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




                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549




                                    FORM 10-Q




                                QUARTERLY REPORT
                       PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934



                FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2005
                          COMMISSION FILE NUMBER 0-5905




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









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

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


AS OF MARCH 29, 2005, 19,762,791 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.



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

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

                                      INDEX
                                      -----



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

         Item 1.  Financial Statements

                  Condensed Consolidated Balance Sheets as of
                  February 28, 2005 and November 30, 2004 ..................   3

                  Condensed Consolidated Statements of Operations
                  for the Three Months Ended February 28, 2005 and
                  February 29, 2004 ........................................   5

                  Condensed Consolidated Statements of Cash Flows
                  for the Three Months Ended February 28, 2005 and
                  February 29, 2004 ........................................   6

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

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations ......................  25

         Item 3.  Quantitative and Qualitative Disclosures About
                  Market Risks .............................................  33

         Item 4.  Controls and Procedures ..................................  33





PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings ........................................  34

         Item 2.  Unregistered Sales of Equity Securities and
                  Use of Proceeds ..........................................  34

         Item 3.  Defaults Upon Senior Securities ..........................  34

         Item 4.  Submission of Matters to a Vote of Security Holders ......  34

         Item 5.  Other Information ........................................  34

         Item 6.  Exhibits and Reports on Form 8-K .........................  35


SIGNATURES .................................................................  36







                                        2

                          PART 1. FINANCIAL INFORMATION
                          -----------------------------

ITEM 1.  FINANCIAL STATEMENTS
- -----------------------------

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------
                                 (In thousands)




                                                                 FEBRUARY 28,   NOVEMBER 30,
ASSETS                                                               2005           2004
- ------                                                           ------------   ------------
                                                                  (Unaudited)
                                                                          
CURRENT ASSETS:
  Cash and cash equivalents                                      $     43,539   $     40,193
  Accounts receivable, less allowances of $2,339 at
     February 28, 2005 and $1,682 at November 30, 2004                 40,810         32,098
  Inventories                                                          21,976         21,690
  Refundable income taxes                                               2,530          4,702
  Deferred income taxes                                                 4,699          4,308
  Prepaid expenses and other current assets                             6,552          3,683
                                                                 ------------   ------------
     Total current assets                                             120,106        106,674
                                                                 ------------   ------------

PROPERTY, PLANT AND EQUIPMENT, NET                                     28,354         28,765
                                                                 ------------   ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product rights, net         222,236        225,560
  Debt issuance costs, net                                              4,984          5,174
  Other                                                                 5,897          5,551
                                                                 ------------   ------------
     Total other noncurrent assets                                    233,117        236,285
                                                                 ------------   ------------

     TOTAL ASSETS                                                $    381,577   $    371,724
                                                                 ============   ============





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

                                        3

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------
                                 (In thousands)




                                                                 FEBRUARY 28,   NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY                                 2005           2004
- ------------------------------------                             ------------   ------------
                                                                  (Unaudited)
                                                                          
CURRENT LIABILITIES:
  Current maturities of long-term debt                           $         --   $         --
  Accounts payable and other                                           16,303         13,341
  Accrued liabilities                                                  22,579         23,763
                                                                 ------------   ------------
     Total current liabilities                                         38,882         37,104
                                                                 ------------   ------------

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

DEFERRED INCOME TAXES                                                  27,917         25,732
                                                                 ------------   ------------

OTHER NONCURRENT LIABILITIES                                            1,804          1,776
                                                                 ------------   ------------

COMMITMENTS AND CONTINGENCIES (Note 18)

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized 1,000,
     none issued                                                           --             --
  Common shares, without par value, authorized 50,000, issued
     and outstanding 19,850 at February 28, 2005 and 19,882
     at November 30, 2004                                              84,620         85,949
  Retained earnings                                                    32,553         23,888
                                                                 ------------   ------------
                                                                      117,173        109,837
  Unamortized value of restricted common shares issued                 (3,835)        (2,386)
  Cumulative other comprehensive income, net of tax:
     Interest rate cap adjustment                                        (347)          (316)
     Foreign currency translation adjustment                              (17)           (23)
                                                                 ------------   ------------
     Total shareholders' equity                                       112,974        107,112
                                                                 ------------   ------------

     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                  $    381,577   $    371,724
                                                                 ============   ============





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

                                        4

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 -----------------------------------------------
             (Unaudited and in thousands, except per share amounts)




                                                                 FOR THE THREE MONTHS ENDED
                                                                 ---------------------------
                                                                 FEBRUARY 28,   FEBRUARY 29,
                                                                     2005           2004
                                                                 ------------   ------------
                                                                          
REVENUES:
  Net sales                                                      $     71,480   $     60,927
  Royalties                                                                51            310
                                                                 ------------   ------------
     Total revenues                                                    71,531         61,237
                                                                 ------------   ------------

COSTS AND EXPENSES:
  Cost of sales                                                        20,260         16,952
  Advertising and promotion                                            20,351         18,532
  Selling, general and administrative                                  11,884         10,635
  Litigation settlement                                                 2,755            194
                                                                 ------------   ------------
     Total costs and expenses                                          55,250         46,313
                                                                 ------------   ------------

INCOME FROM OPERATIONS                                                 16,281         14,924
                                                                 ------------   ------------

OTHER INCOME (EXPENSE):
  Interest expense                                                     (3,495)        (4,755)
  Investment and other income, net                                        147             45
  Loss on early extinguishment of debt                                     --        (11,309)
                                                                 ------------   ------------
     Total other income (expense)                                      (3,348)       (16,019)
                                                                 ------------   ------------

INCOME (LOSS) BEFORE INCOME TAXES                                      12,933         (1,095)

PROVISION FOR (BENEFIT FROM) INCOME TAXES                               4,268           (383)
                                                                 ------------   ------------

NET (LOSS) INCOME                                                $      8,665   $       (712)
                                                                 ============   ============

NUMBER OF COMMON SHARES:
  Weighted average outstanding - basic                                 19,648         19,099
                                                                 ============   ============
  Weighted average and potential dilutive outstanding                  20,489         19,881
                                                                 ============   ============

NET INCOME (LOSS) PER COMMON SHARE:
  Basic                                                          $        .44   $       (.04)
                                                                 ============   ============
  Diluted                                                        $        .42   $       (.04)
                                                                 ============   ============


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

                                        5

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 -----------------------------------------------
              (Unaudited and in thousands, except per share amount)


                                                                 FOR THE THREE MONTHS ENDED
                                                                 ---------------------------
                                                                 FEBRUARY 28,   FEBRUARY 29,
                                                                     2005           2004
                                                                 ------------   ------------
                                                                          
OPERATING ACTIVITIES:
  Net income (loss)                                              $      8,665   $       (712)
  Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
     Depreciation and amortization                                      1,624          1,537
     Deferred income taxes                                              1,778          1,982
     Tax benefit realized from stock option plans                         186          1,083
     Loss on early extinguishment of debt                                  --         11,309
     Other, net                                                           361             --
     Changes in operating assets and liabilities:
        Accounts receivable                                            (8,712)        (9,108)
        Inventories                                                      (286)            (9)
        Refundable income taxes                                         2,172         (3,752)
        Prepaid expenses and other current assets                         382          2,092
        Accounts payable and accrued liabilities                        1,778           (101)
                                                                 ------------   ------------
           Net cash provided by operating activities                    7,948          4,321
                                                                 ------------   ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment                             (456)          (491)
  Purchases of patents, trademarks and other product rights                --            (17)
  Decrease (increase) in other assets, net                                524           (490)
                                                                 ------------   ------------
           Net cash provided by (used in) investing activities             68           (998)
                                                                 ------------   ------------

FINANCING ACTIVITIES:
  Repayment of long-term debt                                              --       (182,280)
  Proceeds from long-term debt                                             --        200,000
  Proceeds from borrowings under revolving credit facility                 --         25,000
  Repayment of policy loans                                            (1,031)            --
  Proceeds from exercise of stock options                                 187          1,453
  Repurchase of common shares                                          (3,514)          (319)
  Increase in debt issuance costs                                          --         (5,678)
  Debt retirement costs                                                    --         (6,946)
  Restricted cash                                                          --        (32,227)
                                                                 ------------   ------------
           Net cash used in financing activities                       (4,358)          (997)
                                                                 ------------   ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                                                                         (312)            26
                                                                 ------------   ------------

CASH AND CASH EQUIVALENTS:
  Increase for the period                                               3,346          2,352
  At beginning of period                                               40,193         26,931
                                                                 ------------   ------------
  At end of period                                               $     43,539   $     29,283
                                                                 ============   ============

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

PAYMENTS FOR:
  Interest                                                       $      1,003   $      6,378
  Taxes                                                          $         85   $        108


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

                                        6

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              ----------------------------------------------------
                                   (UNAUDITED)


All monetary and share amounts are expressed in thousands.

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

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

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

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

3.   RECLASSIFICATIONS
     -----------------

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

4.   RECENT ACCOUNTING PRONOUNCEMENTS
     --------------------------------

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

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

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

                                        7

     No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
     "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for
     transactions in which an entity obtains employee services in share-based
     payment transactions and requires all share-based payments to employees,
     including grants of employee stock options, to be recognized in the income
     statement based on their fair values. Accordingly, the adoption of SFAS
     123R's fair value method will have a significant impact on our results of
     operations, although it will have no impact on our overall financial
     position. The impact of the adoption of SFAS 123R cannot be predicted at
     this time because it will depend on the levels of share-based payments
     granted in the future. However, had we adopted SFAS 123R in prior periods
     the impact of that standard would have approximated the impact of SFAS 123
     as described in the disclosure of proforma net income and earnings per
     share in Note 5. SFAS 123R also requires the benefits of tax deductions in
     excess of recognized compensation costs to be reported as a financing cash
     flow, rather than as an operating cash flow as required under current
     literature. This requirement will reduce net operating cash flows and
     increase net financing cash flows in periods after adoption. While we
     cannot estimate what those amounts will be in the future (because they
     depend on, among other things, when employees exercise stock options), the
     amount of operating cash flows recognized in prior periods for such excess
     tax deductions were not material to our consolidated financial position or
     results of operations. This statement is effective for our interim periods
     beginning after June 15, 2005.

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

5.   STOCK-BASED COMPENSATION
     ------------------------

          Our 1998 Non-Statutory Stock Option Plan provides for the issuance of
     up to 1,400 shares of common stock to key employees, while the 1999
     Non-Statutory Stock Option Plan for Non-Employee Directors allows for the
     issuance of up to 200 shares of common stock. The 2000 Non-Statutory Stock
     Option Plan provides for the issuance of up to 1,500 shares of common
     stock. The 2003 Stock Incentive Plan 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 No. 123, "Accounting for Stock-Based Compensation" ("SFAS
     123") purposes, as amended by SFAS No. 148, "Accounting for Stock-Based
     Compensation - Transition and Disclosure", the fair value of each option
     grant has been estimated as of the date of grant using the Black-Scholes
     option-pricing model with the following weighted average assumptions for
     grants in 2005 and 2004: expected dividend yield of 0%, expected volatility
     of 57% and 53%, respectively, risk-free interest rates of 4.38% and 3.97%,
     respectively, and expected lives of approximately five and six years,
     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 three months ended
     February 28, 2005 and February 29, 2004, respectively, as indicated below:

                                                         2005           2004
                                                      ----------     ----------
          Net income (loss):
             As reported                              $    8,665     $     (712)
             Fair value method compensation cost, net     (1,278)          (861)
                                                      ----------     ----------
             Pro forma                                $    7,387     $   (1,573)
                                                      ==========     ==========

          Net income (loss) per share, basic:
             As reported                              $      .44     $     (.04)
             Pro forma                                $      .38     $     (.08)

          Net income (loss) per share, diluted:
             As reported                              $      .42     $     (.04)
             Pro forma                                $      .36     $     (.08)

                                        8

6.   EARNINGS PER SHARE
     ------------------

          The following table presents the computation of per share earnings for
     the three months ended February 28, 2005 and February 29, 2004,
     respectively:

                                                         2005           2004
                                                      ----------     ----------

          NET INCOME (LOSS)                           $    8,665     $     (712)
                                                      ==========     ==========

          NUMBER OF COMMON SHARES:
             Weighted average outstanding                 19,648         19,099
             Issued upon assumed exercise of
               outstanding stock options                     762            712
             Effect of issuance of restricted
               common shares                                  79             70
                                                      ----------     ----------
             Weighted average and potential
               dilutive outstanding (1)                   20,489         19,881
                                                      ==========     ==========
          NET INCOME (LOSS) PER COMMON SHARE:
             Basic                                    $      .44     $     (.04)
                                                      ==========     ==========
             Diluted                                  $      .42     $     (.04)
                                                      ==========     ==========

          (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: 0 and 62 shares for the three months ended
          February 28, 2005 and February 29, 2004, respectively.

7.   ADVERTISING EXPENSES
     --------------------

          We incur significant expenditures on television, radio and print
     advertising to support our nationally branded over-the-counter ("OTC")
     health care products and toiletries. Customers purchase products from us
     with the understanding that the brands will be supported by our extensive
     media advertising. This advertising supports the retailers' sales effort
     and maintains the important brand franchise with the consuming public.
     Accordingly, we consider our advertising program to be clearly implicit in
     our sales arrangements with our customers. Therefore, we believe it is
     appropriate to allocate a percentage of the necessary supporting
     advertising expenses to each dollar of sales by charging a percentage of
     sales on an interim basis based upon anticipated annual sales and
     advertising expenditures (in accordance with Accounting Principles Board
     Opinion No. 28, "Interim Financial Reporting") and adjusting that accrual
     to the actual expenses incurred at the end of the year.

8.   SHIPPING AND HANDLING
     ---------------------

          Shipping and handling costs of $1,857 and $1,434 are included in
     selling expenses for the three months ended February 28, 2005 and February
     29, 2004, respectively.

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

          The carrying value of trademarks, which are not subject to
     amortization under the provisions of SFAS No. 142, "Goodwill and Other
     Intangible Assets" ("SFAS 142"), was $221,654 and $224,797 as of February
     28, 2005 and November 30, 2004, respectively. The gross carrying amount of
     intangible assets subject to amortization at February 28, 2005 and November
     30, 2004, which consist primarily of non-compete agreements, was $2,139 and
     $2,400, respectively. The related accumulated amortization of intangible
     assets at February 28, 2005 and November 30, 2004 was $1,557 and $1,637,
     respectively. Amortization of our intangible assets subject to amortization
     under the provisions of SFAS 142 for the three months ended February 28,
     2005 and February 29, 2004 was $73 and $77, respectively. Estimated annual
     amortization expense for these assets for the years ended November 30,
     2006, 2007, 2008, 2009 and 2010 is $290, $123, $40, $20 and $0
     respectively.

                                        9

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

10.  INVENTORIES
     -----------

          Inventories consisted of the following as of February 28, 2005 and
     November 30, 2004:

                                                         2005           2004
                                                      ----------     ----------
          Raw materials and work in process           $   11,656     $   10,728
          Finished goods                                  11,753         12,395
          Excess of current cost over LIFO values         (1,433)        (1,433)
                                                      ----------     ----------
               Total inventories                      $   21,976     $   21,690
                                                      ==========     ==========

11.  ACCRUED LIABILITIES
     -------------------

          Accrued liabilities consisted of the following as of February 28, 2005
     and November 30, 2004:

                                                         2005           2004
                                                      ----------     ----------
          Interest                                    $    5,415     $    3,152
          Salaries, wages and commissions                  1,490          4,886
          Product advertising and promotion                5,568          3,750
          Litigation settlement and legal fees             8,568         10,046
          Other                                            1,538          1,929
                                                      ----------     ----------
               Total accrued liabilities              $   22,579     $   23,763
                                                      ==========     ==========

12.  LONG-TERM DEBT
     --------------

          Long-term debt consisted of the following as of February 28, 2005 and
     November 30, 2004:
                                                         2005           2004
                                                      ----------     ----------
             Revolving Credit Facility due 2009 at a
               variable rate of 6.0% as of February
               28, 2005 and November 30, 2004,
               respectively                           $       --     $       --
             Floating Rate Senior Notes due 2010 at a
               variable rate of  5.38% and  4.78% as
               of  February 28, 2005 and November 30,
               2004, respectively                         75,000         75,000
             7.0% Senior Subordinated Notes due 2014     125,000        125,000
                                                      ----------     ----------
             Total long-term debt                        200,000        200,000
             Less:  current maturities                        --             --
                                                      ----------     ----------
             Total long-term debt, net of
               current maturities                     $  200,000     $  200,000
                                                      ==========     ==========


          On February 26, 2004, we entered into a new Senior Secured Revolving
     Credit Facility that matures February 26, 2009 (the "Revolving Credit
     Facility") with Bank of America, N.A. that provided an initial borrowing
     capacity of $25,000 and an additional $25,000, subject to successful
     syndication. On March 9, 2004, we entered into a new commitment agreement
     with a syndicate of commercial banks led by Bank of America, N.A., as
     agent, that enables us to borrow up to a total of $50,000 under the
     Revolving Credit Facility. Borrowings under our Revolving Credit Facility
     bear interest at LIBOR plus applicable percentages of 1.75% to 2.50% or a
     base rate (the higher of the federal funds rate plus 0.5% or the prime
     rate) plus applicable percentages of 0.25% to 1.0%. The applicable
     percentages are calculated based on our leverage ratio. As of February 28,
     2005, no amounts were outstanding under the Revolving Credit Facility, and
     the variable rate was 6.0%. 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 March
     29, 2005, we had no borrowings outstanding under our Revolving Credit
     Facility.

                                       10

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

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

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

          Due to our refinancing transactions, in the first quarter of fiscal
     2004 tender premiums and related fees of $6,946 were paid and net debt
     issuance costs of $4,363 were written off and charged to loss on early
     extinguishment of debt in the Condensed Consolidated Statements of
     Operations. In addition, new debt issuance costs of $5,678 were
     capitalized.

          Also on February 26, 2004, we issued and sold $75,000 of Floating Rate
     Senior Notes due March 1, 2010 (the "Floating Rate Notes") and $125,000 of
     7.0% Senior Subordinated Notes due March 1, 2014 (the "7.0% Subordinated
     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 (5.38% as of February 28, 2005). Interest payments are due
     quarterly in arrears commencing on June 1, 2004. On March 8, 2004, we
     entered into an interest rate cap agreement effective June 1, 2004 with
     decreasing annual notional principal amounts of $15,000 beginning March 1,
     2006 and cap rates ranging from 4.0% to 5.0% over the life of the
     agreement. We paid a $1,375 premium to enter into the interest rate cap
     agreement, which will be amortized over the life of the agreement. The
     current portion of the premium on the interest rate cap agreement of $189
     is included in prepaid expenses and other current assets, and the long-term
     portion of $642 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 February 28, 2005, and a charge of $347, 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.

          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

                                       11

     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 February 28,
     2005 are as follows:

          2006                                                --
          2007                                                --
          2008                                                --
          2009                                                --
          2010                                            75,000
          Thereafter                                     125,000
                                                      ----------
                                                      $  200,000
                                                      ==========

13.  COMPREHENSIVE INCOME
     --------------------

          Comprehensive income consisted of the following components for the
     three months ended February 28, 2005 and February 29, 2004, respectively:

                                                         2005           2004
                                                      ----------     ----------
          Net income                                  $    8,665     $     (712)
          Other - interest rate cap adjustment               (31)            --
          Other - foreign currency translation
             adjustment                                        6            270
                                                      ----------     ----------
             Total                                    $    8,640     $     (442)
                                                      ==========     ==========

14.  STOCK BUYBACK
     -------------

          In January 2005, our board of directors increased the total
     authorization to repurchase our common stock under our stock buyback
     program to $30,000. In the first quarter of fiscal 2005, we repurchased 103
     shares for $3,514. All repurchased shares were retired and returned to
     unissued. We, however, are limited in our ability to repurchase shares due
     to restrictions under the terms of our Revolving Credit Facility, Floating
     Rate Notes and 7.0% Subordinated Notes. Subsequent to February 28, 2005, we
     have repurchased 116 of our shares for $4,221.




                                       12

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

          RETIREMENT PLANS

          We have a noncontributory defined benefit pension plan ("the Plan"),
     which covers substantially all employees as of December 31, 2000. The Plan
     provides benefits based upon years of service and the employee's
     compensation. Our contributions are based on computations by independent
     actuaries. Plan assets at February 28, 2005 and November 30, 2004 were
     invested primarily in United States government and agency securities and
     corporate debt and equity securities. In October 2000, our board of
     directors adopted an amendment to the Plan that freezes benefits of the
     Plan and prohibits new entrants to the Plan effective December 31, 2000.

          Net periodic pension cost for the three months ended February 28, 2005
     and February 29, 2004 comprised the following components:

                                                         2005           2004
                                                      ----------     ----------
          Service cost                                $       --     $       --
          Interest cost on projected benefit
             obligation                                      152            155
          Actual return on plan assets                      (212)          (178)
          Net amortization and deferral                        5             28
                                                      ----------     ----------
          Net pension cost (benefit)                  $      (55)    $        5
                                                      ==========     ==========

          No employer contributions were made for the three months ended
     February 28, 2005 and February 29, 2004, and no employer contributions are
     expected to be made in fiscal 2005.

          POSTRETIREMENT HEALTH CARE BENEFITS

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

          Net periodic postretirement health care benefits cost for the three
     months ended February 28, 2005 and February 29, 2004, included the
     following components:
                                                         2005           2004
                                                      ----------     ----------
          Service cost                                $       18     $       16
          Interest cost on accumulated postretirement
             benefit obligation                               21             20
          Amortization of prior service cost                   4              4
          Amortization of net gain                            (4)            (8)
                                                      ----------     ----------
          Net periodic postretirement benefits cost   $       39     $       32
                                                      ==========     ==========


16.  INCOME TAXES
     ------------

          We account for income taxes using the asset and liability approach as
     prescribed by SFAS No. 109, "Accounting for Income Taxes". This approach
     requires recognition of deferred tax assets and liabilities for the
     expected future tax consequences of events that have been included in the
     consolidated financial statements or tax returns. Using the enacted tax
     rates in effect for the year in which the differences are expected to
     reverse, deferred tax assets and liabilities are determined based on the
     differences between the financial reporting and the tax basis of an asset
     or liability. We record income tax expense in our consolidated financial
     statements based on an estimated annual effective income tax rate. Our tax
     rate for the three months ended February 28, 2005 was 33%, as compared to
     35% in the three months ended February 29, 2004. The lower rate for the
     three months ended February 28, 2005 reflects the implementation of a
     number of foreign and state tax planning initiatives, which include our
     determination during the third quarter of fiscal 2004 to reinvest
     indefinitely all undistributed earnings of Chattem Canada, a wholly-owned
     subsidiary.

          Undistributed earnings of Chattem Canada amounted to approximately
     $281 for the three months ended February 28, 2005. These earnings are
     considered to be reinvested indefinitely and, accordingly, no provision for
     U.S. federal and state

                                       13

     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).

17.  PRODUCT SEGMENT INFORMATION
     ---------------------------

          Net sales of our domestic product categories within our single
     healthcare business segment for the three months ended February 28, 2005
     and February 29, 2004 are as follows:

                                                         2005           2004
                                                      ----------     ----------
          Topical analgesics                          $   21,407     $   15,712
          Medicated skin care products                    17,624         13,332
          Dietary supplements                              8,660          8,511
          Medicated dandruff shampoos and conditioner      9,800          9,221
          Other OTC and toiletry products                  8,078          8,830
                                                      ----------     ----------
             Total                                    $   65,569     $   55,606
                                                      ==========     ==========


18.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

     GENERAL LITIGATION

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

     On April 13, 2004, we entered into a class action settlement agreement with
representatives of the plaintiffs' settlement class, which provided for a
national class action settlement of all DEXATRIM PPA claims, 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. Both of these appeals have now been 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 eight
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 settlement agreement with
Interstate Fire & Casualty Company ("Interstate") with regard to its $25,000 of
coverage in excess of the insurance funds available in the settlement trust. 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

                                       14

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, 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 settlement agreement 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 settlement agreement, 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. Pursuant to the settlement agreement, we and Interstate have
dismissed all claims and counterclaims filed against each other.

     Prior to the fourth quarter of fiscal 2004, 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 reasonably estimate
the probable loss related to the DEXATRIM litigation. Based on the estimated
litigation settlement costs relating to our DEXATRIM products, we have recorded
an accrued liability in our Consolidated Balance Sheets as of February 28, 2005
and November 30, 2004 of $8,506 and $9,519, respectively. We currently do not
expect to record any additional charges relative to the settlement costs of the
PPA litigation, although we will continue to incur costs related to legal
expenses. During the first fiscal quarter of 2005, we incurred and recorded
$1,070 of legal expenses relating to the PPA settlement. We will record future
PPA related legal expenses in the period incurred.

     We maintain a significantly lower level of insurance coverage for all other
potential claims relating to our products including DEXATRIM products containing
ephedrine. For the current policy period, we are insured for product liability
insurance for all of our other products, including DEXATRIM products containing
ephedrine, for $10,000 through our captive insurance subsidiary, of which
approximately $3,500 is funded as of March 29, 2005. We also have $40,000 of
excess coverage through third party insurers.

     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 alleged injury caused by DEXATRIM containing
ephedrine filed opt out

                                       15

notices in the PPA class action settlement, but did not file lawsuits against
us. In the first quarter of fiscal 2005, we reached a settlement with respect to
two of the four pending lawsuits and the three opt out claims. Each of these
settlements has been or will be funded by insurance coverage provided by our
captive insurance subsidiary. After these settlements, there are two lawsuits
currently pending against us related to DEXATRIM containing ephedrine. We
recorded a litigation settlement charge of $1,685 in the first quarter of fiscal
2005 associated with ephedrine-related claims and legal expenses.

     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 March 29, 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. 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

                                       16

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.

     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.

     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.

                                       17

     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.


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

     The condensed consolidating financial statements, for the dates or periods
indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co.
("Signal"), SunDex, LLC ("SunDex") and Chattem (Canada) Holdings, Inc.
("Canada"), the guarantors of the long-term debt of Chattem, and the
non-guarantor direct and indirect wholly-owned subsidiaries of Chattem are
presented below. Signal is 89% owned by Chattem and 11% owned by Canada. SunDex
and Canada are wholly-owned subsidiaries of Chattem. The guarantees of Signal,
SunDex and Canada are full and unconditional and joint and several. The
guarantees of Signal, SunDex and Canada as of February 28, 2005 arose in
conjunction with Chattem's Revolving Credit Facility and Chattem's issuance of
the Floating Rate Notes and the 7.0% Subordinated Notes (See Note 12). The
maximum amount of future payments the guarantors would be required to make under
the guarantees as of February 28, 2005 is $200,000.








                                       18

CHATTEM, INC. AND SUBSIDIARIES                                           Note 19
CONDENSED CONSOLIDATING BALANCE SHEETS

FEBRUARY 28, 2005
(Unaudited and in thousands)

                                                           GUARANTOR       NON-GUARANTOR
                                                          SUBSIDIARY        SUBSIDIARY
ASSETS                                    CHATTEM          COMPANIES         COMPANIES       ELIMINATIONS      CONSOLIDATED
- ------                                 ------------      ------------      ------------      ------------      ------------
                                                                                                
CURRENT ASSETS:
  Cash and cash equivalents            $     29,026      $      1,969      $     12,544      $         --      $     43,539
  Accounts receivable, less
     allowances of $2,339                    34,890            10,379             5,923           (10,382)           40,810
  Interest receivable                            --               619                --              (619)               --
  Inventories                                17,143             2,391             2,442                --            21,976
  Refundable income taxes                     2,530                --                --                --             2,530
  Deferred income taxes                       4,699                --                --                --             4,699
  Prepaid expenses and
     other current assets                     5,668                --               884                --             6,552
                                       ------------      ------------      ------------      ------------      ------------
     Total current assets                    93,956            15,358            21,793           (11,001)          120,106
                                       ------------      ------------      ------------      ------------      ------------
PROPERTY, PLANT AND EQUIPMENT, NET           27,319               775               260                --            28,354
                                       ------------      ------------      ------------      ------------      ------------
OTHER NONCURRENT ASSETS:
  Patents, trademarks and other
     purchased product rights, net              582           283,944                --           (62,290)          222,236
  Debt issuance costs, net                    4,984                --                --                --             4,984
  Investment in subsidiaries                257,166            33,000            70,266          (360,432)               --
  Note receivable                                --            33,000                --           (33,000)               --
  Other                                       5,528                --               369                --             5,897
                                       ------------      ------------      ------------      ------------      ------------
     Total other noncurrent assets          268,260           349,944            70,635          (455,722)          233,117
                                       ------------      ------------      ------------      ------------      ------------
     TOTAL ASSETS                      $    389,535      $    366,077      $     92,688      $   (466,723)     $    381,577
                                       ============      ============      ============      ============      ============

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

CURRENT LIABILITIES:
  Current maturities of long-term
     debt                              $         --      $         --      $         --      $         --      $         --
  Accounts payable and other                 10,299                --             6,004                --            16,303
  Accrued liabilities                        28,463             1,362             3,755           (11,001)           22,579
                                       ------------      ------------      ------------      ------------      ------------
     Total current liabilities               38,762             1,362             9,759           (11,001)           38,882
                                       ------------      ------------      ------------      ------------      ------------

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

DEFERRED INCOME TAXES                           383            27,534                --                --            27,917
                                       ------------      ------------      ------------      ------------      ------------

OTHER NONCURRENT LIABILITIES                  1,804                --                --                --             1,804
                                       ------------      ------------      ------------      ------------      ------------

INTERCOMPANY ACCOUNTS                        35,607           (36,184)              577                --                --
                                       ------------      ------------      ------------      ------------      ------------

SHAREHOLDERS' EQUITY:
  Preferred shares, without par
     value, authorized 1,000,
     none issued                                 --                --                --                --                --
  Common shares, without par
     value, authorized 50,000,
     issued and outstanding 19,850           84,620                --                --                --            84,620
  Share capital of subsidiaries                  --           329,704            43,209          (372,913)               --
  Retained earnings                          32,553            43,661             5,915           (49,576)           32,553
                                       ------------      ------------      ------------      ------------      ------------
     Total                                  117,173           373,365            49,124          (422,489)          117,173
                                       ------------      ------------      ------------      ------------      ------------
  Unamortized value of restricted
     common shares issued                    (3,835)               --                --                --            (3,835)
  Cumulative other comprehensive
     income, net of taxes:
     Interest rate cap adjustment              (347)               --                --                --              (347)
     Foreign currency translation
       adjustment                               (12)               --               228              (233)              (17)
                                       ------------      ------------      ------------      ------------      ------------
     Total shareholders' equity             112,979           373,365            49,352          (422,722)          112,974
                                       ------------      ------------      ------------      ------------      ------------
     TOTAL LIABILITIES AND
     SHAREHOLDERS' EQUITY              $    389,535      $    366,077      $     92,688      $   (466,723)     $    381,577
                                       ============      ============      ============      ============      ============


                                       19

CHATTEM, INC. AND SUBSIDIARIES                                           Note 19
CONDENSED CONSOLIDATING BALANCE SHEETS

NOVEMBER 30, 2004
(In thousands)

                                                           GUARANTOR       NON-GUARANTOR
                                                          SUBSIDIARY        SUBSIDIARY
ASSETS                                    CHATTEM          COMPANIES         COMPANIES       ELIMINATIONS      CONSOLIDATED
- ------                                 ------------      ------------      ------------      ------------      ------------
                                                                                                
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 and outstanding 19,882           85,949                --                --                --            85,949
  Share capital of subsidiaries                  --           329,705            41,100          (370,805)               --
  Retained earnings                          23,888            36,630             6,115           (42,745)           23,888
                                       ------------      ------------      ------------      ------------      ------------
     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
                                       ============      ============      ============      ============      ============


                                       20

CHATTEM, INC. AND SUBSIDIARIES                                           Note 19
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2005
(Unaudited and in thousands)

                                                           GUARANTOR       NON-GUARANTOR
                                                          SUBSIDIARY        SUBSIDIARY
                                          CHATTEM          COMPANIES         COMPANIES       ELIMINATIONS      CONSOLIDATED
                                       ------------      ------------      ------------      ------------      ------------
                                                                                                

TOTAL REVENUES                         $     58,790      $     19,062      $      4,873      $    (11,194)     $     71,531
                                       ------------      ------------      ------------      ------------      ------------

COSTS AND EXPENSES:
  Cost of sales                              16,614             2,323             2,139              (816)           20,260
  Advertising and promotion                  15,459             3,803             1,089                --            20,351
  Selling, general and administrative        11,521                73               290                --            11,884
  Litigation settlement                       1,070                --             1,685                --             2,755
  Equity in subsidiary income                (6,831)               --                --             6,831                --
                                       ------------      ------------      ------------      ------------      ------------
     Total costs and expenses                37,833             6,199             5,203             6,015            55,250
                                       ------------      ------------      ------------      ------------      ------------

INCOME (LOSS) FROM OPERATIONS                20,957            12,863              (330)          (17,209)           16,281
                                       ------------      ------------      ------------      ------------      ------------

OTHER INCOME (EXPENSE):
  Interest expense                           (3,489)               --              (623)              617            (3,495)
  Investment and other income, net               95               623               671            (1,242)              147
  Royalties                                  (9,017)           (1,362)               --            10,379                --
  Corporate allocations                         715              (699)              (16)               --                --
                                       ------------      ------------      ------------      ------------      ------------
     Total other income (expense)           (11,696)           (1,438)               32             9,754            (3,348)
                                       ------------      ------------      ------------      ------------      ------------

INCOME (LOSS) BEFORE INCOME TAXES             9,261            11,425              (298)           (7,455)           12,933

PROVISION FOR (BENEFIT FROM)
INCOME TAXES                                    596             3,770               (98)               --             4,268
                                       ------------      ------------      ------------      ------------      ------------

NET INCOME (LOSS)                      $      8,665      $      7,655      $       (200)     $     (7,455)     $      8,665
                                       ============      ============      ============      ============      ============






                                       21

CHATTEM, INC. AND SUBSIDIARIES                                           Note 19
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004
(Unaudited and in thousands)

                                                           GUARANTOR       NON-GUARANTOR
                                                          SUBSIDIARY        SUBSIDIARY
                                          CHATTEM          COMPANIES         COMPANIES       ELIMINATIONS      CONSOLIDATED
                                       ------------      ------------      ------------      ------------      ------------
                                                                                                

TOTAL REVENUES                         $     49,908      $     16,549      $      4,172      $     (9,392)     $     61,237
                                       ------------      ------------      ------------      ------------      ------------

COSTS AND EXPENSES:
  Cost of sales                              13,702             2,249             1,549              (548)           16,952
  Advertising and promotion                  16,376             1,177               979                --            18,532
  Selling, general and administrative        10,467                46               122                --            10,635
  Litigation settlement                         194                --                --                --               194
  Equity in subsidiary income                (8,309)               --                --             8,309                --
                                       ------------      ------------      ------------      ------------      ------------
     Total costs and expenses                32,430             3,472             2,650             7,761            46,313
                                       ------------      ------------      ------------      ------------      ------------

INCOME FROM OPERATIONS                       17,478            13,077             1,522           (17,153)           14,924
                                       ------------      ------------      ------------      ------------      ------------

OTHER INCOME (EXPENSE):
  Interest expense                           (4,763)               --              (611)              619            (4,755)
  Investment and other income, net               27               620                17              (619)               45
  Loss on early extinguishment of debt      (11,309)               --                --                --           (11,309)
  Royalties                                  (7,525)           (1,319)               --             8,844                --
  Corporate allocations                         788              (759)              (29)               --                --
                                       ------------      ------------      ------------      ------------      ------------
     Total other income (expense)           (22,782)           (1,458)             (623)            8,844           (16,019)
                                       ------------      ------------      ------------      ------------      ------------

(LOSS) INCOME BEFORE INCOME TAXES            (5,304)           11,619               899            (8,309)           (1,095)

(BENEFIT FROM) PROVISION FOR
INCOME TAXES                                 (4,592)            4,067               142                --              (383)
                                       ------------      ------------      ------------      ------------      ------------

NET (LOSS) INCOME                      $       (712)     $      7,552      $        757      $     (8,309)     $       (712)
                                       ============      ============      ============      ============      ============






                                       22

CHATTEM, INC. AND SUBSIDIARIES                                           Note 19
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2005
(Unaudited and in thousands)

                                                           GUARANTOR       NON-GUARANTOR
                                                          SUBSIDIARY        SUBSIDIARY
                                          CHATTEM          COMPANIES         COMPANIES       ELIMINATIONS      CONSOLIDATED
                                       ------------      ------------      ------------      ------------      ------------
                                                                                                
OPERATING ACTIVITIES:
  Net income (loss)                    $      8,665      $      7,655      $       (200)     $     (7,455)     $      8,665
  Adjustments to reconcile net
  income (loss) to net cash provided
  by operating activities:
     Depreciation and amortization            1,585                --                39                --             1,624
     Deferred income taxes                      487             1,291                --                --             1,778
     Tax benefit realized from
        stock option plans                      186                --                --                --               186
     Other, net                                  49                --               312                --               361
     Equity in subsidiary income             (7,455)               --                --             7,455                --
     Changes in operating assets
     and liabilities:
        Accounts receivable                 (11,307)            1,498              (547)            1,644            (8,712)
        Inventories                            (462)              628              (452)               --              (286)
        Refundable income taxes               2,172                --                --                --             2,172
        Prepaid expenses and other
          current assets                      1,072                --              (690)               --               382
        Accounts payable and
          accrued liabilities                   (70)              255             3,237            (1,644)            1,778
                                       ------------      ------------      ------------      ------------      ------------
        Net cash provided by
          operating activities               (5,078)           11,327             1,699                --             7,948
                                       ------------      ------------      ------------      ------------      ------------

INVESTING ACTIVITIES:
  Purchases of property, plant
     and equipment                             (423)               --               (33)               --              (456)
  (Increase) decrease in other
     assets, net                                 12                --               512                --               524
                                       ------------      ------------      ------------      ------------      ------------
        Net cash (used in) provided
          by investing activities              (411)               --               479                --                68
                                       ------------      ------------      ------------      ------------      ------------

FINANCING ACTIVITIES:
  Repayment of policy loans                  (1,031)               --                --                --            (1,031)
  Proceeds from exercise of stock
     options                                    187                --                --                --               187
  Repurchase of common shares                (3,514)               --                --                --            (3,514)
  Changes in intercompany accounts           10,529           (10,700)              171                --                --
  Dividends paid                                 --              (625)              625                --                --
                                       ------------      ------------      ------------      ------------      ------------
        Net cash provided by (used
          in) financing activities            6,171           (11,325)              796                --            (4,358)
                                       ------------      ------------      ------------      ------------      ------------

EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS                        --                --              (312)               --              (312)
                                       ------------      ------------      ------------      ------------      ------------

CASH AND CASH EQUIVALENTS:
  Increase for the period                       682                 2             2,662                --             3,346
  At beginning of period                     28,344             1,967             9,882                --            40,193
                                       ------------      ------------      ------------      ------------      ------------
  At end of period                     $     29,026      $      1,969      $     12,544      $         --      $     43,539
                                       ============      ============      ============      ============      ============






                                       23

CHATTEM, INC. AND SUBSIDIARIES                                           Note 19
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004
(Unaudited and in thousands)

                                                           GUARANTOR       NON-GUARANTOR
                                                          SUBSIDIARY        SUBSIDIARY
                                          CHATTEM          COMPANIES         COMPANIES       ELIMINATIONS      CONSOLIDATED
                                       ------------      ------------      ------------      ------------      ------------
                                                                                                
OPERATING ACTIVITIES:
  Net (loss) income                    $       (712)     $      7,552      $        757      $     (8,309)     $       (712)
  Adjustments to reconcile net
  (loss) income to net cash
  provided by operating activities:
     Depreciation and amortization            1,519                --                18                --             1,537
     Deferred income taxes                      303             1,679                --                --             1,982
     Tax benefit realized from
       stock option plans                     1,083                --                --                --             1,083
     Loss on early extinguishment
       of debt                               11,309                --                --                --            11,309
     Equity in subsidiary income             (8,309)               --                --             8,309                --
     Changes in operating assets
     and liabilities:
        Accounts receivable                  (8,844)           (8,845)             (264)            8,845            (9,108)
        Interest receivable                      --              (619)               --               619                --
        Inventories                             (74)               22                43                --                (9)
        Refundable income taxes              (3,752)               --                --                --            (3,752)
        Prepaid expenses and other
          current assets                      2,567                --                25              (500)            2,092
        Accounts payable and
          accrued liabilities                 7,368             1,319               176            (8,964)             (101)
                                       ------------      ------------      ------------      ------------      ------------
          Net cash provided by
            operating activities              2,458             1,108               755                --             4,321
                                       ------------      ------------      ------------      ------------      ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and
    equipment                                  (485)               --                (6)               --              (491)
  Purchases of patents, trademarks
     and other product rights                    --               (17)               --                --               (17)
  Increase in note receivable                    --           (33,000)               --            33,000                --
  (Increase) decrease in other
     assets, net                               (760)               --               270                --              (490)
                                       ------------      ------------      ------------      ------------      ------------
          Net cash (used in)
            provided by investing
            activities                       (1,245)          (33,017)              264            33,000              (998)
                                       ------------      ------------      ------------      ------------      ------------


FINANCING ACTIVITIES:
  Repayment of long-term debt              (182,280)               --                --                --          (182,280)
  Proceeds from long-term debt              200,000                --                --                --           200,000
  Proceeds from borrowings under
     revolving credit facility               25,000                --                --                --            25,000
  Proceeds from exercise of stock
     options                                  1,453                --                --                --             1,453
  Repurchase of common shares                  (319)               --                --                --              (319)
  Increase in debt issuance costs            (5,678)               --                --                --            (5,678)
  Debt retirement costs                      (6,946)               --                --                --            (6,946)
  Restricted cash                           (32,227)               --                --                --           (32,227)
  Intercompany debt proceeds, net                --                --            33,000           (33,000)               --
  Changes in intercompany accounts              882            31,915           (32,797)               --                --
                                       ------------      ------------      ------------      ------------      ------------
          Net cash (used in)
            provided by financing
            activities                         (115)           31,915               203           (33,000)             (997)
                                       ------------      ------------      ------------      ------------      ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
                                                 --                --                26                --                26
                                       ------------      ------------      ------------      ------------      ------------
CASH AND CASH EQUIVALENTS:
  Increase for the period                     1,098                 6             1,248                --             2,352
  At beginning of period                     18,702             1,964             6,265                --            26,931
                                       ------------      ------------      ------------      ------------      ------------
  At end of period                     $     19,800      $      1,970      $      7,513      $         --      $     29,283
                                       ============      ============      ============      ============      ============



                                       24

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
         RESULTS OF OPERATIONS
         ---------------------

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

OVERVIEW

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

     o    Topical analgesics such as ICY HOT and ASPERCREME;

     o    Medicated skin care products such as GOLD BOND medicated skin care
          powder, cream, lotion, 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 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 the first quarter of fiscal 2005. We
sell our products nationally through mass merchandiser, drug and food channels
principally utilizing our own sales force.

     Our net income (loss) margin (net income (loss)/total revenues) was 12.1%
and (1.2%) for the first quarter of fiscal 2005 and 2004, respectively. Our net
income (excluding debt extinguishment and litigation settlement charges) margin
(net income (excluding debt extinguishment and litigation settlement
charges)/total revenues) was 14.7% and 11.0% for the first quarter of fiscal
2005 and 2004, respectively. We believe that disclosure of net income (excluding
debt extinguishment 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 and
litigation settlement charges) to net income is presented in the following
table:

                                                   FOR THE THREE MONTHS ENDED
                                                -------------------------------
                                                FEBRUARY 28,       FEBRUARY 29,
                                                    2005               2004
                                                ------------       ------------
                                                     (dollars in thousands,
                                                     except per share data)

Net income (loss)                               $      8,665       $       (712)
Add:
     Loss on early extinguishment of debt                 --             11,309
     Litigation settlement charges                     2,755                194
     Benefit from income taxes                          (909)            (4,026)
                                                ------------       ------------
Net income (excluding debt extinguishment
   and litigation settlement charges)           $     10,511       $      6,765
                                                ============       ============
Net income (excluding debt extinguishment
   and litigation settlement charges) per
   common share (diluted)                       $        .51       $        .34
                                                ============       ============
Net income (excluding debt extinguishment
   and litigation settlement charges) margin            14.7%              11.0%
                                                ============       ============

                                       25

     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 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 and EBITDA (excluding litigation settlement charges) as
important indicators of our operational strength and performance, including our
ability to pay interest, service debt and fund capital expenditures. EBITDA and
EBITDA (excluding litigation settlement charges) 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 litigation settlement
charges) to net income is presented in the following table:

                                                                          FOR THE THREE MONTHS ENDED
                                                       ------------------------------------------------------------------
                                                                                              DOLLAR          PERCENTAGE
                                                       FEBRUARY 28,      FEBRUARY 29,        INCREASE          INCREASE
                                                           2005              2004           (DECREASE)        (DECREASE)
                                                       ------------      ------------      ------------      ------------
                                                                             (dollars in thousands)
                                                                                                 
Net income (loss)                                      $      8,665      $       (712)     $      9,377           1,317.0%
Add:
   Provision for (benefit from) income taxes                  4,268              (383)            4,651           1,214.4
   Interest expense, net (1)                                  3,348            16,019           (12,671)            (79.1)
   Depreciation and amortization less amounts
   included in interest                                       1,434             1,268               166              13.1
                                                       ------------      ------------      ------------
EBITDA                                                 $     17,715      $     16,192      $      1,523               9.4
                                                       ============      ============      ============
   Litigation settlement charges                              2,755               194             2,561           1,320.1
                                                       ------------      ------------      ------------
EBITDA (excluding litigation settlement charges)       $     20,470      $     16,386      $      4,084              24.9
                                                       ============      ============      ============

EBITDA margin (EBITDA/total revenues)                          24.8%             26.4%
                                                       ============      ============
EBITDA (excluding litigation settlement charges)
   margin (EBITDA (excluding litigation settlement
   charges)/total revenues)                                    28.6%             26.8%
                                                       ============      ============


(1)  Fiscal 2004 includes a loss on early extinguishment of debt of $11.3
     million.

DEVELOPMENTS DURING FISCAL 2005

     In the first quarter of fiscal 2005, we introduced the following product
line extensions: ASPERCREME Odor-Free Therapy Back and Body Patch, GOLD BOND
Ultimate Comfort Powder, PHISODERM pH2O, NEW PHASE Extra Strength, DEXATRIM Max
and BULLFROG UV Defender.

     On December 13, 2004, we entered into a term sheet of settlement with
Interstate Fire & Casualty Company ("Interstate") with regard to Interstate's
lawsuit to rescind its $25.0 million of excess coverage for product liability
claims relating to DEXATRIM products containing PPA. On March 18, 2005, we
entered into a settlement and coverage-in-place agreement with Interstate
consistent with the term sheet of settlement (the "Settlement Agreement"). In
accordance with the Settlement Agreement, Interstate will provide coverage of
DEXATRIM PPA claims that are covered by its policy after $78.5 million has been
paid toward covered claims. 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
Settlement Agreement, 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.

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

                                       26

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain items
from our Condensed Consolidated Statements of Operations expressed as a
percentage of total revenues:
                                                  FOR THE THREE MONTHS ENDED
                                               -------------------------------
                                               FEBRUARY 28,       FEBRUARY 29,
                                                   2005               2004
                                               ------------       ------------
TOTAL REVENUES                                        100.0%             100.0%
                                               ------------       ------------
COSTS AND EXPENSES:
  Cost of sales                                        28.3               27.7
  Advertising and promotion                            28.5               30.2
  Selling, general and administrative                  16.6               17.4
  Litigation settlement                                 3.8                0.3
                                               ------------       ------------
     Total costs and expenses                          77.2               75.6
                                               ------------       ------------
INCOME FROM OPERATIONS                                 22.8               24.4
                                               ------------       ------------
OTHER INCOME (EXPENSE):
  Interest expense                                     (4.9)              (7.8)
  Investment and other income, net                      0.2                0.1
  Loss on early extinguishment of debt                   --              (18.5)
                                               ------------       ------------
     Total other income (expense)                      (4.7)             (26.2)
                                               ------------       ------------

INCOME (LOSS) BEFORE INCOME TAXES                      18.1               (1.8)

PROVISION FOR (BENEFIT FROM) INCOME TAXES               6.0               (0.6)
                                               ------------       ------------
NET INCOME (LOSS)                                      12.1%              (1.2%)
                                               ============       ============

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 February 28, 2005 condensed consolidated
financial statements:

     ALLOWANCE FOR DOUBTFUL ACCOUNTS

     As of February 28, 2005, an estimate was made of the collectibility of the
outstanding accounts receivable balances. This estimate requires the utilization
of outside credit services, knowledge about the customer and the customer's
industry, new developments in the customer's industry and operating results of
the customer as well as general economic conditions and historical trends. When
all these facts are compiled, a judgment as to the collectibility of the
individual account is made. Many factors can impact this estimate, including
those noted in this paragraph. The adequacy of the estimated allowance may be
impacted by the deterioration in the financial condition of a large customer,
weakness in the economic environment resulting in a higher level of customer
bankruptcy filings or delinquencies and the competitive environment in which the
customer operates. During the first quarter of fiscal 2005, we performed a
detailed assessment of the collectibility of trade accounts receivable and
reduced our estimate of allowance for doubtful accounts by approximately $0.3
million, which resulted in a decrease to selling, general and administrative
expense in our condensed consolidated financial statements.

     REVENUE RECOGNITION

     Revenue is recognized when our products are shipped to our customers. It is
generally our policy across all classes of customers that all sales are final.
As is common in the consumer products industry, customers return products for a
variety of reasons including products damaged in transit, discontinuance of a
particular size or form of product and shipping errors. As sales are recorded,
we accrue an estimated amount for product returns, as a reduction of these
sales, based upon our historical

                                       27

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. As a result of higher
sales volumes in the first quarter of fiscal 2005 and 2004, we increased our
estimate of seasonal returns by approximately $0.1 million and $0.2 million,
respectively, which resulted in a decrease to net sales in our condensed
consolidated financial statements. During the first quarter of fiscal 2005, as a
result of our estimate of customer inventory levels and based on historical
non-seasonal product returns, we increased our estimate of non-seasonal returns
by approximately $0.6 million, which resulted in a decrease to net sales in our
condensed consolidated financial statements, as compared to a $0.2 million
decrease in our estimate in the first quarter of fiscal 2004.

     We routinely enter into agreements with our customers to participate in
promotional programs. These programs generally take the form of coupons,
temporary price reductions, scan downs, display activity and participations in
advertising vehicles provided uniquely by the customer. The ultimate cost of
these programs is often variable based on the number of units actually sold.
Estimated unit sales of a product under a promotional program are used to
estimate the total cost of the program, which is recorded as a reduction of
sales. Actual results can differ from the original estimate. We also consider
customer delays in requesting promotional program payments when evaluating the
required accrual. Many customers audit programs significantly after the date of
performance to determine the actual amount due and make a claim for
reimbursement at that time. As a result, changes in the unit sales trends under
promotional programs as well as the timing of payments could result in changes
in the accrual. During the first quarter of fiscal 2005 and 2004, primarily as a
result of the sales volume impact on variable based programs, we increased our
estimate of promotional accruals by approximately $0.5 million and $1.0 million,
respectively, which resulted in a decrease to net sales in our condensed
consolidated financial statements.

     INCOME TAXES

     We account for income taxes using the asset and liability approach as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". This approach requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in our condensed consolidated financial statements or
tax returns. Using the enacted tax rates in effect for the year in which the
differences are expected to reverse, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and the tax
basis of an asset or liability. We record income tax expense in our condensed
consolidated financial statements based on an estimated annual effective income
tax rate. Our tax rate for the three months ended February 28, 2005 was 33%, as
compared to 35% in the three months ended February 29, 2004, respectively. The
lower rates for the three months ended February 28, 2005 reflect 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 $281 for
the three months ended February 28, 2005. These earnings are considered to be
reinvested indefinitely and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, we would be subject to U.S.
income taxes (subject to an adjustment for foreign tax credits).

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

                                       28

COMPARISON OF THREE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004

     To facilitate discussion of our operating results for the three months
ended February 28, 2005 and February 29, 2004, we have included the following
selected data from our Condensed Consolidated Statements of Operations:

                                                                             INCREASE (DECREASE)
                                                                          ------------------------
                                                 2005          2004         AMOUNT      PERCENTAGE
                                              ----------    ----------    ----------    ----------
                                                             (dollars in thousands)
                                                                            
Domestic net sales                            $   65,569    $   55,606    $    9,963          17.9%
International revenues (including royalties)       5,962         5,631           331           5.9
Total revenues                                    71,531        61,237        10,294          16.8
Cost of sales                                     20,260        16,952         3,308          19.5
Advertising and promotion expense                 20,351        18,532         1,819           9.8
Selling, general and administrative expense       11,884        10,635         1,249          11.7
Litigation settlement                              2,755           194         2,561       1,320.1
Interest expense                                   3,495         4,755        (1,260)        (26.5)
Loss on early extinguishment of debt                  --       (11,309)           nm            nm
Net  income (loss)                                 8,665          (712)        9,377       1,317.0


     DOMESTIC NET SALES

     Domestic net sales for the three months ended February 28, 2005 increased
$10.0 million or 17.9% as compared to the comparable period of 2004. A
comparison of domestic net sales for the categories of products included in our
portfolio of OTC healthcare products is as follows:

                                                                             INCREASE (DECREASE)
                                                                          ------------------------
                                                 2005          2004         AMOUNT      PERCENTAGE
                                              ----------    ----------    ----------    ----------
                                                             (dollars in thousands)
                                                                            
Topical analgesics                            $   21,407    $   15,712    $    5,695          36.2%
Medicated skin care products                      17,624        13,332         4,292          32.2
Dietary supplements                                8,660         8,511           149           1.8
Medicated dandruff shampoos and conditioner        9,800         9,221           579           6.3
Other OTC and toiletry products                    8,078         8,830          (752)         (8.5)
                                              ----------    ----------    ----------
  Total                                       $   65,569    $   55,606    $    9,963          17.9
                                              ==========    ==========    ==========


     Net sales growth in the topical analgesic category was led by 53% and 50%
increases in sales of ASPERCREME and ICY HOT, respectively. ASPERCREME'S sales
increase was driven by the launch of the Odor-Free Therapy Back and Body Patch.
ICY HOT continued to benefit from the ICY HOT Medicated Sleeve and the effective
advertising campaign featuring Shaquille O'Neal. Net sales growth in this
category also resulted from 13% and 10% increases in SPORTSCREME and CAPZASIN
sales, 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 42% increase in the GOLD BOND franchise. GOLD BOND sales growth was
attributable to 70%, 52%, 23% and 20% increases from the lotion, foot care,
powder and cream product lines, respectively. The increase in sales from the
GOLD BOND lotion line of products was attributable to the continuing strength of
GOLD BOND ULTIMATE Healing Skin Therapy Lotion. The increase in net sales of
GOLD BOND foot resulted from increased distribution, GOLD BOND cream benefited
from an effective advertising campaign, and GOLD BOND powder sales were driven
by the launch of GOLD BOND ULTIMATE Comfort Powder.

     Net sales growth in the dietary supplements category was led by a 34%
increase in sales of NEW PHASE as a result of the introduction of NEW PHASE
Extra Strength. The increase in net sales of NEW PHASE was partially offset by a
7% decline in sales of GARLIQUE.

     Domestic net sales of SELSUN BLUE medicated dandruff shampoo increased due
to an effective advertising campaign.

     The decrease in net sales for the other OTC and toiletry products category
was due primarily to sales decreases of PAMPRIN and PREMSYN, which both lost
distribution at a major retailer during the second quarter of fiscal 2004. The
decrease was partially offset by an increase in net sales of SUN-IN as a result
of expanded distribution.

                                       29

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

     INTERNATIONAL REVENUES

     For the first quarter of fiscal 2005, international revenues increased $0.3
million or 5.9% as compared to the first quarter of fiscal 2004 due principally
to strengthening sales of SELSUN in certain European and Middle Eastern
countries. 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 28.3% for the first
quarter of fiscal 2005 as compared to 27.7% for the first quarter of fiscal
2004. Gross margin of 71.7% was attributable to favorable product mix,
purchasing and manufacturing efficiencies and ongoing cost savings programs.

     ADVERTISING AND PROMOTION EXPENSE

     Advertising and promotion expenses in the first quarter of fiscal 2005
increased $1.8 million or 9.8% as compared to the same quarter of fiscal 2004
and were 28.5% of total revenues for the three months ended February 28, 2005
compared to 30.2% for the comparable period of fiscal 2004. The decrease in
advertising and promotion expense as a percentage of revenues of 1.7% represents
a more effective use of advertising to generate sales. Increases in advertising
and promotion expenditures in the current period were recorded for ICY HOT,
ASPERCREME, CAPZASIN, DEXATRIM, SELSUN BLUE, GARLIQUE, NEW PHASE and GOLD BOND
powder, lotion and foot care lines. Decreases in advertising and promotion
expenditures were recognized for FLEXALL, PHISODERM, PAMPRIN and PREMSYN.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expenses increased $1.2 million or
11.7% as compared to the same quarter of fiscal 2004. Selling, general and
administrative expenses were 16.6% and 17.4% of total revenues for the first
quarter of fiscal 2005 and 2004, respectively. An increase in sales was
primarily responsible for the increase in selling expense. In addition, freight
expenses increased due to an increase in fuel costs. The increase in general and
administrative expenses was largely a result of increased compensation and
insurance expense.

     LITIGATION SETTLEMENT CHARGES

     Litigation settlement charges were $2.8 million in the first quarter of
fiscal 2005. This expense was attributable to incurring $1.1 million of legal
expenses relating to the DEXATRIM PPA settlement, and $1.7 million associated
with DEXATRIM ephedrine-related claims and legal expenses.

     INTEREST EXPENSE

     Interest expense decreased $1.3 million or 26.5% in the first quarter of
fiscal 2005 as compared to the same quarter of fiscal 2004. The decrease was
largely the result of lower interest rates and a reduction in outstanding debt
as a result of our debt refinancing completed during the first quarter of fiscal
2004. 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 the first quarter of fiscal 2004, we retired $174.5 million
principal amount of our 8.875% Subordinated Notes and the remaining outstanding
balance of our Credit Facility, which resulted in a loss on early extinguishment
of debt of $11.3 million.

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

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

     Cash of $7.9 million and $4.3 million was provided by operations for the
three months ended February 28, 2005 and February 29, 2004, respectively. The
increase in cash flows from operations over the prior period was primarily
attributable to an increase in refundable income taxes and accounts payable. In
addition, prepaid expenses and other assets decreased as a result of an increase
in prepaid advertising in the first quarter of fiscal 2005.

                                       30

     Investing activities provided cash of $68,000 and used cash of $1.0 million
in the three months ended February 28, 2005 and February 29, 2004, respectively.
The usage of cash in the first quarter of fiscal 2004 was primarily due to the
increase in cash surrender value related to executive and director insurance
policies.

     Financing activities used cash of $4.4 million and $1.0 million in the
three months ended February 28, 2005 and February 29, 2004, respectively. The
increase in cash used in the current period was primarily attributable to the
$3.5 million repurchase of common stock and the repayment of loans related to
executive and director life insurance policies as compared to the prior period
reflecting the refinancing transaction.

     In January 2005, our board of directors increased the total authorization
to repurchase our common stock under our stock buyback program to $30.0 million.
In the first quarter of fiscal 2005, we repurchased 102,500 shares for $3.5
million. All repurchased shares were retired and returned to unissued. We,
however, are limited in our ability to repurchase shares due to restrictions
under the terms of our Revolving Credit Facility, Floating Rate Notes and 7.0%
Subordinated Notes. Subsequent to February 28, 2005, we have repurchased 115,800
of our shares for $4.2 million.

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

     Historically, our primary foreign operations have been conducted through
our Canadian and United Kingdom ("U.K.") subsidiaries. Effective November 1,
2004, we transitioned our European business to Chattem Global Consumer Products
Limited, a wholly-owned subsidiary located in Limerick, Ireland. The functional
currencies of these subsidiaries are Canadian dollars, British pounds and Euros,
respectively. Fluctuations in exchange rates can impact operating results,
including total revenues and expenses, when translations of the subsidiary
financial statements are made in accordance with SFAS No. 52, "Foreign Currency
Translation". For the three months ended February 28, 2005 and February 29,
2004, these subsidiaries accounted for 7% of total revenues, respectively, and
5% and 3% of total assets, respectively. It has not been our practice to hedge
our assets and liabilities in Canada, the U.K. and Ireland or our intercompany
transactions due to the inherent risks associated with foreign currency hedging
transactions and the timing of payments between us and our foreign subsidiaries.
Following our acquisition of SELSUN BLUE, which is sold in approximately 70
foreign countries, our international business operations have expanded
significantly, which 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, and
beginning April 1, 2004, Abbott began billing us in local currencies.
Historically, gains or losses from foreign currency transactions have not had a
material impact on our operating results. (Losses) gains of $(10,000) and
$34,000 for the three months ended February 28, 2005 and February 29, 2004,
respectively, resulted from foreign currency transactions and are included in
selling, general and administrative expenses in the Condensed Consolidated
Statements of Operations.

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

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

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

     In November 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" in Determining Whether to Report Discontinued Operations" ("EITF
03-13"). Under the consensus, the approach for assessing whether cash flows of
the component have been eliminated from the ongoing operations of the entity
focuses on whether

                                       31

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 123R focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions and
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Accordingly, the adoption of SFAS 123R's fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. The impact of the adoption of SFAS 123R
cannot be predicted at this time because it will depend on the levels of
share-based payments granted in the future. However, had we adopted SFAS 123R in
prior periods the impact of that standard would have approximated the impact of
SFAS 123 as described in the disclosure of proforma net income and earnings per
share in Note 5 to our condensed consolidated financial statements. SFAS 123R
also requires the benefits of tax deductions in excess of recognized
compensation costs to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. While we cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods
for such excess tax deductions were not material to our consolidated financial
position or results of operations. This statement is effective for our interim
periods beginning after June 15, 2005.

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

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

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








                                       32

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

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

     Our exposure to interest rate risk currently consists of our Floating Rate
Notes and our Revolving Credit Facility. The aggregate balance outstanding under
the Floating Rate Notes as of February 28, 2005, was $75.0 million. The Floating
Rate Notes bear interest at a three-month LIBOR plus 3.00% per year (5.38% as of
February 28, 2005). Loans under our Revolving Credit Facility bear interest at
LIBOR plus applicable percentages of 1.75% to 2.50% or a base rate (the higher
of the federal funds rate plus 0.5% or the prime rate) plus applicable
percentages of 0.25% to 1.0%. The applicable percentages are calculated based on
our leverage ratio. As of February 28, 2005, no amounts were outstanding under
the Revolving Credit Facility, and the variable rate on the Revolving Credit
Facility was 6.0%. 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 February 28, 2005, 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 Condensed Consolidated Statements of
Operations. In addition, Abbott has continued to supply a portion of our
international product, and beginning April 1, 2004, Abbott began billing us in
local currencies. The potential loss resulting from a hypothetical 10.0% adverse
change in the quoted foreign currency exchange rate amounts to approximately
$1.3 million as of February 28, 2005.

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


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

     (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such terms are defined in Rules
13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of February 28, 2005 of this Form 10-Q (the
"Evaluation Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, our disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to us
(including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.

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





                                       33

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



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

     See Note 18 of Notes to Condensed Consolidated Financial Statements
included in Part 1, Item 1 of this Report.


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

     A summary of the common stock repurchase activity for our first quarter of
fiscal 2005 is as follows:

                                                                    TOTAL NUMBER OF      MAXIMUM DOLLAR
                                                                  SHARES PURCHASED AS    VALUE THAT MAY
                                                                   PART OF PUBLICLY     YET BE PURCHASED
                            TOTAL NUMBER OF      AVERAGE PRICE      ANNOUNCED PLANS     UNDER THE PLANS
       PERIOD              SHARES PURCHASED    PAID PER SHARE(1)    OR PROGRAMS(2)        OR PROGRAMS
- -----------------------    ----------------    ----------------    ----------------     ----------------
                                                                            
December 1- December 31            500               $32.50                 500           $14,950,220
January 1 - January 31          99,800               $34.24              99,800           $28,479,862
February 1 - February 28         2,200               $36.55               2,200           $28,399,452
  Total First Quarter          102,500               $34.28             102,500           $28,399,452


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

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



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


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


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






                                       34

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------

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

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

                 10.1           Final Settlement Trust Agreement among Chattem,
                                Inc. and AmSouth Bank dated March 16, 2005

                 10.2           Settlement and Coverage-In-Place Agreement
                                between Interstate Fire & Casualty Company and
                                Chattem, Inc. effective March 18, 2005

                 10.3           First Amendment to Credit Agreement dated as of
                                December 22, 2004 among Chattem, Inc., its
                                domestic subsidiaries, identified lenders and
                                Bank of America, N.A., as Agent

                 10.4           Waiver and Second Amendment to Credit Agreement
                                dated as of February 25, 2005 among Chattem,
                                Inc., its domestic subsidiaries, identified
                                lenders and Bank of America, N.A., as Agent

                 31.1           Certification required by Rule 13a-14(a) under
                                the Securities Exchange Act of 1934

                 31.2           Certification required by Rule 13a-14(a) under
                                the Securities Exchange Act of 1934

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


        (b)  During the first quarter ended February 28, 2005, we filed the
             following Form 8-K reports with the Securities and Exchange
             Commission:

             Form 8-K, filed December 20, 2004, announcing a term sheet of
             settlement between Chattem, Inc. and Interstate Fire & Casualty
             Company.

             Form 8-K, filed January 20, 2005, containing a copy of our press
             release announcing our financial results for the fourth fiscal
             quarter of 2004.



                                       35

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


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





                                      CHATTEM, INC.
                                      ------------------------------------------
                                       (Registrant)




Dated:  April 1, 2005                 /s/ A. Alexander Taylor II
        -------------                 ------------------------------------------
                                      A. Alexander Taylor II
                                      President, Chief Operating Officer
                                      and Director
                                      (Chief Operating Officer)




Dated:  April 1, 2005                 /s/ Richard D. Moss
        -------------                 ------------------------------------------
                                      Richard D. Moss
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)












                                       36

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






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

   10.1              Final Settlement Trust Agreement among Chattem, Inc. and
                     AmSouth Bank dated March 16, 2005

   10.2              Settlement and Coverage-In-Place Agreement between
                     Interstate Fire & Casualty Company and Chattem, Inc.
                     effective March 18, 2005

   10.3              First Amendment to Credit Agreement dated as of December
                     22, 2004 among Chattem, Inc., its domestic subsidiaries,
                     identified lenders and Bank of America, N.A., as Agent

   10.4              Waiver and Second Amendment to Credit Agreement dated as of
                     February 25, 2005 among Chattem, Inc., its domestic
                     subsidiaries, identified lenders and Bank of America, N.A.,
                     as Agent

   31.1              Certification required by Rule 13a-14(a) under the
                     Securities Exchange Act of 1934

   31.2              Certification required by Rule 13a-14(a) under the
                     Securities Exchange Act of 1934

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

















                                       37