CHATTEM, INC. ANNUAL CASH INCENTIVE PLAN

1.    Purpose .   The purpose of the Plan is to provide cash incentive compensation to Executive Officers and other key employees within a pay-for-performance framework that enables the Company to provide a total compensation opportunity that attracts, motivates and retains such employees and contributes to the Company’s ability to maximize its return to shareholders.  The Plan is intended to reward Participants for achieving specified annual financial performance objectives, focuses strongly on Company and individual performance, and is designed to ensure that the Company’s total compensation package for Participants remains competitive.  The Plan is also intended to qualify the compensation paid under the Plan as “performance-based compensation” within the meaning of Section 162(m) so as to exempt such eligible compensation from the deduction limits imposed by Section 162(m) and to make such eligible compensation deductible by the Company for federal income tax purposes.

2.    Definitions .   As used herein, the following terms shall have the meanings ascribed to such terms below:

(a)   “ Authorized Officers ” means the Chairman and Chief Executive Officer of the Company and the President and Chief Operating Officer of the Company.

(b)   “ Award ” means any cash award payable under the Plan, including any Incentive Award and any Discretionary Bonus.

(c)   “ Board ” means the board of directors of the Company.

(d)   “ Code ” means the Internal Revenue Code of 1986, as amended.

(e)   “ Company ” means Chattem, Inc.

(f)   “ Committee ” means the Compensation Committee of the Board, which shall be comprised solely of two or more “outside directors” as defined in regulations promulgated under Section 162(m).

(g)   “ Corporate Performance Levels ” means the following levels of overall Company performance (or such other levels as may be established by the Committee from time to time), each of which shall correspond to a Performance Goal established by the Committee in accordance with the Plan in respect of the Incentive Awards:

(i)   “ Level 1 ”, which term when used herein shall mean “Minimal:  Results which are the lowest permissible for the payment of an Incentive Award under the Plan.”

(ii)   “ Level 2 ”, which term when used herein shall mean “Good:  Results which are fully adequate and expected.”

(iii)   “ Level 3 ”, which term when used herein shall mean “Outstanding:  Results which are measurably above what could be expected as a norm.”

(iv)   “ Level 4 ”, which term when used herein shall mean “Exceptional:  Results which are remarkable and extraordinary.”

(h)   “ Disability ” means a disability that entitles the Participant to benefits under the Company’s Long-Term Disability Plan, as amended from time to time.

(i)   “ Discretionary Bonus ” means any cash bonus awarded to a Participant pursuant to Section 8 hereof.

(j)   “ Executive Officer ” means an “executive officer” as defined in Rule 3b-7 promulgated under the Securities Exchange Act of 1934, as amended.

(k)   “ Incentive Award ” means any annual cash incentive award payable to a Participant under this Plan based on the achievement of the Performance Goals associated with Corporate Performance Levels with respect to a Performance Period.

(l)   “ Participant ” means (i) each Executive Officer of the Company and (ii) each other key employee of the Company recommended by the Authorized Officers and approved by the Committee as a participant under the Plan, as determined from time to time by the Committee.

(m)   “ Participant Grouping ” means, with respect to Incentive Awards, the grouping to which a Participant is assigned for a given Performance Period based upon the Participant’s position at the Company, as more fully described in Section 5 hereof.

(n)   “ Performance Goals ” means, with respect to each Performance Period, one or more targeted levels of performance based on one or more of the following objective business criteria:  revenues, sales, earnings before interest, taxes, depreciation and amortization (EBITDA), earnings per share, earnings, price/earnings ratio, debt or debt-to-equity, expenses, cost of goods sold, cost reductions and savings, assets, operating income, operating margins, stock price, working capital and components thereof, return on revenues or productivity, return on capital, equity or assets, cash flow, market share, total shareholder return (stock price increase plus dividends), accounts receivable, manufacturing, production or inventory, customer satisfaction, economic value added or any increase or decrease of one or more of the foregoing over a specified period.  The Committee may, after taking into account whether such action would result in the loss of an otherwise available exemption for performance-based compensation under Section 162(m), appropriately adjust any evaluation of performance in respect of a Performance Goal to eliminate or offset the effect of unusual, unplanned, non-recurring or extraordinary items or occurrences affecting the Company or the financial statements of the Company, including, without limitation, the effect of mergers, acquisition, divestitures, changes in laws, regulations or accounting principles or such other objective adjustments as may be consistent with the purposes of the Performance Goals set for the given Performance Period and specified by the Committee within the Performance Period.  The Performance Goals may be expressed in terms of overall Company performance or the performance of any business unit, division, subsidiary, acquired business, partnership or joint venture of the Company.  The portion of any Award paid under the Plan based on the

achievement of the Performance Goals is intended to constitute “performance-based compensation” within the meaning of Section 162(m).

(o)   “ Performance Period ” means the Plan Year or such other shorter or longer period as may be designated by the Committee, during which performance will be measured in order to determine a Participant’s eligibility to receive payment of an Award.  The Committee may establish different Performance Periods for different Participants, and the Committee may establish concurrent or overlapping Performance Periods.

(p)   “ Plan ” means the Chattem, Inc. Annual Cash Incentive Plan, as set forth herein and as may be amended from time to time.

(q)   “ Plan Year ” means the 12-month period beginning on the first day of the Company’s fiscal year and ending on the last day of such fiscal year.

(r)   “ Retirement ” means separation from service with the Company and its subsidiaries, by a Participant at or after age 65, or as otherwise approved by the Committee in its sole discretion.

(s)   “ Section 162(m) ” means Section 162(m) of the Code and any regulations promulgated thereunder.

3.    Administration of the Plan .   The Plan shall be administered by and under the direction of the Committee.  The Committee shall review the Plan on a periodic basis.  The Committee shall have full, exclusive and final authority in all determinations and decisions affecting the Plan and Participants, including sole authority to interpret and construe any provision of the Plan, to adopt, amend and rescind such rules and regulations for administering the Plan as it may deem necessary or appropriate under the circumstances and to make any other determination it deems necessary or appropriate for the administration of the Plan, in each case subject to and consistent with the provisions of the Plan.  Without limiting the generality of the foregoing, the Committee shall have the power, duty and authority (a) to establish Performance Periods and the Performance Goals, the performance measurement and evaluation criteria and guidelines to be used to determine Awards and the maximum potential Incentive Awards payable to Participants for such Performance Periods, (b) to designate or approve eligible persons to become Participants and the Participant Groupings that may apply to Participants each Performance Period, (c) to resolve all questions relating to the eligibility of Participants, Participant Groupings and the right of any Participant to receive an Award under the Plan, (d) to calculate the amount (including any reduction thereof pursuant to Section 7(a) hereof) and approve the payment of the Incentive Award payable to each Participant each Performance Period, (e) to determine the extent to which the Performance Goals actually were achieved each Performance Period, (f) to correct defects, supply omissions or reconcile inconsistencies with respect to the Plan, (g) to engage any administrative, legal, consulting, clerical or other services it deems appropriate in administering the Plan, and (h) to approve the grant of Discretionary Bonuses and the Performance Goals, Performance Periods and all other criteria thereunder.  All actions taken or determinations made by the Committee with respect to the Plan shall be final, binding and conclusive upon all parties.  The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or part of its administrative authority and

powers under the Plan to one or more directors or employees of the Company to the extent permitted under the exemption for performance-based compensation under Section 162(m).  Any expenses relating to administration of the Plan shall be borne by the Company.

4.    Participation .   Eligibility for participation in any Incentive Award for any Performance Period is limited to Participants, as determined on the first day of such Performance Period.  Any person who is hired or promoted into a position qualifying such person as a Participant or who is otherwise designated or approved by the Committee as a Participant eligible for an Incentive Award after the commencement of such Performance Period but prior to the date on which 25% of the Performance Period has elapsed shall be eligible to receive a pro rata portion (based on the number of days in the Performance Period during which such person was such a Participant) of the Incentive Award such person would have received if he or she had participated for the entire Performance Period provided attainment of the Performance Goal is substantially uncertain at the date of eligibility.  No person shall participate in any Incentive Award for a Performance Period in which such person first becomes a Participant on or after the date on which 25% of the Performance Period has elapsed or when the attainment of a Performance Goal is not substantially uncertain unless otherwise approved by the Committee based upon (i) a determination that satisfaction of the Performance Goal is substantially uncertain, or (ii) such alternative Performance Period or Performance Goal as may be determined by the Committee in compliance with the exemption for performance-based compensation under Section 162(m).  In the event a Participant’s employment wit