Exhibit 10.1


AMENDMENT
NO. 2 TO


WATSON
PHARMACEUTICALS, INC.


KEY EMPLOYEE AGREEMENT


This
Amendment No. 2 to Key Employee Agreement (this “Amendment”) by and between
Allen Chao, Ph.D. (“Executive”) and Watson Pharmaceuticals, Inc. (the “Company”),
a Nevada corporation is entered into as of August 1, 2007 (the “Effective Date”),
and, to the extent provided herein, amends that certain Key Employee Agreement
between Executive and the Company dated as of June 30, 1999, as amended
November 15, 2000 (the “Agreement”).


WHEREAS, the Company and Executive have entered into
the Agreement, pursuant to which Executive serves as Chairman of the Board,
Chief Executive Officer and President of the Company; and


WHEREAS,
the Executive desires to resign as Chief Executive Officer, and the Company
wishes to accept such resignation and to retain Executive to serve as Chairman
of the Board of Directors and Executive Chairman of the Company to assist in an
orderly transition of senior management at the Company; and


WHEREAS, the Company and Executive desire to amend
the Agreement to the extent provided herein.


NOW, THEREFORE, in consideration of the mutual
promises and covenants contained herein, it is hereby agreed by and between the
parties hereto as follows:


1.             EMPLOYMENT BY THE COMPANY.   Section 1 of the Agreement shall
be deleted and replaced in its entirety with the following:


“1.              EMPLOYMENT BY THE COMPANY.  Executive’s employment under this
Agreement shall commence on the Effective Date and end on December 31, 2007,
unless earlier terminated in accordance with the provisions hereof (the “Employment
Term”).  Following the Employment Term,
Executive shall continue to serve the Company, subject to such applicable
stockholder and Board approval as may be required, as the Chairman of the Board
of Directors of the Company (the “Board”) in accordance with the provisions
hereof and the Company’s bylaws and other applicable governing documents.  Subject to the terms set forth herein, the
Company agrees as follows:


1.1          Chief Executive Officer.  Executive shall be employed as Chief
Executive Officer and President of the Company in accordance with the terms
hereof commencing on the Effective Date and ending on September 4, 2007 (the “Transition
Date”).


1.2          Executive Chairman.  Upon and following the Transition Date and
until the expiration of the Employment Term, Executive shall, without any
further action by the Company, cease to be employed as Chief Executive Officer
and shall instead be employed as Executive Chairman of the Company.  Upon the



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earlier of the expiration
of the Employment Term or other separation of employment, Executive’s
separation shall for all purposes be deemed a resignation for Good Reason.


1.3          Board Membership.  During the period commencing on the Effective
Date and ending at the Annual Meeting of Shareholders in 2010 (the “Board Term”),
Executive shall serve as a member of the Board and, provided that Executive
continues to be so nominated and duly elected, Executive shall also serve as
Chairman of the Board, unless Executive resigns as a member of the Board or as
Chairman of the Board.


1.4          Duties and Service
Commitment.  During the Employment
Term, Executive shall perform such duties as are assigned to him from time to
time by the Board, consistent with the bylaws of the Company.  As Chief Executive Officer, Executive will
devote his best efforts and substantially all of his business time and
attention (except for paid time-off periods as set forth herein and reasonable
periods of illness or other incapacity permitted by the Company’s general
employment policies) to the business of the Company.  As Executive Chairman, Executive will devote
up to seventy five percent (75%) of his business time and attention (except for
paid time-off periods as set forth herein and reasonable periods of illness or
other incapacity permitted by the Company’s general employment policies) to the
business of the Company.  During the
Board Term, Executive shall devote such services to the Company as the Board
shall reasonably direct that are consistent with the position then held and as
are mutually agreed to by Executive and the Company.  At all times during the Employment Term
Executive shall abide by the general employment policies and procedures of the
Company, except that wherever the terms of this Agreement may differ from or
are in conflict with the Company’s general employment policies or procedures,
this Agreement shall control.  At all
times during the Board Term, Executive shall abide by the Company’s bylaws and
other applicable policies and procedures of the Company which apply to members
of the Board.”


2.             COMPENSATION. 
Section 2 of the Agreement shall be deleted and replaced in
its entirety with the following:


“2.              COMPENSATION AND DIRECTOR FEES.


2.1          Base Salary.  During the Employment Term, Executive shall
receive a base salary as set forth in Section 1 of the Compensation and
Severance Terms Schedule, attached hereto as Exhibit A.


2.2          Bonus.  During the Employment Term, Executive shall
be eligible to participate in the Company’s bonus plan at the senior executive
level.  The Company shall have the sole
discretion to determine whether Executive is entitled to any such bonus and to
determine the amount of the bonus.  The
amount of Executive’s bonus may be determined in part based on Executive’s
performance with respect to certain goals established by the Company and
attainment by the



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Company of its planned
financial objectives for the bonus period. 
Notwithstanding the foregoing, no bonus is guaranteed to Executive.  Any bonus is subject to the approval of the
Compensation Committee of the Board.  The
Company retains the authority to review, grant, deny or revise any bonus in its
sole discretion.  To be eligible to
receive a bonus, Executive must remain in employment with the Company
throughout the Employment Term.  The
target level of such bonus for 2007 is set forth in that certain Form 8-K filed
with the U.S. Securities and Exchange Commission on March 2, 2007, and in
Section 2 of the Compensation and Severance Terms Schedule, attached hereto as
Exhibit A.


2.3          Equity Awards.  Each
equity-based award (e.g., stock option or restricted stock) granted to
Executive by the Company prior to the Effective Date or thereafter shall be
referred to herein as an “Award” for the purposes of this Agreement.  Each Award shall hereby be amended to the
extent necessary to provide that Executive’s continued service as a member of
the Board shall be treated the same as had his employment with the Company
continued during such service, including without limitation, for the purposes
of vesting and expiration.


2.3          Paid Time Off.  During the Employment Term, Executive shall
be eligible to accrue paid time off (“PTO”) in accordance with the Company’s
standard policy regarding PTO and in an amount commensurate with other
employees at a level similar to that of the Executive.


2.4          Standard Company
Benefits.  During the Employment
Term, Executive shall be entitled to all rights and benefits for which he is
eligible under the terms and conditions of the standard Company benefits plans
(e.g., health and disability insurance, 401(k) retirement plan, etc.) and other
benefits and incentives which may be in effect from time to time and provided
by the Company to employees at levels similar to the Executive.


2.5          Director Fees.  During that portion of the Board Term which
follows the Employment Term and provided that Executive remains a member of the
Board, Executive shall receive the same compensation as other members of the
Board, which for the term from the 2007 Annual Meeting of Shareholders until
the 2008 Annual Meeting of Shareholders shall be $40,000, pro-rated for a
partial year until the 2008 Annual Meeting of Shareholders.  During that portion of the Board Term which
follows the Employment Term and provided that Executive remains the Chairman of
the Board, Executive shall receive an additional $75,000 each year, pro-rated
for partial years.”


3.             Resignation.  New Section 6.8 shall be inserted in the
Agreement to read in its entirety as follows:


“6.8
       Resignation.  Executive
agrees that he has tendered his resignation as the Company’s President and
Chief Executive Officer, and all other offices of the Company and its
affiliates, effective as of September 4, 2007, and shall execute such further
documents and papers as reasonably necessary to carry out



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and otherwise effectuate
such resignation, provided that such resignation shall for all purposes be
deemed a resignation for Good Reason.”


4.             Section 409A.  New Section 10.2 shall be inserted immediately
after Section 10.1 of the Agreement, with subsequent sections renumbered
accordingly, to read in its entirety as follows:


“This Agreement is
intended to be interpreted and construed in a manner that does not cause
Executive to incur federal tax liability under Section 409A of the Code.”


5.             EXHIBIT A. 
Exhibit A of the Agreement shall be deleted and replaced in
its entirety with the Exhibit A attached to this Amendment.


6.             EXHIBIT B. 
Exhibit B of the Agreement shall be deleted and replaced in
its entirety with the Exhibit B attached to this Amendment.


7.             NO OTHER CHANGES.  Except as provided in this Amendment, the
Agreement shall remain in full force and effect.


8.             DEFINITIONS.       Unless otherwise defined herein, all capitalized
terms shall have the meaning as set forth in the Agreement.


(Signature
Page Follows)



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IN
WITNESS WHEREOF, the parties have executed this Agreement
effective as of the Effective Date above written.


	
  Watson Pharmaceuticals, Inc.

  
	
   

  
	
   

  
	
  By:

  	
          /s/
  David A. Buchen

  	
   

  
	
   

  	
  Name:  David A. Buchen

  
	
   

  	
  Title:  Senior Vice President, General
  Counsel and Secretary

  
	
   

  	
   

  
	
   

  	
   

  
	
  Executive:

  
	
   

  
	
   

  
	
              /s/
  Allen Chao

  	
   

  
	
  Name: Allen Chao

  



 



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EXHIBIT A


COMPENSATION
AND SEVERANCE TERMS SCHEDULE


1.             BASE SALARY


For services to be
rendered under this Agreement during the period of the Employment Term,
Executive shall receive a base salary at an annualized rate of $920,000,
payable in accordance with the Company’s standard payroll practices.


2.             BONUS


Executive’s annual
bonus, if granted, shall be set by the Compensation Committee of the Board at
the beginning of each fiscal year.  For
fiscal year 2007, the Compensation Committee has set the Executive’s annual
bonus target of up to $1,200,000.00, $800,000.00 of which shall be based upon
achievement of certain financial goals, and the remaining $400,000.00 of which
shall be at the discretion of the Compensation Committee, taking into account
achievement of certain objectives.


3.             [Intentionally
Omitted]


4.             SEVERANCE BENEFITS


4.1          Executive’s Termination
of Employment.  Notwithstanding
anything to the contrary in the Agreement, when Executive’s employment with the
Company terminates for any reason (other than in a Change in Control
Termination), such termination shall be deemed a resignation for Good Reason
and the Company shall provide to Executive, within thirty (30) days after the
Effective Date of the Release attached hereto as Exhibit B (as “Effective Date”
is defined in the Release) or such later date as may be required under Section
4.4, as the only severance compensation and benefits all of the following:


(a)           A lump sum severance
payment, subject to standard withholdings or deductions, in an amount equal to
the sum of: (i) twenty-four (24) months of Executive’s then base salary; (ii)
two times Executive’s target bonus to be earned for the year in which
termination occurs or two times the bonus amount paid to the Executive in the
prior year, whichever is greater; and (iii) Executive’s prorated bonus (based
on Executive’s target bonus amount) for the year in which the termination
occurs.


(b)           Continued group health
insurance benefits for Executive and his current spouse (as of the Effective
Date) (“Spouse”) for the rest of their lives (“Coverage Period”); provided, however, that once Executive or his Spouse becomes
Medicare eligible, the Company shall coordinate that individual’s medical
insurance benefits with Medicare, and such benefits shall be secondary to
Medicare.  During the Coverage Period,
the Company, at its election, shall either (i) arrange commercial medical
coverage for Executive and his Spouse (which is (x) comparable to the
medical benefits provided to Executive and his Spouse immediately prior to
commencement of such commercial medical care coverage and (y) mutually
agreeable to the 



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Company and Executive),
or (ii) provide Executive and his Spouse continued coverage under the
Company’s medical insurance plan.


(c)           Outplacement services
for one year with a nationally recognized service selected by the Company.


4.2          [Intentionally
Omitted]


4.3          Change
of Control Termination.  In the event
of a Change of Control Termination at any time during the Employment Term, the
Company shall provide to Executive, within thirty (30) days after the Effective
Date of the Release attached hereto as Exhibit B (as “Effective Date” is
defined in the Release) or such later date as may be required pursuant to
Section 4.4, as the only severance compensation and benefits: (a) the same
severance compensation and benefits provided in Section 4.1 hereof and, (b) any
unvested Awards held by Executive shall have their vesting accelerated in full
so as to become one hundred percent (100%) vested and, if applicable, immediately
exercisable in full as of the date of such termination.


4.4          Delayed
Payments.  Notwithstanding anything
in this Section 4 to the contrary, if the Company determines in good faith that
any payment or benefit under this Section 4, that is payable to Executive on
account of a termination of employment with the Company, constitutes a “deferral
of compensation” under Code Section 409A (as set forth in IRS Notice 2005-1, or
the final regulations issued thereunder by the U.S. Treasury Department (the “Final
Regulations”), and that Executive is a “specified employee” within the meaning
of Code Section 409A(a)(2)(B)(i), then the Company shall delay commencement of
any such payment or benefit until six months after Executive’s termination of
employment with the Company which constitutes a “separation from Service” (as
such term is used in Code Section 409A) or, if later, the Effective Date of the
Release attached hereto as Exhibit B (as “Effective Date” is defined in the
Release) (the “409A Suspension Period”). 
With respect to any benefits to be provided by the Company (such as
continued health care benefits, if any), if necessary in order to avoid any
additional tax or interest under Code Section 409A, Executive shall pay for
such benefits directly during the 409A Suspension Period.  Within 15 calendar days after the end of the
409A Suspension Period, the Company shall pay to Executive a lump sum payment
in cash equal to any payments and benefits (including interest on any such payments
and benefits, at an interest rate equal to the 120-month rolling average yield
to maturity of the index called the “Merrill Lynch U.S. Corporate, A Rated, 15+
Years Index” as of December 31 of the year preceding the year of termination,
for the 409A Suspension Period) that the Company would otherwise have been
required to provide under this Section 4 but for the imposition of the 409A
Suspension Period.  Thereafter, Executive
shall receive any remaining payments and benefits due under this Section 4 in
accordance with the terms of this Section 4 (as if there had not been any
suspension period).  The provisions of
this paragraph shall apply only to the minimum extent required to avoid
Executive’s incurrence of any additional tax or interest under Code Section
409A.  Executive shall execute the
Release which is attached hereto as Exhibit B not later than January 15, 2008,
so that the lump sum severance payment under Section 4.1(a) above will qualify
as a “short-term deferral” that will not be treated as a “deferral of
compensation” under Code Section 409A and the Final Regulations.



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EXHIBIT B


RELEASE AGREEMENT


I understand that
my position with Watson Pharmaceuticals, Inc. (the “Company”) terminated
effective December 31, 2007 (the “Separation Date”).  The Company has agreed that if I choose to
sign this Release, the Company will, within thirty (30) days after the
Effective Date of this Release or such later date as may be required by
Internal Revenue Code Section 409A, pay me certain severance benefits (minus
the standard withholdings and deductions) pursuant to the terms of the Key Employee
Agreement entered into as of June 30, 1999, between myself and the Company, as
amended from time to time (the “Agreement”), and any agreements incorporated
therein by reference.  I understand that
I am not entitled to such severance benefits unless I sign this Release.  I further understand that, regardless of
whether I sign this Release, the Company will pay me all of my accrued base
salary and paid time off through the Separation Date, to which I am entitled by
law.


As a material
inducement for the Company to enter into the Agreement, and in exchange for the
performance of the Company’s obligations under the Agreement provided for
therein, I knowingly and voluntarily waive and release all rights and claims,
known and unknown, which I may have against the Company and/or any of the
Company’s related or affiliated entities or successors, or any of their current
or former officers, directors, managers, employees, agents, insurance carriers,
auditors, accountants, attorneys or representatives, including any and all
charges, complaints, claims, liabilities, obligations, promises, agreements,
contracts, controversies, damages, actions, causes of action, suits, rights,
demands, costs, losses, debts and expenses of any kind.  This includes, but is not limited to, claims
for employment discrimination, harassment, wrongful termination, constructive
termination, violation of public policy, breach of any express or implied
contract, breach of any implied covenant, fraud, intentional or negligent
misrepresentation, emotional distress, defamation, or any other claims relating
to my relationship with the Company. 
This also includes a release of any claims under any federal, state or
local laws or regulations, including, but not limited to: (1) Title VII of the
Civil Rights Act of 1964, 42 U.S.C. § 2000(e) et seq. (race, color, religion,
sex, and national origin discrimination); (2) the Age Discrimination in
Employment Act, as amended, 29 U.S.C. § 621 et seq. (the “ADEA”) (age
discrimination); (3) Section 1981 of the Civil Rights Act of 1866, 42 U.S.C.
1981 (race discrimination); (4) the Equal Pay Act of 1963, 29 U.S.C. § 206
(equal pay); (5) the Fair Labor Standards Act, 29 U.S.C. § 201, et seq. (wage
and hour matters, including overtime pay); (6) COBRA; (7) Executive Order 11141
(age discrimination); (8) Section 503 of the Rehabilitation Act of 1973, 29
U.S.C. § 701, et seq. (disability discrimination); (9) the Employee Retirement
Income Security Act of 1974, as amended, 29 U.S.C. § 1001, et seq. (employee
benefits); (10) Title I of the Americans with Disabilities Act (disability
discrimination); and (11) any applicable state law counterpart of any of the
foregoing, including, without limitation, including the California Fair
Employment and Housing Act, the California Family Rights Act, claims for wages
under the California Labor Code. 
Notwithstanding the generality of the foregoing, I do not release (i)
claims for unemployment compensation or any state disability insurance benefits
pursuant to the terms of applicable state law; (ii) claims to continued
participation in certain of the Company’s group benefit plans pursuant to the
terms and conditions of COBRA; (iii) claims to any severance payment or benefit
entitlements vested as the date of separation of my employment pursuant to
written terms of the Agreement or any employee benefit plan of the Company or
any affiliate or subsidiary of the Company; (iv) claims to any equity awards
which continue to vest following the separation of my employment, pursuant to
the written terms of the applicable equity compensation plan, the agreements
evidencing such awards and the Agreement; (iv) my right to bring to the
attention of the Equal Employment Opportunity Commission claims of
discrimination; provided, however, that I do release my right to secure any
damages for alleged discriminatory treatment; and (v) my right under applicable
law and the Company’s D&O policy to seek indemnity for acts committed, or
omissions, within the course and scope of my employment duties. I













ACKNOWLEDGE THAT I
HAVE BEEN ADVISED OF AND AM FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL
CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: “A GENERAL RELEASE DOES NOT
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR
HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER
MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”  BEING AWARE OF SAID CODE SECTION, I HEREBY
EXPRESSLY WAIVE ANY RIGHTS I MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER
STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT.


If I am forty (40)
years of age or older as of the Separation Date, I acknowledge that I am
knowingly and voluntarily waiving and releasing any rights I may have under the
federal Age Discrimination in Employment Act of 1967, as amended (“ADEA”).  I also acknowledge that this paragraph, and
this Release, are written in a manner calculated to be understood by me, and
the consideration given for the waiver in the above paragraph is in addition to
anything of value to which I was already entitled.  I have been advised by this writing, as
required by the ADEA that:  (a) my waiver
and release do not apply to any claims that may arise after my signing of this
Release; (b) I should consult with an attorney prior to executing this Release;
(c) I have twenty-one (21) days (forty-five (45) days in the event of a group
termination) within which to consider this Release (although I may choose to
voluntarily execute this Release earlier); (d) I have seven (7) days following
the execution of this release to revoke the Release; and (e) this Release will
not be effective until the eighth day after this Release has been signed both
by me and by the Company
(“Effective Date”).


I acknowledge that I remain bound by the Employee Proprietary
Information and Invention Agreement which I signed in connection with my
employment (“Invention Agreement”) and that the provisions of the Invention
Agreement shall remain in full force and effect. In accordance with my existing
and continuing obligations under the Invention Agreement, I have returned to
the Company all materials required to be returned pursuant to the Invention
Agreement, as well as any other Company property in my possession.  In consideration for the severance benefits I
am receiving hereunder, I agree that I will reasonably cooperate with the
Company after the Separation Date to assure the smooth transition of pending
matters and to answer questions which may arise from time to time regarding my
former duties and responsibilities. 
Effective as of the Separation Date, I resign any and all offices and
directorships with the Company and any of its affiliates except as otherwise
provided in the Agreement, and will execute all documents reasonably requested
by the Company or its affiliates to effectuate such resignations.  Further, I agree that I will not hereafter
disparage the Company or any of the Releasees, either orally or in writing, to
any person or entity.  The Company agrees
that its officers and directors will not disparage me, either orally or in
writing, to any person or entity.


Agreed:


	
   

  	
   

  	
   

  
	
                 Date

  	
  ALLEN CHAO

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
                Date

  	
  WATSON PHARMACEUTICALS, INC.

  



 



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