premium on interest rate cap agreement                     (1,375)             --              --              --          (1,375)
  Changes in intercompany accounts                           31,199           4,046         (35,245)             --              --
  Dividends paid                                                 --          (1,875)          1,875              --              --
  Intercompany debts proceeds (payments)                         --              --          33,000         (33,000)             --
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash provided by (used in) financing
          activities                                          5,046           2,171            (370)        (33,000)        (26,153)
                                                       ------------    ------------    ------------    ------------    ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS                                                    --              --             196              --             196
                                                       ------------    ------------    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS:
  Increase for the year                                       9,642               3           3,617              --          13,262
  At beginning of year                                       18,702           1,964           6,265              --          26,931
                                                       ------------    ------------    ------------    ------------    ------------
  At end of year                                       $     28,344    $      1,967    $      9,882    $         --    $     40,193
                                                       ============    ============    ============    ============    ============
</TABLE>









                                       77
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2003
(In thousands)


<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>

OPERATING ACTIVITIES:
  Net income                                           $     23,371    $     27,483    $      2,497    $    (29,980)   $     23,371
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
    Depreciation and amortization                             6,427              --             157              --           6,584
    Deferred income tax provision                             1,650           4,979              (2)             --           6,627
    Tax benefit realized from stock option plans              1,259              --              --              --           1,259
    Other, net                                                  (72)             --               6              --             (66)
    Equity in subsidiary income                             (29,980)             --              --          29,980              --
    Changes in operating assets and liabilities:
      Accounts receivable                                      (144)         (4,792)            339           4,792             195
      Inventories                                                64           1,099              47              --           1,210
      Refundable income taxes                                  (509)             --             120              --            (389)
      Prepaid expenses and other current assets              (1,777)             --              (7)          1,167            (617)
      Accounts payable and accrued liabilities               (1,898)            302             832          (5,959)         (6,723)
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash (used in) provided by operating
          activities                                         (1,609)         29,071           3,989              --          31,451
                                                       ------------    ------------    ------------    ------------    ------------


INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                 (5,359)             --            (168)             --          (5,527)
  Purchase of patents, trademarks and other product
    rights                                                       --            (400)             --              --            (400)
  Decrease in other assets, net                               1,055              --             424              --           1,479
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash (used in) provided by investing
          activities                                         (4,304)           (400)            256              --          (4,448)
                                                       ------------    ------------    ------------    ------------    ------------

FINANCING ACTIVITIES:
  Repayment of long-term debt                               (12,250)             --              --              --         (12,250)
  Repurchase of common shares                                (5,351)             --              --              --          (5,351)
  Proceeds from exercise of stock options                     1,555              --              --              --           1,555
  Increase in debt issuance costs                               (25)             --              --              --             (25)
  Changes in intercompany accounts                          215,675        (215,481)           (194)             --              --
  Recapitalization of affiliate loan                       (200,636)        200,636              --              --              --
  Redemption of preferred stock of affiliate                  1,142              --          (1,142)             --              --
  Dividends paid                                             13,000         (13,000)             --              --              --
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash provided by (used in) financing
          activities                                         13,110         (27,845)         (1,336)             --         (16,071)
                                                       ------------    ------------    ------------    ------------    ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS                                                    --              --              75              --              75
                                                       ------------    ------------    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS:
  Increase for the year                                       7,197             826           2,984              --          11,007
  At beginning of year                                       11,505           1,138           3,281              --          15,924
                                                       ------------    ------------    ------------    ------------    ------------
  At end of year                                       $     18,702    $      1,964    $      6,265    $         --    $     26,931
                                                       ============    ============    ============    ============    ============
</TABLE>









                                       78
<PAGE>
CHATTEM, INC. AND SUBSIDIARIES                                           Note 14
CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED NOVEMBER 30, 2002
(In thousands)


<TABLE><CAPTION>
                                                                        GUARANTOR     NON-GUARANTOR
                                                                        SUBSIDIARY      SUBSIDIARY
                                                         CHATTEM        COMPANIES       COMPANIES      ELIMINATIONS    CONSOLIDATED
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>

OPERATING ACTIVITIES:
  Net income                                           $     10,023    $     17,172    $      1,845    $    (19,017)   $     10,023
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
    Depreciation and amortization                             5,685              --             131              --           5,816
    Deferred income tax provision                             1,150           6,959              56              --           8,165
    Provision for income taxes                               (6,672)          6,672              --              --              --
    Cumulative effect of change in accounting
      principle, net                                             --           8,877              --              --           8,877
    Tax benefit realized from stock option plan               4,453              --              --              --           4,453
    Stock option expense                                        175              --              --              --             175
    Other, net                                                  269              --              --              --             269
    Equity in subsidiary income                             (19,017)             --              --          19,017              --
    Changes in operating assets and liabilities:
      Accounts receivable                                    (4,100)             --            (713)             --          (4,813)
      Inventories                                              (470)         (3,139)           (900)             --          (4,509)
      Refundable income taxes                                (1,644)             --              --              --          (1,644)
      Prepaid expenses and other current assets                 694              --              70              --             764
      Accounts payable and accrued liabilities                7,244              --             488              --           7,732
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash (used in) provided by operating
          activities                                         (2,210)         36,541             977              --          35,308
                                                       ------------    ------------    ------------    ------------    ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                 (2,981)           (775)            (29)             --          (3,785)
  Purchase of patents, trademarks and other product
    rights                                                   (1,250)        (73,790)             --              --         (75,040)
  Investment in subsidiary companies                          1,012              --          (1,012)             --              --
  (Increase) decrease in other assets, net                     (658)             --               1              --            (657)
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash used in investing activities                (3,877)        (74,565)         (1,040)             --         (79,482)
                                                       ------------    ------------    ------------    ------------    ------------

FINANCING ACTIVITIES:
  Repayment of long-term debt                               (25,000)             --              --              --         (25,000)
  Proceeds from long-term debt                               45,000              --              --              --          45,000
  Repurchase of common shares                                (1,650)             --              --              --          (1,650)
  Proceeds from exercise of stock options                     7,346              --              --              --           7,346
  Increase in debt issuance costs                            (1,146)             --              --              --          (1,146)
  Changes in intercompany accounts                          (33,337)         33,159             178              --              --
  Dividends paid                                              5,850          (4,000)         (1,850)             --              --
                                                       ------------    ------------    ------------    ------------    ------------
        Net cash  provided by (used in) financing
          activities                                         (2,937)         29,159          (1,672)             --          24,550
                                                       ------------    ------------    ------------    ------------    ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS                                                  (119)             --             222              --             103
                                                       ------------    ------------    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS:
  Decrease for the year                                      (9,143)         (8,865)         (1,513)             --         (19,521)
  At beginning of year                                       20,648          10,003           4,794              --          35,445
                                                       ------------    ------------    ------------    ------------    ------------
  At end of year                                       $     11,505    $      1,138    $      3,281    $         --    $     15,924
                                                       ============    ============    ============    ============    ============
</TABLE>









                                       79
<PAGE>
(15) QUARTERLY INFORMATION (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE
     -------------------------------------------------------------------
     AMOUNTS)
     --------

<TABLE><CAPTION>
                                                                                   QUARTER ENDED
                                                              ------------------------------------------------------
                                                     TOTAL    FEBRUARY 28/29     MAY 31      AUGUST 31   NOVEMBER 30
                                                  ----------  --------------    --------     ---------   -----------
<S>                                               <C>         <C>               <C>          <C>         <C>
FISCAL 2004:
     Total revenues                               $  258,155        61,237        70,092        66,135        60,691
     Gross profit                                 $  185,052        44,285        49,536        47,000        44,231
     Net Income (loss)                            $    1,614          (712)        7,247         8,734       (13,655)
     Net income (loss) per share, diluted (1)     $      .08          (.04)          .36           .43          (.67)



FISCAL 2003:
     Total revenues                               $  233,749        58,425        63,633        59,182        52,509
     Gross profit                                 $  167,363        40,734        45,920        43,187        37,522
     Net Income                                   $   23,371         4,589         7,521         6,837         4,424
     Net income per share, diluted (1)            $     1.19           .23           .38           .34           .23
</TABLE>





     (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.

     During the fourth quarter of fiscal 2004, litigation settlement charges and
impairment charges related to our DEXATRIM product line of $11,345 and $20,000,
respectively, were recorded.
























                                       80
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  ON INTERNAL CONTROL OVER FINANCIAL REPORTING


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
CHATTEM, INC.

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Chattem,
Inc. maintained effective internal control over financial reporting as of
November 30, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Chattem, Inc.'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.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's 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, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, 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, management's assessment that Chattem, Inc. maintained effective
internal control over financial reporting as of November 30, 2004, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Chattem, Inc. maintained, in all material respects, effective internal
control over financial reporting as of November 30, 2004, based on the COSO
criteria.

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 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended November 30, 2004, of Chattem, Inc. and our report dated January
31, 2005, expressed an unqualified opinion thereon.



                                                       /s/ Ernst & Young LLP

Chattanooga, Tennessee
January 31, 2005



                                       81
<PAGE>
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------------------
            FINANCIAL DISCLOSURE
            --------------------

            None


ITEM 9A.    CONTROLS AND PROCEDURES
-----------------------------------

            DISCLOSURE CONTROLS AND PROCEDURES

            Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures (as such
terms are defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of November 30, 2004
(the "Evaluation Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
us (including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act. Since the Evaluation Date, there have
not been any significant changes in our disclosure controls and procedures or in
other factors that could significantly affect such controls.


            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-(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:

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

            o      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

            o      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, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

            Based on our assessment, management believes that, as of November
30, 2004, the Company's internal control over financial reporting is effective
based on those criteria.

            The Company's independent auditors have issued an audit report on
our assessment of the Company's internal control over financial reporting. This
report appears on page 81.

ITEM 9B.    OTHER INFORMATION
-----------------------------

None.


                                       82
<PAGE>
                                    PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------------

            (a)  Directors
                 ---------

            The information found in our 2005 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 February 7, 2005, their ages, their
positions and offices with the Company and the year in which they were first
elected or appointed to these positions:

<TABLE><CAPTION>

          NAME                 AGE     POSITION WITH REGISTRANT                           FIRST ELECTED
--------------------------     ---     ----------------------------                       -------------
<S>                            <C>     <C>                                                <C>
Zan Guerry                     56      Chairman of the Board and                              1990
                                       Chief Executive Officer; Director

A. Alexander Taylor II         51      President and Chief Operating Officer;                 1998
                                       Director

Andrea M. Crouch               46      Vice-President - Brand Management                      1995

Ron Galante                    61      Vice-President - New Business Development              1996

Richard W. Kornhauser          50      Vice-President - Brand Management                      2000

Richard D. Moss                47      Vice-President and Chief Financial Officer             2002

B. Derrill Pitts               62      Vice-President - Operations                            1984

Donald K. Riker, Ph.D.         59      Vice-President - Research and Development              2001
                                       and Chief Scientific Officer

Charles M. Stafford            54      Vice-President - Sales                                 1994

Theodore K. Whitfield, Jr.     40      Vice-President, General Counsel and Secretary          2004
</TABLE>


     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.

     A. ALEXANDER TAYLOR II. Mr. Taylor became our president and chief operating
officer in January 1998. Prior to joining us, he was a partner with the law firm
of Miller & Martin LLP, from 1983 to 1998. Mr. Taylor became one of our
directors in 1993. He is also a director of The Krystal Company, a restaurant
company, and Constar International Inc., a packaging company.

     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.

     RICHARD W. KORNHAUSER. Mr. Kornhauser joined us in May 2000 as our vice
president-brand management. Prior to joining us, Mr. Kornhauser served as vice
president group marketing director for Combe Incorporated, a consumer products
company, from October 1990 until May 2000. Previously, he served as a marketing
director at Del Laboratories, a consumer products company.

                                       83
<PAGE>
     RICHARD D. MOSS. Mr. Moss joined us in August 2002 as our vice president
and chief financial officer. Prior to joining us, he served as vice president
and treasurer for Sealy Corporation, a bedding manufacturing company, from
February 1999 until August 2002 and previously was group treasurer for Ansaldo
Signal N.V., a railway signaling company, from November 1996 to December 1998.
He is also a director of Anvil Holdings, Inc., a marketer and manufacturer of
activewear.

     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.

     DONALD K. RIKER, PH.D. Dr. Riker joined us in November 2001 as our vice
president-research and development and chief scientific officer. Prior to
joining us, he was employed by Richardson-Vicks, Inc., a health and personal
care products company, from 1982 to 1986 and the Procter & Gamble Co., a
consumer products company, from 1986 to 2001 in various research capacities, the
last of which was as P&G Corporate Fellow, Personal Health Care.

     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.

     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 2005 Proxy Statement under the heading
"Section 16 (a) Beneficial Reporting Compliance" is hereby incorporated by
reference.

     (d)    Audit Committee; Audit Committee Financial Expert
            -------------------------------------------------

     The information found in our 2005 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)    Principal Executive and Financial Officer 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. 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.




                                       84
<PAGE>
ITEM 11.    EXECUTIVE COMPENSATION
----------------------------------

            The information found in our 2005 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 2005 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 AND RELATED TRANSACTIONS
----------------------------------------------------------

            The information found in our 2005 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 2005 Proxy Statement under the headings
"Audit Committee Pre-Approval of Services by the Independent Auditor" and "Audit
and Non-Audit Fees" is hereby incorporated by reference.




                                     PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------------------

     (a)  1.   Consolidated Financial Statements

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

     Financial Statements of Chattem, Inc. and Subsidiaries

     Report of Independent Registered Public Accounting Firm
     Consolidated Balance Sheets as of November 30, 2004 and 2003
     Consolidated Statements of Income for the Years Ended November 30, 2004,
        2003 and 2002
     Consolidated Statements of Shareholders' Equity for the Years Ended
        November 30, 2004, 2003 and 2002
     Consolidated Statements of Cash Flows for the Years Ended November 30,
        2004, 2003 and 2002
     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.




                                       85
<PAGE>
          3.   The following documents are filed or incorporated by reference as
               exhibits to this report:
<TABLE><CAPTION>
               EXHIBIT
               NUMBER                     DESCRIPTION OF EXHIBIT                    REFERENCES
               ------                     ----------------------                    ----------
               <S>            <C>                                                   <C>
                 3.1          Restated Charter of Chattem, Inc., as amended             (9)

                 3.2          Amended and Restated By-Laws of Chattem, Inc.             (1)

                 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)

                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                        (4) and (5)

                10.2          First Amended and Restated Master Trademark
                              License Agreement between Signal Investment &
                              Management Co. and Chattem, Inc., effective June
                              30, 1992                                                  (6)

                10.3*         Chattem, Inc. Non-Statutory Stock Option Plan-1998        (6)

                10.4          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.              (7)

                10.5          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                                  (8)

                10.6*         Chattem, Inc. Non-Statutory Stock Option Plan-2000        (9)
</TABLE>



                                       86
<PAGE>
<TABLE><CAPTION>
               EXHIBIT
               NUMBER                     DESCRIPTION OF EXHIBIT                    REFERENCES
               ------                     ----------------------                    ----------
               <S>            <C>                                                   <C>
                10.7*         Form of Employment Agreements -
                                  Zan Guerry
                                  A. Alexander Taylor II                                (10)

                10.8*         Form of Amended and Restated Severance Agreements -
                                  Zan Guerry
                                  A. Alexander Taylor II                                (10)

                10.9*         Form of Amended and Restated Non-Competition and
                              Severance Agreements -
                                  Andrea M. Crouch
                                  Ron Galante
                                  Luke J. Lenahan
                                  Richard W. Kornhauser
                                  Richard D. Moss
                                  B. Derrill Pitts
                                  Don K. Riker
                                  Charles M. Stafford                                   (10)

                10.10*        Non-Competition and Severance Agreement dated June
                              1, 2004 by and between Theodore K. Whitfield, Jr .
                              and Chattem, Inc.

                10.11*        Form of Restricted Stock Agreements -
                                  Zan Guerry
                                  A. Alexander Taylor II                                (11)

                10.12         Asset Purchase Agreement dated March 5, 2002 by
                              and between Abbott Laboratories and Chattem, Inc.
                              for the SELSUN BLUE product line                          (12)

                10.13         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)

                10.14         New Commitment Agreement dated March 9, 2004
                              between Chattem, Inc. and Bank of America, N.A.,
                              as administrative agent                                   (15)

                10.15         Rate Cap Transaction Agreement dated March 8, 2004
                              between Chattem, Inc. and JPMorgan Chase Bank             (15)

                10.16*        Chattem, Inc. Stock Incentive Plan - 2003                 (13)

                10.17         First Amendment to the Second Amended and Restated
                              Master Trademark License Agreement between Signal
                              Investment & Management Co. and Chattem, Inc.
                              effective May 31, 2003                                    (14)
</TABLE>



                                       87
<PAGE>
<TABLE><CAPTION>
               EXHIBIT
               NUMBER                     DESCRIPTION OF EXHIBIT                    REFERENCES
               ------                     ----------------------                    ----------
               <S>            <C>                                                   <C>

                10.18         First Amendment to Master Trademark License
                              Agreement between Signal Investment & Management
                              Co. and SunDex, LLC, effective May 31, 2003               (14)

                10.19         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                                                (13)

                10.20         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                                                (15)

                10.21         Initial Settlement Trust Agreement dated April 12,
                              2004 between Chattem, Inc. and Amsouth Bank               (15)

                10.22         Settlement Agreement dated April 26, 2004 between
                              Chattem, Inc. and General Star Indemnity Company          (15)

                10.23         Memorandum of Understanding dated December 13,
                              2003 between and among Chattem, Inc. and Kemper
                              Indemnity Insurance Company                               (15)

                10.24         Settlement Agreement dated December 30, 2003
                              between Chattem, Inc. and Admiral Insurance
                              Company                                                   (15)

                10.25         Settlement Agreement dated July 14, 2004 between
                              Chattem, Inc. and Sidmak Laboratories                     (16)

                10.26         DEXATRIM Case Scoring System & Matrix for the
                              Chattem DEXATRIM Class Action Settlement                  (16)

                21            Subsidiaries of the Company

                23            Consent of Independent Registered Public
                              Accounting Firm

                31            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 of 1934 and 18 U.S.C.
                              Section 1350

                99.1          Schedule II - Valuation and Qualifying Accounts
</TABLE>



                                       88
<PAGE>


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 10-K for the year ended November 30, 1995.

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

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

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

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

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

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

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

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

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

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

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

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


                  (b)  The following reports on Form 8-K were filed with the
                       Securities and Exchange Commission during the three
                       months ended November 30, 2004:

            Form 8-K, filed September 6, 2004, announcing our financial results
            for the third quarter ended August 31, 2004.

            Form 8-K, filed November 16, 2004, announcing final order and
            judgment certifying the class and granting approval of the
            settlement reached in regard to the PPA litigation relating to our
            DEXATRIM brand.


                                       89
<PAGE>

                                   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: February 10, 2005         CHATTEM, INC.


                                 By:  /s/ Zan Guerry
                                      ------------------------------------
                                      Zan Guerry
                                      Chairman and Chief Executive Officer


                                 By:  /s/Richard D. Moss
                                      ------------------------------------
                                      Richard D. Moss
                                      Vice President and Chief Financial Officer



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                   Chairman of the Board               2-10-05
----------------------------     and Director                      -----------
Zan Guerry                       (Chief Executive Officer)


/s/ A. Alexander Taylor II       President and Director              2-10-05
----------------------------     (Chief Operating Officer)         -----------
A. Alexander Taylor II


/s/ Samuel E. Allen              Director                            2-10-05
----------------------------                                       -----------
Samuel E. Allen


/s/ Robert E. Bosworth           Director                            2-10-05
----------------------------                                       -----------
Robert E. Bosworth


/s/ Richard E. Cheney            Director                            2-10-05
----------------------------                                       -----------
Richard E. Cheney


/s/ Bill W. Stacy                Director                            2-10-05
----------------------------                                       -----------
Bill W. Stacy


/s/ Philip H. Sanford            Director                            2-10-05
----------------------------                                       -----------
Philip H. Sanford



                                       90
<PAGE>

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



    EXHIBIT
     NUMBER                 DESCRIPTION OF EXHIBIT
    --------      -------------------------------------------------------------
     10.10        Non-Competition and Severance Agreement dated June 1, 2004 by
                  and between Chattem, Inc. and Theodore K. Whitfield, Jr.

       21         Subsidiaries of the Company

       23         Consent of Independent Registered Public Accounting Firm

       31         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 of 1934 and 18 U.S.C. Section 1350

     99.1         Schedule II - Valuation and Qualifying Accounts



















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