SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12

CHATTEM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
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/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
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[LOGO]

CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409

MARCH 9, 1998

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of
Chattem, Inc., scheduled for Wednesday, April 8, 1998, at 1:00 p.m., in the
Company's executive offices located in Chattanooga, Tennessee. The matters
expected to be acted upon at the meeting are described in detail in the attached
Notice of Annual Meeting and Proxy Statement.

I hope that you will be able to attend the Annual Meeting on April 8, 1998.
A luncheon reservation card is also enclosed if you are able to attend the
Company's luncheon immediately preceding the meeting.

Sincerely,

/s/ Zan Guerry
Zan Guerry
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER

[LOGO]

CHATTEM, INC.
1715 WEST 38TH STREET
CHATTANOOGA, TENNESSEE 37409
---------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 8, 1998

To the Shareholders of Chattem, Inc.:

Notice is hereby given that the Annual Meeting of Shareholders (the "Annual
Meeting") of Chattem, Inc., a Tennessee corporation (the "Company"), will be
held on Wednesday, April 8, 1998, at 1:00 p.m. local time, at the Company's
executive offices, 1715 West 38th Street, Chattanooga, Tennessee 37409, for the
following purposes:

(1) To elect two members to the Board of Directors, each to serve for a
three year term;

(2) To approve the Company's Non-Statutory Stock Option Plan--1998;

(3) To ratify the appointment of Arthur Andersen LLP as independent
auditors; and

(4) To transact such other business as may properly come before the Annual
Meeting or any adjournment(s) thereof.

Information regarding the matters to be acted upon at the Annual Meeting is
contained in the Proxy Statement attached to this Notice.

Only shareholders of record at the close of business on February 27, 1998
are entitled to notice of, and to vote at, the Annual Meeting or any
adjournment(s) thereof.

You are encouraged to attend the Annual Meeting in person. IF YOU ARE UNABLE
TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS REQUESTS THAT, AT YOUR
EARLIEST CONVENIENCE, YOU PLEASE COMPLETE, DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED REPLY ENVELOPE, WHICH NEEDS NO POSTAGE IF
MAILED IN THE UNITED STATES.

/s/ Zan Guerry
Zan Guerry
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER

Chattanooga, Tennessee
March 9, 1998

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

PROXY STATEMENT
----------

ANNUAL MEETING OF SHAREHOLDERS
APRIL 8, 1998

SOLICITATION OF PROXIES

The accompanying proxy is solicited by the Board of Directors of Chattem,
Inc., a Tennessee corporation (the "Company"), for use at the Company's Annual
Meeting of Shareholders (the "Annual Meeting"), and at any adjournment(s)
thereof, to be held at the Company's executive offices, 1715 West 38th Street,
Chattanooga, Tennessee 37409, on Wednesday, April 8, 1998, at 1:00 p.m. local
time, for the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders. Solicitations of proxies may be made in person or by mail,
telephone or telegram by directors, officers and regular employees of the
Company. The Company will also request banking institutions, brokerage firms,
custodians, trustees, nominees and fiduciaries to forward solicitation material
to the beneficial owners of the Company's shares held of record by such persons,
will furnish at its expense the number of copies thereof necessary to supply
such material to all such beneficial owners and will reimburse the reasonable
forwarding expenses incurred by such record owners. All costs of preparing,
printing, assembling and mailing the form of proxy and the material used in the
solicitation will be paid by the Company. This Proxy Statement is first being
mailed to shareholders on or about March 9, 1998.

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

The Board of Directors has fixed the close of business on February 27, 1998
as the record date for the determination of shareholders entitled to notice of,
and to vote at, the Annual Meeting. Each share of the Company's common stock
without par value ("Common Stock") is entitled to one vote. As of February 27,
1998 there were issued and outstanding 9,127,970 shares of Common Stock.

Set forth below is information, as of February 27, 1998, with respect to
beneficial ownership by (a) each person who is known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (b) each
director and nominee, (c) the chief executive officer and the other most highly
compensated executive officer for the previous fiscal year, and (d) all
directors and executive officers of the Company as a group:

AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- ------------------------------------ ---------------------------- ------------

Palisade Capital Management, L.L.C. 1,313,200(3) 14.4%
Suite 695
One Bridge Plaza
Fort Lee, NJ 07024
Zan Guerry 1,250,639(4)(5)(6)(7) 13.5
1715 W. 38th St.
Chattanooga, TN 37409
Robert E. Bosworth 988,648(7)(8)(9) 10.7
1715 W. 38th St.
Chattanooga, TN 37409
Hamico, Inc. 891,865(10) 9.8
1715 W. 38th Street
Chattanooga, TN 37409

AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS (2)
- ------------------------------------ ---------------------------- ------------

Piedmont Capital Management 794,700(11) 8.7
Corporation
One James Center
Suite 1500
Richmond, VA 23219
Barrow, Hanley, Mewhinney 636,800(12) 7.0
& Strauss, Inc.
One McKinney Plaza
15th Floor, 3232 McKinney Avenue
Dallas, TX 75204
Putnam Investments, Inc. 591,700(13) 6.5
One Post Office Square
Boston, MA 02109
Louis H. Barnett 122,219(14) 1.3
Richard E. Cheney 15,460 *
Scott L. Probasco, Jr. 91,176(15) 1.0
Samuel E. Allen 14,250 *
A. Alexander Taylor, II 9,175 *
Directors and Executive Officers as 1,599,702 17.1
a Group (7 persons)

- ------------
* Less than 1.0%.

(1) Except as otherwise indicated, refers to either shared or sole voting and
investment power. Includes the following numbers of shares subject to
purchase pursuant to options that are exercisable within 60 days of February
27, 1998 under the Company's Non-Statutory Stock Option Plan -- 1993 (the
"1993 Stock Option Plan"), the Company's Non-Statutory Stock Option Plan --
1994 (the "1994 Stock Option Plan") or the Company's Non-Statutory Stock
Option Plan for Non-Employee Directors (the "Director Plan"): Mr. Guerry --
124,600 shares, Mr. Bosworth -- 71,250 shares, Mr. Probasco -- 7,000 shares,
Messrs. Allen and Taylor -- 6,750 shares each, Messrs. Barnett and Cheney --
6,500 shares each, and all directors and executive officers as a group --
229,350 shares. Also includes the following numbers of shares subject to
purchase pursuant to the exercise of warrants issued in June, 1994 in
connection with the Company's 12.75% senior subordinated notes due 2004: Mr.
Guerry -- 1,464 shares, Mr. Barnett -- 1,581 shares, and all directors and
executive officers as a group -- 3,045 shares.

(2) For the purpose of computing the percentage of outstanding shares owned by
each beneficial owner, the shares issuable pursuant to presently exercisable
stock options or warrants held by such beneficial owner are deemed to be
outstanding. Such shares are not deemed to be outstanding for the purpose of
computing the percentage owned by any other person.

(3) This information is based solely upon a Schedule 13G filed by Palisade
Capital Management, L.L.C. on or about January 14, 1998.

(4) Includes 37,081 shares held by a trust for the benefit of Mr. Guerry's
sister, of which he serves as a co-trustee. Mr. Guerry disclaims beneficial
ownership of the shares held by this trust.

(5) Includes 6,000 shares held in trust for Mr. Guerry pursuant to the terms of
the Company's Savings and Investment Plan.

(6) Includes 2,685 shares which Mr. Guerry holds as custodian for his children.
Mr. Guerry disclaims beneficial ownership of these custodial shares.

(7) Includes 878,100 shares and 13,765 shares subject to purchase pursuant to
the exercise of warrants owned by Hamico, Inc., a charitable foundation for
which Messrs. Guerry and Bosworth serve as directors and executive officers.
Messrs. Guerry and Bosworth disclaim beneficial ownership of all such
shares.

(8) Includes 23,433 shares held in trust for Mr. Bosworth pursuant to the terms
of the Company's Savings and Investment Plan.

(9) Includes 600 shares which Mr. Bosworth holds as custodian for his daughter.
Mr. Bosworth disclaims beneficial ownership of these custodial shares.

(10) Includes 13,765 shares subject to purchase pursuant to the exercise of
warrants issued June, 1994 in connection with the Company's 12.75% senior
subordinated notes due 2004.

(11) Includes shares held by various officers and affiliates of Piedmont Capital
Management Corporation for which shares Piedmont Capital Management
Corporation disclaims beneficial ownership.

(12) This information is based solely upon a Schedule 13G filed by Barrow,
Hanley, Mewhinney & Strauss, Inc. on or about February 13, 1997.

(13) Consists solely of shares held by certain wholly-owned subsidiaries of
Putnam Investments, Inc., which are registered investment advisors, for the
benefit of clients of such investment advisors and for which shares Putnam
Investments, Inc. disclaims beneficial ownership. This information is based
solely upon a Schedule 13G filed by Putnam Investments, Inc. on or about
January 27, 1997.

(14) Includes 103,778 shares which are held in trust for the benefit of various
family members. Mr. Barnett disclaims beneficial ownership of these shares.

(15) Includes 1,500 shares which are held in trust for the benefit of Mr.
Probasco's spouse. Mr. Probasco disclaims beneficial ownership of these
shares.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under federal securities laws, the Company's directors, executive officers
and 10% or more shareholders are required to report, within specified monthly
and annual due dates, their initial ownership in the Company's Common Stock and
all subsequent acquisitions, dispositions or other transfers of beneficial
interests therein, if and to the extent reportable events occur which require
reporting by such due dates. Based solely on representations and information
provided to the Company by the persons required to make such filings, the
Company believes that all filing requirements were complied with during the last
fiscal year.

REVOCABILITY OF PROXY

Granting a proxy does not preclude the right of the person giving the proxy
to vote in person, and a person may revoke his or her proxy at any time before
it has been exercised, by giving written notice to the Secretary of the Company,
by delivering a later dated proxy or by voting in person at the Annual Meeting.

QUORUM; VOTING

The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Common Stock which are entitled to vote is necessary to
constitute a quorum at the Annual Meeting. If a quorum is not present or
represented at the Annual Meeting, the shareholders entitled to vote, whether
present in person or represented by proxy, have the power to adjourn the Annual
Meeting from time to time, without notice other than announcement at the Annual
Meeting, until a quorum is present or represented. At any such adjourned Annual
Meeting at which a quorum is present or represented, any business may be
transacted that might have been transacted at the Annual Meeting as originally
noticed.

On all matters submitted to a vote of the shareholders at the Annual Meeting
or any adjournment(s) thereof, each shareholder will be entitled to one vote for
each share of Common Stock owned of record at the close of business on February
27, 1998. There will be no cumulative voting.

ACTION TO BE TAKEN UNDER THE PROXY

Proxies in the accompanying form that are properly executed and returned
will be voted at the Annual Meeting and any adjournment(s) thereof in accordance
with the directions on such proxies. If

no directions are specified, such proxies will be voted (a) "FOR" the election
of the two persons specified as nominees for directors of the Company, each of
whom will serve for a three year term; (b) "FOR" the approval of the Company's
Non-Statutory Stock Option Plan--1998; (c) "FOR" the ratification of the
appointment of Arthur Andersen LLP as independent auditors; and (d) in the best
judgment of the persons named in the enclosed proxy in connection with the
transaction of such other business as may properly come before the Annual
Meeting or any adjournment(s) thereof. Should any director nominee named herein
become unable or unwilling to serve if elected, it is intended that the proxies
will be voted for the election, in his stead, of such other person as the
management of the Company may recommend.

Management has no reason to believe that any of the nominees will be unable
or unwilling to serve if elected. Management knows of no other matters or
business to be presented for consideration at the Annual Meeting. If, however,
any other matters properly come before the Annual Meeting or any adjournment(s)
thereof, it is the intention of the persons named in the enclosed proxy to vote
such proxy in accordance with their best judgment on any such matters. The
persons named in the enclosed proxy may also, if they deem it advisable, vote
such proxy to adjourn the Annual Meeting from time to time.

PROPOSAL 1: ELECTION OF DIRECTORS

The Company's Board of Directors is classified into three classes having
staggered terms of three years each. At present, two classes consist of two
directors each and one class consists of three directors. Each director elected
at the Annual Meeting will serve until the Annual Meeting of Shareholders in
2001 and until his successor has been elected and qualified or until his earlier
resignation or removal. Messrs. Scott L. Probasco, Jr. and Zan Guerry are the
Board of Directors' nominees for election. The Board of Directors has no
nominating committee, and all nominees are selected by the Board of Directors at
large. Directors will be elected by a plurality of the votes cast.

The directors meet quarterly and may convene for special meetings when
necessary. During the fiscal year ended November 30, 1997, the Board of
Directors conducted a total of four regularly scheduled and one special meeting.
Each director attended 75% or more of the meetings of the Board of Directors and
of any committees on which he served during this period.

INFORMATION ABOUT NOMINEES AND CONTINUING DIRECTORS

The following information is furnished with respect to the nominees and
continuing directors:

NAME AGE PRINCIPAL OCCUPATION
- ------------------------------ ---- --------------------------------------------------

NOMINEES FOR TERMS
OF OFFICE TO EXPIRE IN 2001

Scott L. Probasco, Jr. 69 Chairman of the Executive Committees of SunTrust
Bank, Chattanooga, N.A., since March 1989 and
SunTrust Banks of Tennessee, Inc. since January
1990. Also a director of SunTrust Banks, Inc.,
Coca-Cola Enterprises Inc. and Provident Life and
Accident Insurance Company. Member of the
Company's Audit and Compensation Committees. First
elected a director of the Company in 1966.

Zan Guerry 49 Chairman of the Board of the Company since June
1990 and Chief Executive Officer of the Company
since January 1998. Previously served as President
of the Company from 1990 to 1998, as Executive
Vice President of the Company from 1983 to 1990,
as President of Chattem Consumer Products from
1984 to 1989 and as Chief Operating Officer from
1989 to 1990. Director of SunTrust Bank,
Chattanooga, N.A. First elected a director of the
Company in 1981.

DIRECTORS WHOSE TERMS
OF OFFICE EXPIRE IN 1999

Samuel E. Allen 61 Chairman of Globalt, Inc. (investment management).
Member of the Company's Audit Committee. First
elected a director of the Company in 1993.

NAME AGE PRINCIPAL OCCUPATION
- ------------------------------ ---- --------------------------------------------------

A. Alexander Taylor II 44 President and Chief Operating Officer of the
Company since January 1998. Partner with law firm
of Miller & Martin, general counsel to the
Company, from 1983 to 1998. Director of U.S.
Xpress Enterprises, Inc. First elected a director
of the Company in 1993.

DIRECTORS WHOSE TERMS
OF OFFICE EXPIRE IN 2000

Louis H. Barnett 79 Consultant to the Company and others regarding
plastics, chemicals and oil investments and
operations. Director of Overton Bank and Trust and
A/F Protein, Inc. First elected a director of the
Company in 1970.

Robert E. Bosworth 50 Executive Vice President from June 1990 to January
1998 and Chief Financial Officer of the Company
from April 1985 to January 1998. First elected a
director of the Company in October 1986.

Richard E. Cheney 76 Former Chairman Emeritus, director and member of
the executive committee, Hill and Knowlton, Inc.
(international public relations and public affairs
consulting). Director of Stoneridge, Inc. and Rowe
Furniture Corporation. Member of the Company's
Compensation Committee. First elected a director
of the Company in 1984.

In accordance with the Bylaws of the Company, the Board of Directors has
established an Audit Committee and a Compensation Committee.

The Audit Committee recommends to the Board of Directors the engagement of
the independent auditors of the Company and reviews with the independent
auditors the scope and results of the audits, the Company's internal accounting
controls and the professional services furnished by the independent auditors to
the Company. The Audit Committee met two times in fiscal 1997.

The Compensation Committee is composed of independent, non-employee
directors who have no interlocking relationships as defined by the Securities
and Exchange Commission. The Compensation Committee reviews and approves all
salary arrangements, including annual and long-term incentive awards and other
remuneration, for officers of the Company. It also is responsible for
administration of the Company's stock option plans (except for the Director
Plan), the annual incentive plan and certain other plans. The Compensation
Committee met two times in fiscal 1997.

EXECUTIVE COMPENSATION AND OTHER INFORMATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table sets forth information for the past three fiscal years
concerning compensation paid or accrued by the Company to or on behalf of the
Company's chief executive officer and the other most highly compensated
executive officer, the only executive officers of the Company during the fiscal
year ended November 30, 1997:

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
FISCAL --------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS AWARDED (1) COMPENSATION (2)
- ------------------------------ ------ -------- ----------- --------------------- ----------------

Zan Guerry(3) 1997 $285,750 $202,500 0 $2,895
Chairman of the Board 1996 253,000 133,650 40,000 2,854
and President 1995 236,000 108,324 0 2,760

Robert E. Bosworth(4) 1997 $211,667 $125,000 0 $3,099
Executive Vice President and 1996 192,500 81,400 25,000 3,032
Chief Financial Officer 1995 181,760 119,819(5) 0 2,663

- ------------
(1) Represents non-qualified stock options granted on January 31, 1996 under the
Company's 1994 Stock Option Plan at an exercise price of $4.875 per share.

(2) Represents premiums paid by the Company under life insurance policies with
respect to which the named executive is entitled to a death benefit of up to
$450,000 as follows for the 1997 fiscal year: Mr. Guerry - $520; Mr.
Bosworth - $724. Also represents the Company's contributions with respect to
the Company's Savings and Investment Plan for the named executive as follows
for the 1997 fiscal year: Mr. Guerry - $2,375; Mr. Bosworth - $2,375.

(3) Mr. Guerry was appointed Chief Executive Officer of the Company on January
13, 1998.

(4) Mr. Bosworth resigned from his position as Executive Vice President and
Chief Financial Officer on January 13, 1998.

(5) Includes one-time incentive bonus of $50,000 for the 1995 fiscal year.

OPTION EXERCISES AND HOLDINGS

The option exercises by the Company's chief executive officer and the other
most highly compensated executive officer during the fiscal year ended November
30, 1997, as well as the number and total value of unexercised in-the-money
options at November 30, 1997, are shown in the following table:

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT NOVEMBER 30, 1997

VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT OPTIONS AT
SHARES ACQUIRED VALUE NOV. 30, 1997 NOV. 30, 1997
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- --------------- --------- ----------------------- -----------------------

Zan Guerry 26,400 265,950 121,100/30,000 $ 916,625/$303,750
Robert E. Bosworth -- -- 87,500/18,750 652,344/189,844

PENSION PLAN

The following table shows for various years of service the estimated annual
benefits payable under the Chattem, Inc. Pension Plan (the "Pension Plan") upon
normal retirement, before deducting a specified percentage of applicable
estimated Social Security benefits, as provided in the Pension Plan:

PENSION PLAN TABLE

YEARS OF SERVICE
---------------------------------------------------------------
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------------------- ----------- ----------- ----------- ----------- -----------

$100,000................. $ 37,500 $ 50,000 $ 50,000 $ 50,000 $ 50,000
150,000................. 56,250 75,000 75,000 75,000 75,000
200,000................. 75,000 100,000 100,000 100,000 100,000
275,000................. 103,125 137,500* 137,500* 137,500* 137,500*
325,000................. 121,875 162,500* 162,500* 162,500* 162,500*
350,000................. 131,250* 175,000* 175,000* 175,000* 175,000*
375,000................. 140,625* 187,500* 187,500* 187,500* 187,500*
400,000................. 150,000* 200,000* 200,000* 200,000* 200,000*
450,000................. 168,750* 225,000* 225,000* 225,000* 225,000*
500,000................. 187,500* 250,000* 250,000* 250,000* 250,000*

- ------------
* Exceeds maximum Pension Plan benefit permissible under current federal law.

The basis for the compensation covered by the Pension Plan is W-2 earnings
as adjusted for certain extraordinary income items. Covered compensation for the
individuals listed in the summary compensation table as of November 30, 1997,
was: Mr. Guerry -- $451,552; Mr. Bosworth -- $315,734. The accrued years of
service to November 30, 1997, of the individuals listed in the summary
compensation table (assuming repayment of Pension Plan loans from funds
voluntarily contributed) are as follows: Mr. Guerry -- 19.75; Mr. Bosworth --
17.25.

Upon retirement at age 65 (or as otherwise permitted under the Pension
Plan), a participant in the Pension Plan receives an annual benefit which is
2.5% of the average of his highest five consecutive calendar years of
compensation (regular wages or salaries, annual bonuses, incentive or Christmas
gift payments, overtime pay, shift premium, director's fees and, up to the level
of regular wages or salaries, any payments for workers' compensation, civic duty
pay, military pay, sickness pay, temporary disability pay or vacation pay) paid
during the 10 calendar years immediately preceding the earlier of actual or
normal retirement age, multiplied by his years of service not in excess of 20
years. The amount determined in the preceding sentence is then reduced by 2.5%
of the participant's primary Social Security benefit, multiplied by the
participant's years of service not to exceed 20 years. For retirement before age
65, benefits are further reduced actuarially and for years of service proration.

Upon retirement, benefits are calculated on the basis of a normal retirement
pension to be paid during the lifetime of the participant. Benefits will be paid
in the form of a Qualified Joint and Survivor Annuity or Qualified Preretirement
Survivor Annuity, unless one of the following options is appropriately elected:

(i) A reduced annuity benefit to be paid monthly over 5, 10 or 15 years
and thereafter for the participant's life;

(ii) A reduced annuity benefit to be paid during the participant's life
with one-half of the reduced benefit to be continued to the spouse for the
spouse's life;

(iii) A reduced annuity benefit to be paid during the participant's life
with either three-fourths of or the full reduced benefit to be continued to
the spouse for the spouse's life;

(iv) A single lump sum payment; or

(v) A single life annuity.

AGREEMENTS WITH EXECUTIVE OFFICERS

The Company has entered into severance agreements with the officers named in
the Summary Compensation Table. These severance agreements are operative only
upon the occurrence of a change in control of the Company and are intended to
encourage key executives to remain in the Company's employ by providing them
with greater security and imposing various restrictions on competitive
employment should an officer leave the Company's employment. Absent a change in
control of the Company, the severance agreements do not require the Company to
retain any executive or to pay him any specified level of compensation.

If the severance agreements become operative, and if the employment with the
Company of one of these officers is terminated or the officer is constructively
discharged within two years of the occurrence of a change in control of the
Company, the officer will be entitled to receive a termination payment equal to
three times his average annualized includible compensation from the Company
during the five most recently completed fiscal years and the continuation of
certain Company-provided benefits. Includible compensation for purposes of
calculating the severance benefit generally includes all compensation paid to
the officer by the Company and will be calculated in accordance with the
applicable provisions of the Internal Revenue Code.

A change of control of the Company will be deemed to occur if (i) there is a
change of one-third or more of the directors of the Company within any 12-month
period; (ii) there is a change of one-half or more of the directors of the
Company within any 24-month period; or (iii) any person acquires ownership or
the right to vote 35% or more of the Company's outstanding voting shares.

DIRECTOR COMPENSATION

All directors receive monthly compensation of $375 and supplemental life
insurance coverage in varying amounts. In addition, directors who are not
officers of the Company receive $400 for each meeting they attend if they reside
in the Chattanooga area and $700 plus expenses if they reside elsewhere.
Directors who are neither officers nor consultants to the Company also receive
$200 for each committee meeting they attend if held in conjunction with a Board
of Directors meeting and $400 for each committee meeting they attend if held
independently of a Board of Directors meeting. The outside directors of the
Company are also eligible for the grant of stock options under the terms of the
Director Plan. In January 1997, the Director Plan was amended to provide that
the non-employee members of the Board of Directors receive a one-time grant of
options to acquire 5,000 shares at the fair market value on the date preceding
the date of grant.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

PRINCIPLES OF EXECUTIVE COMPENSATION

The Company's executive compensation program is designed to help the Company
attract, motivate and retain the executive talent that the Company needs in
order to maximize its return to

shareholders. Toward that end, the Company's executive compensation program
attempts to provide strongly competitive compensation levels and incentive pay
that varies based on corporate, business unit and individual performance.

The Company attempts to provide its executives with a total compensation
package that -- AT EXPECTED LEVELS OF PERFORMANCE -- is slightly above average
market rates for executives who hold comparable positions or have similar
qualifications in companies the Company's size. Total compensation is defined to
include base salary, annual incentives and long-term incentives. The Company
determines competitive levels of compensation for executive positions based on
information drawn from compensation surveys and compensation consultants. The
Company does not necessarily consider pay levels for the peer companies included
in the shareholder return graph, since these companies, in some cases, vary in
size significantly from the Company.

The reason the Company targets its total executive pay program at slightly
above competitive market norms is that the Company places more emphasis on
long-term incentive compensation than is common in the market for comparable
sized companies. Thus, the Company's executive salaries and annual incentive
target awards tend to be close to the market average while its long-term
incentive award opportunities are at or above average rates.

The Company's incentive plans are designed to ensure that incentive
compensation varies based upon the financial performance of the Company.
However, some of the Company's incentive payouts are based on annual performance
while other incentive values are based on long-term (i.e., multi-year)
performance. Also, the Company considers business unit and individual
performance in its incentive plan. As a result, the total compensation levels
for an executive in any given year may not reflect the Company's overall
bottom-line financial performance in that year.

BASE SALARY PROGRAM

The Company's base salary program is based on a philosophy of providing
salaries that are typically consistent with average market rates for companies
of similar size. The Company believes that offering competitive rates of base
pay plays an important role in its ability to attract and retain executive
talent. Base salary levels are also based on each individual employee's
performance over time. Consequently, employees with higher levels of sustained
performance over time will be paid correspondingly higher salaries. Salaries for
executives are reviewed and revised annually based on a variety of factors,
including individual performance (assessed in a qualitative fashion), general
levels of market salary increases and the Company's overall financial results.
All salary increases are granted within a pay-for-performance framework.

ANNUAL INCENTIVE PLAN

The Company's annual incentive plan is intended to assist the Company in
rewarding and motivating key employees, focuses strongly on Company and
individual performance, and provides a fully competitive compensation package to
plan participants. As a pay-for-performance plan, incentive awards are paid
annually based on the achievement of performance objectives for the year. Under
the plan, each plan participant is provided a range of potential annual
incentive awards based on competitive award levels in the marketplace. The
incentive award ranges are consistent with those provided by other companies
similar in size to the Company. Actual awards paid under the plan are based on
the Company's corporate performance (and for business unit positions, business
unit performance). Individual performance is also considered in determining
actual award levels for each year, but is assessed in a non-formula fashion. The
corporate annual incentive plan objective usually is earnings per share
performance against plan. The specific objectives and standards under the plan
are reviewed annually by the Company in order to ensure consistency with the
Company's business strategy and prevailing market conditions.

An annual incentive funding pool is created to pay awards achieved under the
annual incentive plan. At targeted performance, the plan provides sufficient
funding to pay competitive annual incentives to all plan eligible positions.
However, the actual size of the annual incentive funding pool will vary based on
corporate earnings per share performance. Aggregate payments under the annual
incentive plan are limited by the size of the funding pool. Actual awards made
to participants under the annual incentive plan are based on a combination of
corporate and individual performance. Individual performance is assessed
relative to various qualitative objectives and criteria, such as overall
contribution to the Company's success and successful implementation of business
strategy.

LONG-TERM INCENTIVES

The Company believes that its key employees should have an ongoing interest
in the long-term success of the business. To accomplish this objective, the
Company provides long-term incentives to executives in the form of non-qualified
stock options.

The Company's stock option plans are intended to reward participants for
generating appreciation in the Company's stock price. Stock options granted to
the executive officers named in the Summary Compensation Table and certain other
executives were awarded at 100% of the fair market value of the stock on the
date of grant. All stock options have a term of ten years. Generally, stock
option grants vest at a rate of 25% per year beginning one year after the date
of grant. The exercise price is payable in cash, shares of the Company stock or
some combination thereof. No option holder has any rights as a shareholder for
any shares subject to an option until the exercise price has been paid and the
shares are issued to the employee.

The Company's overall stock option grant levels are established by
considering market data for the Company's stock and the number of shares
reserved under the plan for option grants. Individual stock option grants are
based on the job level of each participant in the Company and individual
performance. The Committee also considers the size of past stock option grants
in determining the size of new option grants.

The Company's compensation plans are periodically reviewed to ensure an
appropriate mix of base salary, annual incentive and long-term incentive within
the philosophy of providing strongly competitive total direct compensation
opportunities.

1997 CHIEF EXECUTIVE OFFICER COMPENSATION

As described above, the Company compensates all executives, including the
chief executive officer, based upon both a pay-for-performance philosophy and
consideration of market rates of compensation for each executive position.
Specific actions taken by the Compensation Committee regarding the chief
executive officer's compensation are summarized below.

BASE SALARY

The base annual salary for the Company's chief executive officer was
increased to $297,000 from $270,000 effective June 1, 1997.

ANNUAL INCENTIVE

The annual incentive earned by the chief executive officer for 1997
performance was $202,500. This annual incentive award was based on competitive
market annual incentive awards for chief executive officers in companies
comparable in size to the Company, and adjusted to reflect the Company's
performance in growth in earnings per share against plan.

LONG-TERM INCENTIVE

The chief executive officer did not receive a stock option award in fiscal
1997.

The foregoing report is submitted by the Compensation Committee, consisting
of Richard E. Cheney and Scott L. Probasco, Jr.

COMPARATIVE PERFORMANCE BY THE COMPANY

The following is a chart comparing the cumulative total return to
shareholders of the Company, assuming reinvestment of dividends, for the
five-year period ending at the end of the 1997 fiscal year with the return from:
(i) the S&P 500 Index and (ii) two peer groups of public companies engaged in
either the functional toiletries, cosmetics or non-prescription drug business,
for the same period. The new peer group consists of the following selected
comparable companies: Block Drug Company (Class A common stock), Church &
Dwight, Inc., Columbia Laboratories, Inc., Del Laboratories, Inc., and Menley &
James, Inc. The old peer group consisted of the following selected comparable
companies: Alberto-Culver Co. (Class B common stock), Carter-Wallace Inc., DEP
Corporation (Class B common stock), Helene Curtis Industries Inc., Menley &
James Inc., Neutrogena Corp., St. Ives Laboratories Inc. and Del Laboratories
Inc. As a result of changes in the Company's business and product lines, the
Company believes the new peer group is a more accurate sample of companies
comparable to the Company.

CHATTEM, INC.
RELATIVE MARKET PERFORMANCE
TOTAL RETURN FISCAL 1993-1997

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

VALUE OF INVESTMENT
($)

Chattem, Inc. S&P 500 Index New Peer Group** Old Peer Group**
11/30/92 $100 $100 $100 $100
11/30/93 $81 $110 $68 $73
11/30/94 $56 $111 $68 $65
11/30/95 $47 $152 $77 $70
11/30/96 $94 $195 $100 $102
11/30/97 $152 $250 $118 $128

* Assumes $100 invested on November 30, 1992 in the common stock of the
Company, S&P 500 Index and the new and old custom peer groups with dividends
reinvested and investment weighted on the basis of market capitalization.

PROPOSAL 2: CHATTEM, INC. NON-STATUTORY STOCK OPTION PLAN--1998

The following summary of the material provisions of the Non-Statutory Stock
Option Plan--1998 (the "1998 Stock Option Plan") does not purport to be complete
and is qualified in its entirety by reference to the 1998 Stock Option Plan, a
copy of which is attached as APPENDIX I.

GENERAL

The 1998 Stock Option Plan was unanimously adopted and recommended to the
shareholders for approval by the Board of Directors on January 28, 1998. In
addition, certain grants of options described below were made under the 1998
Stock Option Plan, subject to shareholder approval. The 1998 Stock Option Plan
is designed to enable officers and key management employees of the Company and
its subsidiaries to continue to acquire shares of the Company's Common Stock and
thus to share in the future success of the Company's business. Accordingly, the
1998 Stock Option Plan is intended as a further means not only of attracting and
retaining outstanding management personnel, but also of promoting a closer
identity of interest between key management employees and the Company and its
shareholders.

The 1998 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors, or in the absence of the Compensation Committee, by the
Board of Directors as a whole.

The Compensation Committee has the authority to interpret the 1998 Stock
Option Plan and, subject to the provisions of the 1998 Stock Option Plan, to
determine the persons to whom options shall be granted, the number of shares of
Common Stock subject to each option, the term of each option, the date on which
each option shall be granted and the provisions of each option agreement.
Options granted under the 1998 Stock Option Plan entitle the optionee to
purchase from the Company a stated number of shares of Common Stock at a price
established by the Compensation Committee.

The Compensation Committee may at any time terminate, suspend, amend or
modify the 1998 Stock Option Plan, except that the Compensation Committee may
not, without the authorization of the shareholders at a shareholders' meeting
duly called and held, change (other than through adjustment for changes in
capitalization): (a) the aggregate number of shares of Common Stock with respect
to which options may be granted; (b) the class of persons eligible for options;
(c) the option price; or (d) the maximum duration of the 1998 Stock Option Plan.
No termination, suspension, amendment or modification of the 1998 Stock Option
Plan may adversely affect any right acquired by an optionee, or by any
beneficiary, under the terms of an option granted before the date of such
termination, suspension, amendment or modification, unless such optionee or
beneficiary shall consent.

Unless sooner terminated as described above, the 1998 Stock Option Plan will
remain in effect until January 28, 2003. Termination will not affect the vesting
of previously granted options. The 1998 Stock Option Plan is not subject to any
provisions of the Employee Retirement Income Security Act of 1974 and is not
intended to be qualified under Section 401(a) of the Internal Revenue Code.

SECURITIES TO BE OFFERED

The 1998 Stock Option Plan provides that eligible participants may be
granted options which, upon exercise, will entitle the optionee to purchase
shares of Common Stock. The maximum aggregate number of shares of Common Stock
that may be issued under the 1998 Stock Option Plan is 700,000, subject to
increases and adjustments as provided in the 1998 Stock Option Plan.

EMPLOYEES WHO MAY PARTICIPATE IN THE 1998 STOCK OPTION PLAN

Options may be granted under the 1998 Stock Option Plan to key management
employees of the Company or any subsidiary, including officers and directors
who, in the judgment of the Compensation

Committee, have a substantial impact on the Company's attainment of corporate
goals. All determinations by the Compensation Committee as to the identity of
the persons to whom options shall be granted under the 1998 Stock Option Plan
are conclusive.

The grant of an option in any year will not give the optionee any right to
options in future years or any right to be retained in the employ of the Company
or its subsidiaries.

ISSUANCE AND EXERCISE OF OPTIONS

The Compensation Committee designates individuals to whom options are to be
granted and specifies the number of shares of Common Stock subject to each
grant. The price per share for Common Stock purchased on the exercise of an
option is determined by the Compensation Committee but will not be less than the
fair market value of the Common Stock on the date of grant of the option. The
price may exceed fair market value in the sole discretion of the Compensation
Committee. Fair market value of the Common Stock means the closing sale price on
the business day preceding the date on which fair market value is being
determined, as reported in THE WALL STREET JOURNAL, or the average of the high
and low bids on such day if no sale exists.

In no event may an option be exercised before approval of the 1998 Stock
Option Plan by the holders of a majority of the outstanding shares of Common
Stock present, or represented and entitled to vote, at the Annual Meeting. The
term of each option will end on a date ten years from the date of grant of the
option.

Each option will become exercisable and vested with respect to 25% of the
shares of Common Stock purchasable thereunder on the first anniversary of the
date of the grant of the option. The option to purchase an additional 25% of
such shares will become exercisable and vested, on a cumulative basis, on each
of the three succeeding anniversaries of the date of the grant of the option, so
that four years from the date of such grant, the option to purchase all such
shares will have become exercisable and vested. Notwithstanding the foregoing
vesting schedule, each option will become exercisable in full immediately (i)
upon certain changes in control of the Company or (ii) upon the death,
disability or retirement of an optionee or termination of an optionee's
employment pursuant to the divestiture of a subsidiary of the Company. When
exercising an option, the optionee may purchase less than the full number of
shares of Common Stock then available under the option.

Options may be exercised by delivering or mailing to the Compensation
Committee: (1) a notice, in the form and in the manner prescribed by the
Compensation Committee, specifying the number of shares of Common Stock to be
purchased and (2) payment in full of the option price for the shares of Common
Stock in cash and/or by the tender of shares of Common Stock (by delivering the
appropriate stock certificates) to the Compensation Committee; provided,
however, that (i) the Compensation Committee will determine acceptable methods
for tendering shares to exercise an option under the 1998 Stock Option Plan and
may impose such limitations and prohibitions on the use of shares of Common
Stock to exercise an option as it deems appropriate, and (ii) the Compensation
Committee may permit optionees to pay for any shares subject to an option by
delivering to the Compensation Committee a properly executed exercise notice
together with a copy of irrevocable instructions to a broker to deliver promptly
to the Company the amount of sale or loan proceeds to pay the purchase price.

The Company may enter into agreements for coordinated procedures with one or
more brokerage firms in connection with exercises of options. The value of any
shares tendered to exercise an option will be determined on the basis of their
fair market value on the date of exercise.

Upon receipt of the notice of exercise and upon payment of the option price,
the Company will promptly deliver to the optionee a certificate or certificates
for the shares of Common Stock purchased, without charge to the optionee for
issue or transfer tax.

OPTIONS GRANTED UNDER THE 1998 STOCK OPTION PLAN SUBJECT TO SHAREHOLDERS'
APPROVAL

On January 28, 1998, the Compensation Committee granted options under the
1998 Stock Option Plan to acquire 433,000 shares of Common Stock. These options
will not become effective unless the grants are approved by the shareholders of
the Company. These options will become exercisable, as described above, at
$13.75 per share.

The fair market value of the Common Stock on March 4, 1998 was $20.8125 per
share.

The number of shares of Common Stock that are currently available under the
1998 Stock Option Plan for the future grant of options is 267,000.

The following table sets forth the options granted under the 1998 Stock
Option Plan to: (a) the Company's chief executive officer and the other most
highly compensated executive officer of the Company during the fiscal year ended
November 30, 1997, (b) all current executive officers as a group (2 persons) and
(c) all employees of the Company as a group.

OPTIONS
NAME AND POSITION (SHARES)
- ----------------------------------------------------------------------------- ---------------

Zan Guerry (1)............................................................... 130,000
Chairman of the Board and President
Robert E. Bosworth (2)....................................................... 0
Executive Vice President and Chief Financial Officer
Executive officers as a group................................................ 175,000(3)
All other employees as a group............................................... 258,000

- ------------
(1) Mr. Guerry was appointed Chief Executive Officer of the Company on January
13, 1998.

(2) Mr. Bosworth resigned from his position as Executive Vice President and
Chief Financial Officer on January 13, 1998.

(3) Includes 45,000 options granted to A. Alexander Taylor II, who was appointed
President and Chief Operating Officer of the Company on January 13, 1998.

TRANSFER RESTRICTIONS

An option granted under the 1998 Stock Option Plan is not transferable,
except with the written consent of the Compensation Committee or by will or by
the laws of descent and distribution, and an option may be exercised during the
lifetime of the optionee only by the optionee.

FEDERAL INCOME TAX CONSEQUENCES

The 1998 Stock Option Plan is not intended to qualify as an "incentive stock
option plan" within the meaning of the Internal Revenue Code. The federal income
tax consequences arising out of the above-described options and the purchase of
shares pursuant thereto will be generally as follows. Upon the grant of a
non-qualified stock option, no taxable income is realized by the participant and
no deduction is available to the Company. Upon exercise of the option, the
excess of the fair market value of the shares on the date of exercise over the
option price will be taxable as income to the participant and deductible by the
Company as compensation expense. The tax basis of shares acquired will be the
fair market value on the date of exercise. For shares held more than one year,
the participant will realize a long-term capital gain or loss upon disposition
with any capital gain taxed at a maximum 28% rate under the current provisions
of the Internal Revenue Code.

If the participant exercises an option by tendering other shares he owns, no
gain or loss will be recognized by the participant with respect to the shares
delivered to the Company. If the participant receives an equal number of shares,
the participant will realize taxable income to the extent the fair

market value of the shares received is greater than the value of the shares
surrendered. The participant's basis and holding period will be the same as the
participant's basis and holding period in the tendered shares. If the
participant receives more shares than tendered in the exchange, the fair market
value of the excess shares will also constitute taxable income of the
participant. The excess shares will have a basis equal to the income recognized,
plus the cash, if any, paid on the exercise of the option. The holding period
for the excess shares begins on the date of exercise of the option.

REQUIRED AFFIRMATIVE VOTE

The approval of the 1998 Stock Option Plan requires the affirmative vote by
holders of a majority of the shares of Common Stock represented at the Annual
Meeting and entitled to vote.

The Board of Directors believes that the proposal is in the best interests
of the Company and its shareholders and recommends that the shareholders vote
FOR the approval of the 1998 Stock Option Plan.

PROPOSAL 3: RATIFICATION OF APPOINTMENT OF AUDITORS

Samuel E. Allen and Scott L. Probasco, Jr. are the current members of the
Company's Audit Committee. The Audit Committee's functions include review and
monitoring of financial reports and accounting practices.

Another of the Audit Committee's functions is the recommendation of auditors
to the Board of Directors. The Audit Committee has recommended and the Board of
Directors has selected Arthur Andersen LLP, the Company's auditors since 1963.
Arthur Andersen LLP is knowledgeable about the Company's operations and
accounting practices and is well qualified to act in this capacity. The
Company's Board of Directors believes that it is a good practice to submit the
appointment of auditors for the approval of the shareholders, although such
approval is not required. If shareholder approval for the appointment is not
obtained, the Audit Committee will investigate the reasons, and the Board of
Directors will reconsider the appointment. If the accompanying proxy is duly
executed and received in time for the Annual Meeting, and if no contrary
specification is made as provided therein, it is the intention of the persons
named in the proxy to vote the shares represented thereby FOR the ratification
of the appointment of Arthur Andersen LLP as auditors.

It is anticipated that a representative of Arthur Andersen LLP will be
present at the Annual Meeting to respond to appropriate questions. Such
representative will have an opportunity to make a statement at the Annual
Meeting if he desires.

SHAREHOLDERS' PROPOSALS

Proposals from the Company's eligible shareholders for presentation for
action at the 1999 Annual Meeting of Shareholders must be received by the
Company no later than November 6, 1998, in order to be considered for inclusion
in the Proxy Statement and Proxy for that Annual Meeting. Any such proposals, as
well as any questions relating thereto, should be directed to Hugh F. Sharber,
Secretary, Chattem, Inc., 1715 West 38th Street, Chattanooga, Tennessee 37409.

Zan Guerry
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
March 9, 1998

APPENDIX I
CHATTEM, INC.
NON-STATUTORY STOCK OPTION PLAN--1998

1. PURPOSE

The Chattem, Inc. Non-Statutory Stock Option Plan--1998 (the "Plan") is
designed to enable officers and key management employees of Chattem, Inc. (the
"Company") and its Subsidiaries to continue to acquire shares of the Company's
common stock and thus to share in the future success of the Company's business.
Accordingly, the Plan is intended as a further means not only of attracting and
retaining outstanding management personnel, but also of promoting a closer
identity of interest between key management employees and the Company and its
shareholders.

2. DEFINITIONS

Unless the context clearly indicates otherwise, the following terms, when
used in the Plan, shall have the meanings set forth in this Section 2.

(a) "BENEFICIARY" means the person or persons designated in writing by the
Optionee or, in the absence of such a designation or if the designated
person or persons predecease the Optionee, the Optionee's Beneficiary
shall be the person or persons who acquire the right to exercise the
Option by bequest or inheritance. In order to be effective, an Optionee's
designation of a Beneficiary must be on file with the Committee before
the Optionee's death. Any such designation may be revoked in writing and
a new written designation substituted therefor at any time before the
Optionee's death.

(b) "BOARD OF DIRECTORS" or "BOARD" means the board of directors of the
Company.

(i) Change of 1/3 or more of the directors of the Company within any
12-month period; or

(ii) Change of 1/2 or more of the directors of the Company within any
24-month period; or

(iii) Acquisition by any person of the ownership of or right to vote 35%
or more of the Company's outstanding voting stock. For purposes of
this paragraph (iii): (A) "person" shall mean any person,
corporation, partnership or other entity and any affiliate or
associate thereof and (B) "affiliate" and "associate" shall have the
meanings given to them in Rule 12b-2 promulgated under the Exchange
Act.

(d) "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.

(e) "COMMITTEE" means the Compensation Committee of the Board of Directors
or, in the event the Board of Directors terminates the existence of the
Compensation Committee, then Committee shall refer to the Board as a
whole.

(f) COMPANY means Chattem, Inc., a corporation incorporated under the laws
of the State of Tennessee, and its successors.

(g) "DISABILITY" means a disability that entitles the Optionee to benefits
under the Company's Long-Term Disability Plan, as amended from time to
time.

(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

(i) "FAIR MARKET VALUE" means the closing sale price on the last business
day prior to the date on which Fair Market Value needs to be determined
as reported in THE WALL STREET JOURNAL, or the average of the high and
low bids on such day if no sale exists.

(j) "OPTION" means an option to purchase a share or shares of the Company's
common stock.

(k) "OPTION AGREEMENT" means the written agreement to be entered into by the
Company and the Optionee, as provided in Section 7 hereof.

(1) "OPTIONEE" means a person to whom an Option has been granted under the
Plan.

(m) "RETIREMENT" means retirement from employment with the Company and its
Subsidiaries, as determined by the Committee in its sole discretion.

(n) "SHARES" means shares of the Company's common stock.

(o) "SUBSIDIARY" means a subsidiary corporation as defined in Section 425(f)
of the Code (or a successor provision of similar import).

(p) "TERM" means the period during which a particular Option may be
exercised in accordance with Section 10 hereof.

3. EFFECTIVE DATE OF THE PLAN

The Plan shall become effective when adopted by the Board of Directors;
provided, however, that if the Plan is not approved by the holders of a majority
of the outstanding Shares present, or represented, and entitled to vote at the
meeting before the first anniversary of its adoption by the Board, the Plan and
all Options granted under the Plan prior to such anniversary shall be null and
void and shall be of no effect.

4. NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN

(a) The Company may grant Options under the Plan for not more than seven
hundred thousand (700,000) Shares (subject, however, to adjustment as
provided in Section 14 hereof) which shall be provided by the issuance of
Shares authorized but unissued.

(b) In the event that an Option shall for any reason lapse or be terminated
without being exercised in whole or in part, the Shares subject to the
Option shall be restored to the total number of Shares with respect to
which Options may be granted under the Plan, but only to the extent that
the Option has not been exercised previously.

5. ADMINISTRATION OF THE PLAN

(a) The Plan shall be administered by the Committee.

(b) The Committee shall adopt such rules and regulations (including
amendments thereto) as it may deem proper; provided, however, that it may
take action only upon the agreement of a majority of its members then in
office. Any action that the Committee may take through a written
instrument signed by a majority of its members then in office shall be as
effective as though taken at a meeting duly called and held.

(c) The powers of the Committee shall include plenary authority to interpret
the Plan, and, subject to the provisions hereof, the Committee shall
determine the persons to whom Options shall be granted, the number of
Shares subject to each Option, the Term of each Option, the date on which
each Option shall be granted, and the provisions of each Option
Agreement.

6. PLAN PARTICIPANTS ELIGIBLE TO RECEIVE OPTIONS

Options may be granted under the Plan to key management employees of the
Company or any Subsidiary, including officers who, in the judgment of the
Committee, have a substantial impact on the Company's attainment of corporate
goals. All determinations by the Committee as to the identity of the persons to
whom Options shall be granted hereunder shall be conclusive.

7. OPTION AGREEMENTS

(a) No Option shall be exercised by an Optionee unless the Optionee shall
have executed and delivered an Option Agreement.

(b) Appropriate officers of the Company are hereby authorized to execute and
deliver Option Agreements in the name of the Company as directed from
time to time by the Committee.

8. NON-STATUTORY OPTIONS

It is intended that the Options granted hereunder shall not be "incentive
stock options" within the meaning of the Code.

9. OPTION PRICE

The Option price to be paid by the Optionee to the Company for each Share
purchased upon the exercise of the Option shall be determined by the Committee
and shall be not less than the Fair Market Value of the Share on the date the
option is granted but may exceed Fair Market Value in the sole discretion of the
Committee.

10. TERM OF OPTION; EXERCISE OF OPTION

(a) Each Option granted under the Plan shall be exercisable as provided in
this Section 10. In no event may an Option be exercised before the
approval of the Plan by the shareholders of the Company at the meeting
within the period specified by Section 3 hereof. The Term of each Option
shall end (unless the Option shall have terminated earlier under any
other provisions of the Plan) on a date ten (10) years from the date of
grant of the Option.

(b) Each Option shall become exercisable and vested with respect to
twenty-five percent (25%) of the Shares purchasable thereunder on the
first anniversary of the date of the grant of the Option. The option to
purchase an additional twenty-five percent (25%) of such Shares shall
become exercisable and vested, on a cumulative basis, on each of the
three succeeding anniversaries of the date of the grant of the Option, so
that four years from the date of such grant the option to purchase all
such Shares shall have become exercisable and vested. Notwithstanding the
foregoing vesting schedule (i) each Option shall become exercisable in
full immediately upon a Change in Control and (ii) upon the death,
disability or retirement of an Optionee or termination of an Optionee's
employment pursuant to Section 12(e), any Option held by such Optionee
shall be exercisable in full in accordance with the provisions of Section
12. When exercising an Option, the Optionee may purchase less than the
full number of Shares then available under the Option.

(1) a notice, in the form and in the manner prescribed by the Committee,
specifying the number of Shares to be purchased, and

(2) payment in full of the Option price for the Shares in cash and/or by
the tender of Shares (by delivering the appropriate stock
certificates) to the Committee; provided, however, that (i) the
Committee shall determine acceptable methods for tendering shares to
exercise an Option under the Plan, and may impose such limitations
and prohibitions on the use of Shares to exercise an Option as it
deems appropriate and (ii) the Committee may permit Optionees to pay
for any Shares subject to an option by delivering to the Committee a
properly executed exercise notice together with a copy of irrevocable
instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds to pay the purchase price.

The Company may enter into agreements for coordinated procedures with
one or more brokerage firms in connection with exercises of Options.
The value of any Shares tendered in accordance with this Paragraph
(c) shall be determined on the basis of their Fair Market Value on
the date of exercise.

(d) Subject to the provisions of Section 11(a) hereof, upon receipt of the
notice of exercise and upon payment of the Option price, the Company
shall promptly deliver to the Optionee a certificate or certificates for
the Shares purchased, without charge to the Optionee for issue or
transfer tax.

11. CONDITIONS ON EXERCISE

(a) The exercise of each Option granted under the Plan shall be subject to
the condition that if at any time the Company shall determine in its
discretion that the satisfaction of withholding tax or other withholding
liabilities, or that the listing, registration or qualification of any
Shares otherwise deliverable upon such exercise upon any securities
exchange or under any State or Federal law, or the consent or approval of
any regulatory body, is necessary or desirable as a condition of, or in
connection with, such exercise or the delivery or purchase of Shares,
then in any such event such exercise or payment shall not be effective or
be made unless such withholding, listing, registration, qualification,
consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Company. Any such postponement shall not
extend the time within which the Option may be exercised; and neither the
Company nor its directors or officers shall have any obligation or
liability to the Optionee or to a Beneficiary with respect to any Shares
as to which the option shall lapse because of such postponement.

(b) Except with the prior written approval of the Committee, all Options
granted under the Plan shall be nontransferable other than by will or by
the laws of descent and distribution in accordance with Section 12(a)
hereof, and an Option may be exercised during the lifetime of the
Optionee only by the Optionee.

(c) Subject to the provisions of Section 11(b), upon the purchase of Shares
under an option, the stock certificate or certificates may, at the
request of the Optionee (or the Optionee's Beneficiary, where the Option
is exercised by the Beneficiary), be issued in the name of the Optionee
(or Beneficiary) and the name of another person as joint tenants with the
right of survivorship.

12. EXERCISE OF OPTION AFTER DEATH, DISABILITY, RETIREMENT, OR
OTHER TERMINATION OF EMPLOYMENT

(a) DEATH. If an Optionee's employment with the Company or a Subsidiary
shall cease due to the Optionee's death, any Option held by the Optionee
on the date of the Optionee's death may be exercised only within three
(3) years after the Optionee's death and only by the Optionee's
Beneficiary. If an Optionee shall die within three (3) years after
cessation of employment while the Option is exercisable pursuant to
Paragraph (b) below, or if the Optionee shall die within three (3) years
after cessation of employment while the Option is exercisable pursuant to
Paragraph (c) below, any Option held by the Optionee on the date of his
death may be exercised after the Optionee's death only within the
remainder of the period prescribed by Paragraph (b) or Paragraph (c), as
the case may be, and only by the Optionee's Beneficiary. Notwithstanding
the foregoing, in no event shall the Option be exercisable after the
expiration date thereof specified in the Option Agreement.

(b) DISABILITY. If an Optionee's employment with the Company or a
Subsidiary ceases due to Disability, the Optionee may exercise the Option
at any time within three (3) years after the Optionee shall so cease to
be an employee; provided, however, that in no event shall the Option be
exercisable after the expiration date thereof specified in the Option
Agreement.

(c) RETIREMENT. If an Optionee's employment with the Company or a
Subsidiary ceases due to Retirement, the Optionee may exercise the Option
at any time within three (3) years after the Optionee shall so cease to
be an employee; provided, however, that in no event shall the Option be
exercisable after the expiration date thereof specified in the Option
Agreement.

(d) LEAVE OF ABSENCE. The Committee shall have the sole authority to
determine whether, in any particular case, a leave of absence shall
result in a termination of employment for purposes of this Section 12.

(e) DIVESTITURE. If an Optionee's employment with the Company or a
Subsidiary ceases due to divestiture of a Subsidiary or other distinct
business unit of the Company, the Optionee may exercise the Option at any
time within ninety (90) days after the divestiture, provided that the
Optionee is an employee on the actual date of the divestiture; and
further provided, that in no event shall the Option be exercisable after
the expiration date thereof specified in the Option Agreement.

(f) TERMINATION FOR OTHER REASONS. Upon termination of an Optionee's
employment with the Company or a Subsidiary for any reason other than
those specified in Paragraphs (a) through (e) above, the Optionee may
exercise the Option (to the extent vested) at any time within thirty (30)
days after such termination; provided, however, that in no event shall
the Option be exercisable after the expiration date thereof specified in
the option Agreement.

13. SHAREHOLDER RIGHTS

No person shall have any rights of a shareholder by virtue of an Option
except with respect to Shares actually issued to him or her, and the issuance of
Shares shall confer no retroactive right to dividends.

14. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION

In the event that there is any change in the Shares through merger,
consolidation, reorganization, recapitalization or otherwise, or if there shall
be any dividend on the Company's Shares, payable in such Shares, or if there
shall be a stock split or combination of Shares, the aggregate number of Shares
available for Options, the number of Shares subject to outstanding Options, and
the Option price per share of each outstanding Option shall be proportionately
adjusted by the Committee as it deems equitable in its absolute discretion, to
prevent dilution or enlargement of the rights of the Optionee; provided, that
any fractional Shares resulting from such adjustments shall be eliminated. The
Committee's determination with respect to any such adjustments shall be
conclusive.

15. EFFECT OF MERGER OR OTHER REORGANIZATION

If the Company shall be the surviving corporation in a merger or other
reorganization, Options shall extend to stock and securities of the Company to
the same extent that a holder of that number of Shares immediately before the
merger or consolidation corresponding to the number of Shares covered by the
Option would be entitled to have or obtain stock and securities of the Company
under the terms of the merger or consolidation.

16. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN

The Committee may at any time terminate, suspend, amend or modify the Plan,
except that the Committee shall not, without the authorization of the holders of
a majority of the Company's Shares

voting at a shareholders' meeting duly called and held, change (other than
through adjustment for changes in capitalization as provided in Section 14
hereof): (a) the aggregate number of Shares with respect to which Options may be
granted; (b) the class of persons eligible for Options; (c) the Option price; or
(d) the maximum duration of the Plan. No termination, suspension or modification
of the Plan shall adversely affect any right acquired by an Optionee, or by any
Beneficiary, under the terms of an Option granted before the date of such
termination, suspension or modification, unless such Optionee or Beneficiary
shall consent; but it shall be presumed conclusively that any adjustment for
changes in capitalization in accordance with Section 14 hereof does not
adversely affect any such right.

17. DURATION OF THE PLAN

Unless sooner terminated in accordance with Section 16 hereof, the Plan
shall remain in effect for a period of five (5) years from the date of its
adoption by the Board of Directors. Expiration of such five (5) year period
shall not affect the vesting of previously granted Options pursuant to Section
10(b) hereof.

18. GOVERNING LAW

The Plan shall be construed and its provisions enforced and administered in
accordance with the laws of the State of Tennessee except to the extent that
such laws may be superseded by any Federal law.

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CHATTEM, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
APRIL 8, 1998

The undersigned, having received the Notice of Annual Meeting and the Proxy
Statement dated March 9, 1998, appoints ZAN GUERRY and A. ALEXANDER TAYLOR II,
and each of them proxies, with full power of substitution and revocation, to
represent the undersigned and to vote all shares of Chattem, Inc. which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
on April 8, 1998, at the principal executive offices of the Company, 1715 West
38th Street, Chattanooga, Tennessee 37409, at 1:00 p.m. local time, and any
adjournment(s) as specified in this Proxy.

1. Election of Directors. FOR all nominees listed below WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE CONTRARY) / / TO VOTE FOR ALL NOMINEES LISTED
BELOW / /

INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR MORE OF THE NOMINEES,
STRIKE A LINE THROUGH HIS NAME IN THE LIST BELOW.

SCOTT L. PROBASCO, JR. and ZAN GUERRY

2. To approve the Chattem, Inc. Non-Statutory Stock Option Plan-1998.

/ / FOR / / AGAINST / / ABSTAIN

3. Ratification of the Appointment of Arthur Andersen LLP as independent auditors.

/ / FOR / / AGAINST / / ABSTAIN

PLEASE MARK /X/
THE BOARD OF DIRECTORS RECOMMENDS AFFIRMATIVE VOTES FOR ITEMS 1, 2 AND 3 AND IF NO CONTRARY YOUR VOTES AS
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR ITEMS 1, 2 AND 3. INDICATED IN
THIS EXAMPLE

The Board of Directors knows of no other
matters that may properly be brought
before the meeting. However, if any
other matters are properly brought
before the meeting, the persons named in
this proxy or their substitutes will
vote in accordance with their best
judgement on such matters. THIS PROXY
SHOULD BE DATED, SIGNED BY THE
SHAREHOLDER AS THE NAME APPEARS HEREIN
AND RETURNED PROMPTLY IN THE ENCLOSED
ENVELOPE. JOINT OWNERS SHOULD EACH SIGN
PERSONALLY, AND TRUSTEES AND OTHERS
SIGNING IN A REPRESENTATIVE CAPACITY
SHOULD INDICATE THE CAPACITY IN WHICH
THEY SIGN.
Dated __________________________________
________________________________________
Signature of Shareholder
________________________________________
Signature of Shareholder

PLEASE SIGN, DATE AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE--NO POSTAGE
REQUIRED.