UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________

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

For the quarterly period ended ~~March~~June 3130, ~~2006~~2008 or

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

For the transition period from to .

Commission File Number: 1-9813

GENENTECH, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

94-2347624

(I.R.S. Employer Identification Number)

1 DNA Way, South San Francisco, California 94080-4990

(Address of principal executive offices and Zip Code)

(650) 225-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller ~~large~~reporting ~~accelerated filer~~company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

Class	Number of Shares Outstanding
Common Stock $0.02 par value	1,~~053~~055,~~627~~649,~~146~~792 Outstanding at ~~April~~July 2631, ~~2006~~2008

GENENTECH, INC.

TABLE OF CONTENTS

		Page No.
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Statements of Income— for the three months ended March 31, 2006 and 2005	3
	Condensed Consolidated Statements of Income— for the three months and six months ended June 30, 2008 and 2007	3
	Condensed Consolidated Statements of Cash Flows— for the three months ended March 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows— for the six months ended June 30, 2008 and 2007	4
	Condensed Consolidated Balance Sheets— March 31, 2006 and December 31, 2005	5
	Condensed Consolidated Balance Sheets— June 30, 2008 and December 31, 2007	5
	Notes to Condensed Consolidated Financial Statements	6~~-15~~–17
	Report of Independent Registered Public Accounting Firm	1618
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~17-36~~19–45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3746
Item 4.	Controls and Procedures	3746
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	3847
Item 1A.	Risk Factors	~~38-49~~47–60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5060–61
Item 6.	Exhibits	50
Item 4.	Submission of Matters to a Vote of Security Holders	61–62
SIGNATURES		51
Item 6.	Exhibits	62
SIGNATURES		63

In this report, “Genentech,” “we,” “us,” and “our” refer to Genentech, Inc.; and its consolidated subsidiaries. “Common Stock” refers to Genentech’s Common Stock, par value $0.02 per share, “Special Common Stock” refers to Genentech’s callable putable ~~Common~~common ~~Stock~~stock, par value $0.02 per share, all of which was redeemed by Roche Holdings, Inc. (~~or “Roche”~~RHI) on June 30, 1999.

We own or have rights to various copyrights, trademarks, and trade names used in our business, including the following: Activase® (alteplase, recombinant) tissue-plasminogen activator; Avastin® (bevacizumab) anti-VEGF antibody; Cathflo® Activase® (alteplase for catheter clearance); Genentech®; Herceptin® (trastuzumab) anti-HER2 antibody; Lucentis™ ® (ranibizumab~~, rhuFab V2~~) anti-VEGF antibody fragment; Nutropin® (somatropin ([rDNA origin)] for injection) growth hormone; Nutropin AQ® and Nutropin AQ Pen® (somatropin ([rDNA origin)] for injection) liquid formulation growth hormone; ~~Nutropin Depot® (somatropin (rDNA origin) for~~ ~~injectable suspension) encapsulated sustained-release growth hormone; Omnitarg™ (pertuzumab) HER dimerization inhibitor; Protropin® (somatrem for injection) growth hormone;~~ Pulmozyme® (dornase alfa, recombinant) inhalation solution; Raptiva® (efalizumab) anti-CD11a antibody; and TNKase® (tenecteplase) single-bolus thrombolytic agent. Rituxan® (rituximab) anti-CD20 antibody is a registered trademark of Biogen Idec Inc.; Tarceva® (erlotinib) is a registered trademark of OSI Pharmaceuticals, Inc.; and Xolair® (omalizumab) anti-IgE antibody is a registered trademark of Novartis AG. This report also includes other trademarks, service marks, and trade names of other companies.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENENTECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	Three Months Ended June 30,							Six Months Ended June 30,
	2006			2005
	2008				2007			2008			2007
Revenues
Revenue
Product sales (including amounts from related parties: 2006-$59; 2005-$54)	$	1,644		$	1,186
Product sales (including amounts from related parties: three months—2008–$146; 2007–$256; six months—2008–$286; 2007–$522)	$	2,536			$	2,443		$	4,915		$	4,773
Royalties (including amounts from a related party: 2006-$167; 2005-$104)		286			232
Royalties (including amounts from related parties: three months—2008–$451; 2007–$296; six months—2008–$874; 2007–$557)		629				484			1,244			903
Contract revenue (including amounts from related parties: 2006-$28; 2005-$26)		56			44
Contract revenue (including amounts from related parties: three months—2008–$35; 2007–$34; six months—2008–$66; 2007–$104)		71				77			140			171
Total operating revenues		1,986			1,462
Total operating revenue		3,236				3,004			6,299			5,847
Costs and expenses
Cost of sales (including amounts for related parties: 2006 and 2005-$50)		262			256
Cost of sales (including amounts for related parties: three months—2008–$90; 2007–$140; six months—2008–$156; 2007–$265)		441				429			831			821
Research and development (including amounts for related parties: 2006-$53; 2005-$44) (including contract related: 2006-$36; 2005-$27)		374			243
Research and development (including amounts associated with related party collaborations: three months—2008–$89; 2007–$79; six months—2008–$168; 2007–$147) (including amounts where reimbursement was recorded as contract revenue: three months—2008–$47; 2007–$60; six months—2008–$97; 2007–$106)		649				603			1,266			1,213
Marketing, general and administrative		~~441~~559			~~310~~	532			1,076			1,023
Collaboration profit sharing (including amounts for a related party: 2006-$43; 2005-$24)		226			176
Collaboration profit sharing (including related party amounts: three months—2008–$48; 2007–$49; six months—2008–$89; 2007–$96)		313				277			592			529
Recurring charges related to redemption		26			35
Recurring amortization charges related to redemption and acquisition		43				26			86			52
Special items: litigation-related		132			11	13			(300	)		26
Total costs and expenses		12,~~342~~007			~~1,031~~	1,880			3,551			3,664
Operating income		~~644~~1,229			~~431~~	1,124			2,748			2,183
Other income (expense):
Interest and other income, net		5393			18	75			166			149
Interest expense		(1915	)		(3	)(17	)		(32	)		(35	)
Total other income, net		3478			15	58			134			114
Income before taxes		~~678~~1,307			~~446~~	1,182			2,882			2,297
Income tax provision		~~257~~525			~~162~~	435			1,118			844
Net income	$	~~421~~782		$	~~284~~$	747		$	1,764		$	1,453
Earnings per share
Basic	$	0.4074		$	~~0.27~~$	0.71		$	1.68		$	1.38
Diluted	$	0.3973		$	~~0.27~~$	0.70		$	1.65		$	1.36
Shares used to compute basic earnings per share		1,~~054~~051			~~1,047~~	1,053			1,052			1,053
Shares used to compute diluted earnings per share		1,~~075~~064			~~1,067~~	1,070			1,066			1,071

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2006			2005
	2008				2007
Cash flows from operating activities
Net income	$	~~421~~1,764		$	~~284~~$	1,453
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		96285			88	215
Employee stock-based compensation		74208			-	203
Deferred income taxes		~~(50~~217	)		~~(21~~	)(103	)
Deferred revenue		10(7	)		(9	)(29	)
Litigation-related liabilities		13			13
Litigation-related special items		(300	)			26
Tax benefit from employee stock options		-			51
Excess tax benefit from stock-based compensation arrangements		(32	)			(127	)
Excess tax benefit from stock-based compensation arrangements		(49	)		-
Gain on sales of securities available-for-sale and other		(52	)			(12	)
Gain on sales of securities available-for-sale and other		(3	)		(1	)
Write-downs of securities available-for-sale and other		41				4
Write-down of securities available-for-sale and other		-			4
Loss on property and equipment dispositions		3				30
Changes in assets and liabilities:
Receivables and other current assets		(9659	)		~~(103~~	)(115	)
Inventories		~~(86~~83	)		25	(180	)
Investments in trading securities		(716	)		(1	)(72	)
Accounts payable, other accrued liabilities, and other long-term liabilities		~~139~~(455	)		55	132
Net cash provided by operating activities		462			385
Accrued litigation		(476	)			–
Cash flows from investing activities
Net cash provided by operating activities		1,204				1,425
Purchases of securities available-for-sale		(454	)		(72	)
Cash flows from investing activities
Proceeds from sales and maturities of securities available-for-sale		193			162
Purchases of securities available-for-sale		(953	)			(465	)
Capital expenditures		(253	)		(144	)
Proceeds from sales of securities available-for-sale		837				335
Change in other assets		(13	)		(8	)
Proceeds from maturities of securities available-for-sale		159				261
Net cash used in investing activities		(527	)		(62	)
Capital expenditures		(398	)			(475	)
Cash flows from financing activities
Change in other intangible and long-term assets		24				(8	)
Stock issuances under employee stock plans		89			106
Net cash used in investing activities		(331	)			(352	)
Stock repurchases		(227	)		(156	)
Cash flows from financing activities
Excess tax benefit from stock-based compensation arrangements		49			-
Stock issuances		228				276
Net cash used in financing activities		(89	)		(50	)
Stock repurchases		(756	)			(666	)
Net (decrease) increase in cash and cash equivalents		(154	)		273
Excess tax benefit from stock-based compensation arrangements		32				127
Cash and cash equivalents at beginning of period		1,225			270
Net cash used in financing activities		(496	)			(263	)
Cash and cash equivalents at end of period	$	1,071		$	543
Net increase in cash and cash equivalents		377				810
Supplemental cash flow data
Cash and cash equivalents at beginning of period		2,514				1,250
Non-cash investing and financing activities
Cash and cash equivalents at end of period	$	2,891			$	2,060
Capitalization of construction in progress related to financing lease transaction	$	27		$	44
Supplemental cash flow data
Exchange of note receivable for a prepaid royalty and other long-term asset		-			29
Cash paid during the period for:
Income taxes	$	1,030			$	806
Interest		31				31
Non-cash investing and financing activities
Capitalization of construction in progress related to financing lease transactions		75				101

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	March 31, 2006			December 31, 2005
	June 30, 2008				December 31, 2007
Assets
Current assets
Cash and cash equivalents	$	12,~~071~~891		$	~~1,225~~$	2,514
Short-term investments		1,~~213~~614			~~1,140~~	1,461
Accounts receivable—product sales (net of allowances: 2006-$93; 2005-$83; including amounts from related parties: 2006-$24; 2005-$4)		615			554
Restricted cash and investments		788				788
Accounts receivable—royalties (including amounts from related party: 2006-$199; 2005-$173)		332			297
Accounts receivable—product sales (net of allowances of: 2008–$145; 2007–$116; including amounts from related parties: 2008–$46; 2007–$2)		889				847
Accounts receivable—other (net of allowances: 2006-$1; 2005-$1; including amounts from related parties: 2006-$129; 2005-$132)		187			199
Accounts receivable—royalties (including amounts from related parties: 2008–$570; 2007–$463)		732				620
Inventories		804			703
Accounts receivable—other (including amounts from related parties: 2008–$96; 2007–$233)		200				299
Prepaid expenses and other current assets		311			268
Inventories		1,406				1,493
Total current assets		4,533			4,386
Deferred tax assets		385				614
Long-term marketable debt and equity securities		1,658			1,449
Prepaid expenses		129				100
Property, plant and equipment, net		3,565			3,349
Other current assets		19				17
Goodwill		1,315			1,315
Total current assets		9,053				8,753
Other intangible assets		548			574
Long-term marketable debt and equity securities		1,832				2,090
Restricted cash and investments		735			735
Property, plant and equipment, net		5,266				4,986
Other long-term assets		358			339
Goodwill		1,577				1,577
Total assets	$	12,712		$	12,147
Other intangible assets		1,083				1,168
Liabilities and stockholders’ equity
Other long-term assets		308				366
Current liabilities
Total assets	$	19,119			$	18,940
Accounts payable (including amounts to related parties: 2006-$3; 2005-$1)	$	328		$	339
Liabilities and stockholders’ equity
Deferred revenue		45			44
Current liabilities
Taxes payable		318			62
Accounts payable (including amounts to related parties: 2008–$8; 2007–$2)	$	223			$	420
Other accrued liabilities (including amounts to related parties: 2006-$148; 2005-$132)		1,059			1,215
Commercial paper		599				599
Total current liabilities		1,750			1,660
Deferred revenue (including amounts from related parties: 2008–$67; 2007–$63)		81				73
Long-term debt		2,103			2,083
Taxes payable		7				173
Deferred revenue		229			220
Accrued litigation		–				776
Litigation-related and other long-term liabilities		736			714
Other accrued liabilities (including amounts to related parties: 2008–$218; 2007–$230)		1,795				1,877
Total liabilities		4,818			4,677
Total current liabilities		2,705				3,918
Commitments and contingencies
Long-term debt		2,475				2,402
Stockholders’ equity
Deferred revenue (including amounts from related parties: 2008–$374; 2007–$384)		404				418
Common stock		21			21
Other long-term liabilities		250				297
Additional paid-in capital		9,468			9,263
Total liabilities		5,834				7,035
Accumulated other comprehensive income		255			253
Commitments and contingencies
Accumulated deficit, since June 30, 1999		(1,850	)		(2,067	)
Stockholders’ equity
Total stockholders’ equity		7,894			7,470
Common stock		21				21
Total liabilities and stockholders’ equity	$	12,712		$	12,147
Additional paid-in capital		10,878				10,695
Accumulated other comprehensive income		105				197
Retained earnings		2,281				992
Total stockholders’ equity		13,285				11,905
Total liabilities and stockholders’ equity	$	19,119			$	18,940

See Notes to Condensed Consolidated Financial Statements.

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GENENTECH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.

Summary of Significant Accounting Policies

Basis of Presentation

We prepared the Condensed Consolidated Financial Statements following the requirements of the United States (U.S.) Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by ~~accounting~~U.S. ~~principles~~ generally accepted ~~in the~~ ~~United~~accounting ~~States~~principles ~~of America~~ (~~or “~~GAAP”) can be condensed or omitted. The ~~information~~ information included in this Quarterly Report on Form 10-Q should be read in ~~conjunction~~ conjunction with the ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2005~~ 2007. In the opinion of management, the financial statements include all adjustments, consisting only of normal and recurring adjustments, ~~that are~~ considered necessary for the fair presentation of our financial position and operating results.

~~Revenues~~Revenue, expenses, assets, and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those ~~expected~~reported for the full year or any future period.

Principles of Consolidation

The ~~Condensed~~consolidated ~~Consolidated~~financial ~~Financial~~statements ~~Statements~~ include the accounts of Genentech and all of our wholly owned subsidiaries. Material intercompany accounts and ~~transactions~~ transactions have been eliminated.

Use of Estimates ~~and Reclassifications~~

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. ~~Actual~~ Actual results could differ materially from ~~those~~the estimates.

~~Certain~~Recent ~~reclassifications~~Accounting ~~of prior period amounts have been made to our Condensed Consolidated Financial Statements to conform to the current period presentation.~~Pronouncements

In February 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Position (FSP) No. 157-2, which delays the effective date of FASB Statement of Financial Accounting Standard (FAS) No. 157, “Fair Value Measurements” (FAS 157) for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (items that are remeasured at least annually). The FSP defers the effective date of FAS 157 for non-financial assets and non-financial liabilities until our fiscal year beginning on January 1, 2009. We do not expect the adoption of this FSP to have a material effect on our consolidated financial statements.

In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (FAS 161). FAS 161 requires us to provide greater transparency about how and why we use derivative instruments, how the instruments and related hedged items are accounted for under FAS 133, and how the instruments and related hedged items affect our financial position, results of operations, and cash flows. FAS 161 is effective for us beginning on January 1, 2009. We do not expect the adoption of FAS 161 to have a material effect on our consolidated financial statements, but we will be required to expand our disclosure regarding our derivative instruments.

Revenue Recognition

We recognize revenue from the sale of our products, royalties earned, and contract arrangements. Certain of our revenue arrangements that contain multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has standalone value to the customer and whether there is objective

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and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

The Avastin Patient Assistance Program is a voluntary program that enables eligible patients who have received 10,000 milligrams (mg) of Avastin in a 12-month period to receive free Avastin in excess of the 10,000 mg during the remainder of the 12-month period. Based on the current wholesale acquisition cost, 10,000 mg is valued at $55,000 in gross revenue. We defer a portion of our gross Avastin product sales revenue to reflect our estimate of the commitment to supply free Avastin to patients who elect to enroll in the program. To calculate our deferred revenue, we estimate several factors, most notably: the number of patients who are currently being treated for U.S. Food and Drug Administration (FDA)-approved indications and the start date of their treatment regimen, the extent to which patients may elect to enroll in the program, the number of patients who meet the financial eligibility requirements of the program, and the duration and extent of treatment for the FDA-approved indications, among other factors. We will continue to update our estimates for each reporting period as new information becomes available. Based on these estimates, we defer a portion of the Avastin revenue on product vials sold through normal commercial channels. The deferred revenue is recognized when free Avastin vials are delivered or after the associated patient eligibility period has passed.

Earnings Per Share

Basic earnings per share (~~or “~~EPS”) are computed based on the weighted-average number of of shares of our Common Stock outstanding. Diluted EPS are computed based on the weighted-average number of shares of our Common Stock and other dilutive securities.

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations (in millions):

	Three Months Ended March 31,
	Three Months Ended June 30,					Six Months Ended June 30,
	2006		2005
	2008			2007		2008		2007
Numerator:
Net income	$	~~421~~782	$	~~284~~$	747	$	1,764	$	1,453
Denominator:
Weighted-average shares outstanding used to compute basic EPS		1,054		1,047
Weighted-average shares outstanding used to compute basic earnings per share		1,051			1,053		1,052		1,053
Effect of dilutive stock options		2113		20	17		14		18
Weighted-average shares outstanding and dilutive securities used to compute diluted EPS		1,075		1,067
Weighted-average shares outstanding and dilutive securities used to compute diluted earnings per share		1,064			1,070		1,066		1,071

Outstanding employee stock options to purchase 49 million shares of our Common Stock were excluded from the computation of diluted EPS for the second quarter and first six months of 2008 because the effect would have been anti-6-dilutive.

Employee stock options to purchase approximately 19 million shares of our Common Stock were outstanding in the first quarter of 2006. These employee stock options were excluded from the computation of diluted EPS because the effect would have been anti-dilutive.

Comprehensive Income

Comprehensive income iscomprises ~~comprised of~~ net income and other comprehensive income (~~or “~~OCI”). OCI ~~includes~~ includes certain changes in stockholders’ equity that are excluded from net income. Specifically, we include in OCI changes in the estimated fair value of derivatives designated as effective cash flow hedges, ~~and~~ unrealized gains and losses on our securities available-for-sale, ~~securities~~and the gains or losses and prior service costs or credits related to our post-retirement benefit plan that arise during the period but are not recognized as components of net periodic benefit cost.

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The components of accumulated OCI, net of taxes, were as follows (in millions):

	March 31, 2006			December 31, 2005
	June 30, 2008				December 31, 2007
Net unrealized gains on securities available-for-sale	$	~~233~~161		$	~~230~~$	219
Net unrealized gains on cash flow hedges		22			23
Net unrealized losses on cash flow hedges		(48	)			(14	)
Accumulated other comprehensive income	$	255		$	253
Accumulated changes in post-retirement benefit obligation		(8	)			(8	)
Accumulated other comprehensive income	$	105			$	197

The activity in comprehensive income, net of income taxes, was as follows (in millions):

	Three Months Ended March 31,
	Three Months Ended June 30,							Six Months Ended June 30,
	2006			2005
	2008				2007			2008			2007
Net income	$	~~421~~782		$	~~284~~$	747		$	1,764		$	1,453
Change in unrealized gains (losses) on securities available-for-sale		3			(77	)
Decrease in unrealized gains on securities available-for-sale		(44	)			(14	)		(58	)		(10	)
Change in unrealized gains (losses) on derivatives		(1	)		13
Decrease (increase) in unrealized losses on cash flow hedges		26				8			(34	)		11
Comprehensive income	$	423		$	220
Comprehensive income, net of income taxes	$	764			$	741		$	1,672		$	1,454

~~Derivative~~The ~~Financial~~decrease ~~Instruments~~in net unrealized losses on cash flow hedges during the second quarter of 2008 was primarily due to the strengthening of the U.S. dollar during this period. The increase in net unrealized losses on cash flow hedges during the first six months of 2008 was primarily due to the overall weakening of the U.S. dollar during this period, despite the strengthening that occurred during the second quarter. In the periods in which the hedged transaction affects earnings, any gains or losses on cash flow hedges will be offset by revenue denominated in the underlying foreign currency.

AtFair ~~March~~Value ~~31, 2006, estimated net gains on cash flow hedge derivative instruments, consisting~~ of ~~foreign~~Financial ~~currency exchange options and marketable equity security collars, expected to be reclassified from accumulated OCI to “other income, net” during the next twelve months are $23 million.~~ Instruments

The fair value of our financial instruments reflects the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report reflect the information available to us as of June 30, 2008 and December 31, 2007. See Note 4, “Fair Value Measurements.”

Derivative Instruments

Our derivative instruments, designated as cash flow hedges, consist of foreign currency exchange options and forwards. As of June 30, 2008, unrealized net losses of approximately $50 million were expected to be reclassified from accumulated OCI to earnings within the next 12 months. If realized, these amounts are expected to be offset by increases in the underlying foreign-currency-denominated royalty revenue over this same 12-month period.

Note 2.

Employee Stock-Based Compensation

~~On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share~~Stock-Based ~~Payment” (or “FAS 123R”), which supersedes our~~ ~~previous~~Compensation ~~accounting~~Expense under ~~APB Opinion No. 25, “Accounting for Stock Issued to Employees” (or “APB 25”).~~ FAS 123R requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options and stock issued under our employee stock plans. FAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our Condensed Consolidated Statements of Income. Also, certain of these costs are capitalized into inventory on our Condensed Consolidated Balance Sheets, and generally will be recognized as an expense when the related products are sold. We adopted FAS 123R using the modified prospective transition method, which requires that compensation expense be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption. The modified prospective transition method does not require restatement of prior periods to reflect the impact of FAS 123R.

InThe ~~November~~components ~~2005,~~of ~~the~~employee ~~Financial~~stock-based ~~Accounting~~compensation ~~Standards~~expense ~~Board~~recognized ~~(or~~under ~~“FASB”)~~FAS ~~issued FSP~~ No. ~~123R-3~~ 123(R), “~~Transition Election Related to Accounting for the Tax Effects of~~ Share-Based Payment ~~Awards.~~” ~~We have adopted the simplified method to calculate the beginning balance of the additional paid-in-capital~~ (orFAS ~~“APIC”~~123R), ~~pool~~were ofas ~~the~~follows ~~excess~~(in millions):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of sales	$	18	$	16	$	41	$	33
Research and development		38		39		80		77
Marketing, general and administrative		41		47		87		93
Total employee stock-based compensation expense	$	97	$	102	$	208	$	203

tax benefit, and to determine the subsequent impact on the APIC pool and Condensed Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon our adoption of FAS 123R.

Prior to the adoption of FAS 123R, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under FAS No. 123, “Accounting for Stock-Based Compensation” (or “FAS 123”). Under the intrinsic value method, no employee stock-based compensation expense had been recognized in our Condensed Consolidated Statements of Income for any period prior to our adoption of FAS 123R on January 1, 2006, as the exercise price of the stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Employee Stock Plans

We currently have an employee stock purchase plan, adopted in 1991 and amended thereafter (or “the 1991 Plan”). The 1991 Plan allows eligible employees to purchase Common Stock at 85% of the lower of the fair market value of the Common Stock on the grant date or the fair market value on the purchase date. The offering period under the 1991 Plan is currently 15 months, and the purchase price is established during each new offering period. Purchases are limited to 15% of each employee’s eligible compensation and subject to certain Internal Revenue Service restrictions. All of our full-time employees are eligible to participate in the 1991 Plan. Of the 52,400,000 shares of Common Stock reserved for issuance under the 1991 Plan, 45,640,634 shares have been issued as of March 31, 2006.

We currently grant options under a stock option plan adopted in 1999 and amended thereafter (or “the 1999 Plan”), that allows for the granting of non-qualified stock options, incentive stock options and stock purchase rights to our employees, directors and consultants. Incentive stock options may only be granted to employees under this plan. Generally, non-qualified options and incentive options have a maximum term of 10 years, and options vest in increments over four years from the date of grant, although we may grant options with different vesting terms from time to time. When an employee over the age of 65 retires, the number of options that would have vested in the 12 month period following the retirement date, if the retiree had remained an employee, automatically becomes fully vested. The expiration date of the exercisable options remains the original expiration date at the time the options were granted. Upon employee termination, unexercised options will expire at the end of three months. No stock purchase rights or incentive stock options have been granted under the 1999 Plan to date.

Adoption of FAS 123R

Employee stock-based compensation expense recognized in the first quarter of 2006 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Employee stock-based compensation expense recognized under FAS 123 was as follows (in millions, except for per share data):

	Three Months Ended March 31, 2006
Research and development	$	33
Marketing, general and administrative		41
Total employee stock-based compensation expense		74
Tax benefit related to employee stock-based compensation expense		(27	)
Net effect on net income	$	47
Effect on earnings per share:
Basic	$	0.04
Diluted	$	0.04

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As of ~~March~~June 3130, ~~2006~~2008, total compensation cost related to ~~nonvested~~unvested stock options ~~not~~ not yet recognized was $~~734~~ 661 million, which is expected to be allocated to expense and production costs over a weighted-average period of 27 31 months. The portion allocated to production costs will be recognized as cost of sales (COS) when the related products are estimated to be sold.

The carrying value of inventory on our Condensed Consolidated Balance ~~Sheet~~Sheets as of ~~March~~June 30, 2008 and December 31, ~~2006~~2007 ~~includes~~included employee stock-based compensation costs of $1668 million~~. Substantially~~ ~~all~~and of$72 the products sold in the first quarter of 2006 were manufactured in previous periods when we did not include employee stock-based compensation expense in our production costs. In future periodsmillion, when product manufactured after the adoption of FAS 123R is sold or written off, or reserves are required for obsolescence or lack of demand, we will recognize employee stock-based compensation expense in cost of salesrespectively.

The following pro forma net income and EPS were determined as if we had accounted for employee stock-based compensation for our employee stock plans under the fair value method prescribed by FAS 123 in prior periods and had capitalized certain costs into inventory manufactured in those prior periods, with the resulting impact on cost of sales for the quarter ended March 31, 2006 when previously manufactured products were sold. (In millions, except for per share data):

	Three Months Ended March 31, 2006
Net income as reported	$	421
Deduct: Total employee stock-based compensation expense includable in cost of sales, net of related tax effects		(8	)
Pro forma net income	$	413
Earnings per share:
Basic-as reported	$	0.40
Basic-pro forma	$	0.39
Diluted-as reported	$	0.39
Diluted-pro forma	$	0.38

Pro Forma Information for Period Prior to Adoption of FAS 123R

	Three Months Ended March 31, 2005
Net income as reported	$	284
Deduct: Total employee stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects		(40	)
Pro forma net income	$	244
Earnings per share:
Basic-as reported	$	0.27
Basic-pro forma	$	0.23
Diluted-as reported	$	0.27
Diluted-pro forma	$	0.22

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Valuation Assumptions

The employee stock-based compensation expense recognized under FAS 123R ~~and presented in the pro forma disclosure required under FAS 123~~ was ~~determined~~ determined using the Black-Scholes option valuation model. Option ~~valuation~~ valuation models require the input of subjective assumptions, and these assumptions can vary over time. The weighted-average assumptions used ~~are~~were as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,							Six Months Ended June 30,
	2006			2005
	2008				2007			2008			2007
Risk-free interest rate		43.63	%		~~4.0~~	%4.8	%		3.0	%		4.7	%
Dividend yield		0.0	%		~~0.0~~	%0.0	%		0.0	%		0.0	%
Expected volatility		2925.0	%		~~32.0~~	%27.0	%		25.0	%		27.0	%
Expected term (years)		45.20			~~4.2~~	4.6			5.0			4.6

Due to the redemption of our Special Common Stock in June 1999 by Roche Holdings, Inc. (RHI), there is limited historical information available to support our estimate of certain assumptions required to value our employee stock options ~~and the stock issued under our employee stock purchase plan~~. In developing our estimate of expected term, we have ~~determined~~assumed that our recent historical stock option exercise experience is a relevant indicator of future exercise patterns. We ~~also take into account other available information, including industry averages. We primarily~~ base our determination of expected volatility predominantly ~~through~~on ~~our assessment of~~ the implied volatility of our ~~Common~~traded ~~Stock.~~options ~~Implied~~with consideration ~~volatility~~of isour ~~the~~historical ~~volatility~~volatilities ~~assumption~~and ~~inherent in~~ the ~~market~~volatilities ~~prices~~ of acomparable ~~company’s traded options~~companies.

Stock Option Activity

The following is a summary of option activity for the first quarter of 2006 (shares in millions):

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted- Average Exercise Price
December 31, 2005		84			83		$	46.64
Grants		(1	)		1			88.10
Exercises		-			(2	)		30.38
Cancellations		1			(1	)		57.63
March 31, 2006		84			81		$	47.43

The intrinsic value of options exercised during the first quarters of 2006 and 2005 was $125 million and $117 million, respectively. The estimated fair value of shares vested during the first quarters of 2006 and 2005 was $90 million and $40 million, respectively. The weighted-average estimated fair value of stock options granted during the three months ended March 31, 2006 and 2005 was $27.34 and $15.95, respectively, based on the assumptions in the Black-Scholes valuation model discussed above.

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The following table summarizes outstanding and exercisable options at March 31, 2006 (in millions, except exercise price data):

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares Outstanding		Weighted-Average Remaining Contractual Life (in years)		Weighted-Average Exercise Price		Number of Shares Outstanding		Weighted-Average Remaining Contractual Life (in years)		Weighted-Average Exercise Price
$6.27 - $8.89		0.5		5.61	$	7.71		0.5		5.61	$	7.71
$10.00 - $14.35		13.7		5.68	$	13.73		11.2		5.51	$	13.61
$15.04 - $22.39		9.0		5.09	$	20.82		8.7		5.04	$	20.91
$22.88 - $33.00		0.3		5.07	$	27.53		0.3		5.07	$	27.53
$35.63 - $53.23		36.9		7.53	$	46.79		18.0		6.93	$	44.71
$53.95 - $75.90		1.5		8.53	$	59.26		0.5		8.34	$	56.09
$81.15 - $98.80		18.9		9.49	$	86.12		-		9.54	$	86.04
		80.8						39.2

At March 31, 2006, the aggregate intrinsic value of the outstanding options was $3,032 million and the aggregate intrinsic value of the exercisable options was $2,136 million.

Stock Repurchase Program

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2006 (see also Note 7, “Subsequent Event” for a discussion of the April 2006 extension), we are authorized to repurchase up to 100 million shares of our Common Stock for an aggregate amount of up to $6.0 billion through June 30, 2007. During the first quarter of 2006, we repurchased approximately 3 million shares at an aggregate cost of $227 million. Since the program’s inception, we have repurchased approximately 52 million shares at a total price of $3.6 billion. We intend to use the repurchased stock to offset dilution caused by the issuance of shares in connection with our employee stock plans and also to maintain Roche’s minimum percentage ownership interest in our stock.

Note 3.

Condensed Consolidated Financial Statement Detail

Inventories

The components of inventories were as follows (in millions):

	March 31, 2006		December 31, 2005
	June 30, 2008			December 31, 2007
Raw materials and supplies	$	89125	$	79$	119
Work in process		463		438
Work-in-process		1,113			1,062
Finished goods		~~252~~168		~~186~~	312
Total	$	~~804~~1,406	$	~~703~~$	1,493

Included in work -in -process ~~are~~as ~~approximately~~of June ~~$47 million at March 31~~30, ~~2006~~2008 were ~~and~~approximately $~~31 million~~21 ~~at December 31, 2005 for pre-approval inventories of Lucentis, in~~million ~~anticipation~~ of ~~the~~inventories ~~product~~manufactured ~~launch,~~through ~~and for~~ a ~~qualification~~process ~~campaign~~that atis ~~a contract~~awaiting ~~manufacturing facility. During the first quarter of 2006, approximately~~regulatory ~~$16 million in employee stock-based compensation costs were capitalized in inventory pursuant to FAS 123R~~licensure.

Note 4.

Fair Value Measurements

On January 1, 2008, we adopted FAS 157, which established a framework for measuring fair value under GAAP and clarified the definition of fair value within that framework. FAS 157 does not require assets and liabilities that were previously recorded at cost to be recorded at fair value. For assets and liabilities that are already required to be disclosed at fair value, FAS 157 introduced, or reiterated, a number of key concepts that form the foundation of the fair value measurement approach to be used for financial reporting purposes. The fair value of our financial instruments reflects the amounts that we estimate we would receive in connection with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 also established a fair value hierarchy that prioritizes the inputs used in valuation

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techniques into the following three levels:

Level 1—quoted prices in active markets for identical assets and liabilities

Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3—unobservable inputs

The adoption of FAS 157 did not have an effect on our financial condition or results of operations, but FAS 157 introduced new disclosures about how we value certain assets and liabilities. Much of the disclosure focuses on the inputs used to measure fair value, particularly in instances in which the measurement uses significant unobservable (Level 3) inputs. A substantial majority of our financial instruments are valued using quoted prices in active markets or are based on other observable inputs.

The following table sets forth the fair value of our financial assets and liabilities measured on a recurring basis, including those that are pledged as collateral or are restricted. Assets and liabilities are measured on a recurring basis if they are remeasured at least annually.

	June 30, 2008				December 31, 2007
(In millions)	Assets		Liabilities		Assets		Liabilities
Cash and cash equivalents	$	2,891	$	–	$	2,514	$	–
Restricted cash		788		–		788		–
Short-term investments		1,614		–		1,461		–
Long-term marketable debt securities		1,458		–		1,674		–
Total fixed income investment portfolio		6,751		–		6,437		–

Long-term marketable equity securities		374		–		416		–
Total derivative financial instruments		28		82		30		19
Total	$	7,153	$	82	$	6,883	$	19

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of June 30, 2008 (in millions).

	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	1,939	$	952	$	–	$	2,891
Trading securities		84		947		2		1,033
Securities available-for-sale		205		2,467		155		2,827
Equity securities		374		–		–		374
Derivative financial instruments		18		10		–		28
Total	$	2,620	$	4,376	$	157	$	7,153

Liabilities
Derivative financial instruments	$	–	$	82	$	–	$	82

Our Level 1 assets include cash, money market instruments, U.S. Treasury securities, marketable equity securities and equity forwards. Level 2 assets include other government and agency securities, commercial paper, corporate bonds, asset-backed securities, municipal bonds, preferred securities, and other derivatives. Our Level 3 assets include student loan auction-rate securities and structured investment vehicle securities. As of June 30, 2008, we held $157 million of investments which were measured using unobservable (Level 3) inputs, representing approximately 2% of our total fair value investment portfolio. Student loan auction-rate securities of $155 million and structured investment vehicle securities of $2 million were valued based on broker-provided valuations, which approximate fair value. In February 2008, the auction-rate securities market experienced a number of failed auctions for student loan-backed securities, including those that we held and continue to hold, which severely limited the liquidity of these securities. Due to market liquidity constraints related to the failed auctions, we classified the auction-rate securities as non-current assets consistent with the long-term maturity dates of the underlying student loans. As of June 30, 2008, we believed that the unrealized losses in the auction-rate securities were temporary and

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that we had the ability to hold the assets to maturity. All of our auction-rate securities are AAA/Aaa-rated and are collateralized by student loans that are guaranteed by the U.S. government to be repaid at no less than 95% of par value.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial assets, which were measured at fair value on a recurring basis for the second quarter and first six months of 2008 (in millions).

	Three Months Ended June 30, 2008					Six Months Ended June 30, 2008
	Structured Investment Vehicle Securities		Auction-Rate Securities			Structured Investment Vehicle Securities			Auction-Rate Securities
Beginning balance	$	2	$	161		$	7		$	–
Transfer into Level 3(1)		–		–			–			174
Total unrealized losses(2)		–		(3	)		(1	)		(16	)
Purchases, issuances, settlement		–		(3	)		(4	)		(3	)
Ending balance	$	2	$	155		$	2		$	155

___________

(1)	During the first quarter of 2008, we held $174 million of auction-rate securities that were transferred to Level 3 assets.
(2)	The unrealized loss of $3 million in the second quarter and $16 million in the first six months of 2008 was included in OCI as of June 30, 2008.

Note 5.

Contingencies

We are a party to various legal proceedings, including licensing and contract disputes, and other matters.

On October 4, 2004, we received a subpoena from the U.S. Department of Justice requesting documents related to the promotion of Rituxan, a prescription treatment now approved for five indications. We are cooperating with the associated investigation. Through counsel we are having discussions with government representatives about the status of their investigation and Genentech’s views on this matter, including potential resolution. Previously the investigation had been both criminal and civil in nature. We have been informed by the prosecutor handling this matter that the government has declined to prosecute the company criminally in connection with this investigation. The civil matter is still ongoing. The outcome of this matter cannot be determined at this time.

We and the City of Hope National Medical Center (COH) are parties to a 1976 agreement related to work conducted by two COH employees, Arthur Riggs and Keiichi Itakura, and patents that resulted from that work, which are referred to as the “Riggs/Itakura Patents.” Since that time, we have entered into license agreements with various companies to manufacture, use, and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999, COH filed a complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties to COH in connection with these license agreements, as well as product license agreements that involve the grant of licenses under the Riggs/Itakura Patents. On June 10, 2002, a jury voted to award COH approximately $300 million in compensatory damages. On June 24, 2002, a jury voted to award COH an additional $200 million in punitive damages. Such amounts were accrued as an expense in the second quarter of 2002. Included within current liabilities in “Accrued litigation” in the accompanying Condensed Consolidated Balance Sheet at December 31, 2007 was $776 million, which represented our estimate of the costs for the resolution of the COH matter as of that reporting date. We filed a notice of appeal of the verdict and damages awards with the California Court of Appeal. On October 21, 2004, the California Court of Appeal affirmed the verdict and damages awards in all respects. On November 22, 2004, the California Court of Appeal modified its opinion without changing the verdict and denied Genentech’s request for rehearing. On November 24, 2004, we filed a petition seeking review by the California Supreme Court. On February 2, 2005, the California Supreme Court granted that petition. The California Supreme Court heard our appeal on this matter on February 5, 2008, and on April 24, 2008 overturned the award of $200 million in punitive damages to COH but upheld the award of $300 million in compensatory damages. We paid $476 million to COH in the second quarter of 2008, reflecting the amount of compensatory damages awarded plus interest thereon from the date of the original decision, June 10, 2002.

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~~Note~~As a 4result of the April 24, 2008 California Supreme Court decision, we reversed a $300 million net litigation accrual related to the punitive damages and accrued interest, which we recorded as “Special items: litigation-related” in our Condensed Consolidated Statements of Income for the first quarter and first six months of 2008. ~~Contingencies~~In the second quarter and first six months of 2007, we recorded accrued interest and bond costs on both the compensatory and punitive damages, totaling $13 million and $26 million, respectively. In conjunction with the COH judgment in 2002, we posted a surety bond and were required to pledge cash and investments of $788 million to secure the bond, and this balance was reflected in “Restricted cash and investments” in the accompanying Condensed Consolidated Balance Sheets. Subsequent to June 30, 2008, the court completed certain administrative procedures to dismiss the case. As a result, the restrictions were lifted from the restricted cash and investments accounts, and the funds became available for use in our operations.

WeOn ~~are~~April 11, 2003, MedImmune, Inc. filed a ~~party~~lawsuit against Genentech, COH, and Celltech R & D Ltd. in the U.S. District Court for the Central District of California (Los Angeles). The lawsuit related to ~~various~~U.S. ~~legal~~Patent ~~proceedings~~No. 6,331,415 ~~including~~(the Cabilly patent) ~~infringement~~that we co-own with COH and under which MedImmune and other ~~litigation~~companies have been licensed and ~~licensing~~are paying royalties to us. The lawsuit included claims for violation of anti-trust, patent, and ~~contract~~unfair ~~disputes~~competition laws. MedImmune sought a ruling that the Cabilly patent was invalid and/or unenforceable, a determination that MedImmune did not owe royalties under the Cabilly patent on sales of its Synagis® antibody product, an injunction to prevent us from enforcing the Cabilly patent, an award of actual and exemplary damages, and other ~~matters~~relief. On June 11, 2008, we announced that we settled this litigation with MedImmune. Pursuant to the settlement agreement, the U.S. District Court dismissed all the claims against us in the lawsuit. The litigation has been fully resolved and dismissed and the settlement did not have a material effect on our operating results for the second quarter and first six months of 2008.

On ~~October~~May 413, ~~2004~~2005, wea ~~received~~request was filed by a ~~subpoena~~third ~~from~~party for reexamination of the Cabilly ~~United~~patent. ~~States~~The ~~(or~~request “sought reexamination on the basis of non-statutory double patenting over U.S.~~”) Department~~ ofPatent ~~Justice~~No. 4,816,567. ~~requesting~~On ~~documents~~July ~~related~~7, to2005, the ~~promotion~~U.S. Patent and Trademark Office (Patent Office) ordered reexamination of ~~Rituxan~~the Cabilly patent. On September 13, 2005, the Patent Office mailed an initial non-final aPatent ~~prescription~~Office ~~treatment~~action ~~now~~rejecting ~~approved~~all ~~for~~36 ~~three~~claims ~~indications:~~of ~~(1)~~the Cabilly patent. We filed our response to the ~~treatment~~Patent Office action on November 25, 2005. On December 23, 2005, a second request for reexamination of ~~relapsed~~the orCabilly ~~refractory~~patent was filed by another third party, ~~low-grade~~and oron ~~follicular~~January 23, ~~CD20-positive~~2006, ~~B-cell~~the Patent Office granted that request. On ~~non-Hodgkin’s~~June ~~lymphoma~~6, ~~(2)~~2006, the ~~first-line~~two ~~treatment~~reexaminations ofwere ~~diffuse~~merged ~~large~~into ~~B-cell,~~one proceeding. On August ~~CD20-positive~~16, 2006, the Patent Office mailed a non-~~Hodgkin’s~~final ~~lymphoma~~Patent Office action in ~~combination~~the merged ~~with~~proceeding, ~~CHOP~~rejecting orall ~~other anthracycline-~~the claims of the Cabilly patent based ~~chemotherapy~~on issues ~~regimens~~raised ~~(approved~~in the two reexamination requests. We filed our response to the Patent Office action on ~~February~~October 1030, 2006). On February 16, 2007, the Patent Office mailed a final Patent Office action rejecting all the claims of the Cabilly patent. We responded to the final Patent Office action on May 21, 2007 and requested continued reexamination. On May 31, 2007, the Patent Office ~~(3)~~granted the request for ~~use~~continued reexamination, and in ~~combination~~doing ~~with~~so ~~methotrexate~~withdrew tothe finality ~~reduce~~of ~~signs~~the February 2007 Patent Office action and ~~symptoms~~agreed into treat our May ~~adult~~21, ~~patients~~2007 ~~with~~filing ~~moderately-~~as a response to ~~severely-~~a ~~active~~first ~~rheumatoid~~Patent ~~arthritis~~Office ~~who~~action. On February 25, ~~have~~2008, ~~had~~the anPatent ~~inadequate~~Office ~~response~~mailed toa ~~one~~final orPatent ~~more~~Office ~~TNF~~action ~~antagonist~~rejecting ~~therapies~~all the ~~(approved~~claims of the Cabilly patent. We filed our response to that final Patent Office action on ~~February~~June 286, ~~2006)~~2008. WeOn ~~are~~July ~~cooperating~~19, ~~with~~2008, the ~~associated~~Patent Office mailed an advisory ~~investigation~~action replying to our response and confirming the rejection of all claims of the Cabilly patent. We intend to file a notice of appeal challenging the rejection. The Cabilly patent, which expires in 2018, relates to methods that we and ~~have~~others ~~been~~use ~~advised~~to ismake ~~both~~certain ~~civil~~antibodies or antibody fragments, as well as cells and ~~criminal~~deoxyribonucleic acid (DNA) used in ~~nature~~these methods. We have licensed the Cabilly patent to other companies and derive significant royalties from those licenses. The ~~government~~Cabilly ~~has~~patent ~~called~~licenses contributed royalty revenue of $75 million and is$159 ~~expected~~million toin ~~call~~the ~~former~~second quarter and ~~current~~first ~~Genentech~~six months of 2008, ~~employees~~respectively. toThe ~~appear~~claims ~~before~~of athe ~~grand~~Cabilly ~~jury~~patent inremain ~~connection~~valid ~~with~~and ~~this~~enforceable throughout ~~investigation~~the reexamination and appeals processes. The outcome of this matter cannot be determined at this time.

OnIn ~~July 29~~2006, ~~2005~~we made development decisions involving our humanized anti-CD20 program, and aour ~~former~~collaborator, ~~Genentech~~Biogen ~~employee~~Idec Inc., ~~whose~~disagreed ~~employment~~with ~~ended~~certain inof ~~April~~our ~~2005,~~development ~~filed~~decisions arelated ~~qui~~to ~~tam~~humanized ~~complaint~~anti-CD20 ~~under~~products. ~~seal~~Under inour ~~the~~2003 collaboration ~~United~~agreement ~~States~~with ~~District~~Biogen ~~Court~~Idec, we believe that we are permitted to ~~for~~proceed ~~the~~with ~~District~~further trials of ~~Maine~~certain ~~against~~humanized ~~Genentech~~anti-CD20 ~~and~~antibodies, and Biogen Idec, ~~alleging~~disagreed ~~violations~~with our position. The disputed issues have been submitted ofto arbitration. In the ~~False~~arbitration, ~~Claims~~Biogen ~~Act~~Idec filed motions for a preliminary injunction and ~~retaliatory~~summary ~~discharge~~judgment ofseeking ~~employment~~to stop us from proceeding with certain development activities, including planned clinical trials. On ~~December~~ April 20, ~~2005,~~ 2007, the ~~United~~arbitration ~~States~~panel ~~District~~denied ~~Court~~Biogen ~~filed~~Idec’s ~~notice~~motion offor ~~its~~a ~~election~~preliminary ~~to decline~~injunction ~~intervention~~and inBiogen ~~the~~Idec’s ~~lawsuit.~~motion ~~The~~for ~~complaint~~summary ~~was~~judgment. ~~subsequently~~Resolution ~~unsealed~~of ~~and~~the wearbitration ~~were served~~could onrequire ~~January~~that 5,both ~~2006.~~parties ~~The~~agree ~~outcome~~to ofcertain ~~this~~development ~~matter~~decisions ~~cannot~~before moving beforward ~~determined at this~~with ~~time.~~humanized anti-CD20 antibody clinical trials (and

We and the City of Hope National Medical Center (or “COH”) are parties to a 1976 agreement relating to work conducted by two COH employees, Arthur Riggs and Keiichi Itakura, and patents that resulted from that work, which are referred to as the “Riggs/Itakura Patents.” Since that time, we have entered into license agreements with various companies to make, use and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999, the COH filed a complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties to the COH in connection with these license agreements, as well as product license agreements that involve the grant of licenses under the Riggs/Itakura Patents. On June 10, 2002, a jury voted to award the COH approximately $300 million in compensatory damages. On June 24, 2002, a jury voted to award the COH an additional $200 million in punitive damages. Such amounts were accrued as an expense in the second quarter of 2002 and are included in the accompanying Condensed Consolidated Balance Sheets in “litigation-related and other long-term liabilities” at March 31, 2006 and December 31, 2005. We filed a notice of appeal of the verdict and damages awards with the California Court of Appeal. On October 21, 2004, the California Court of Appeal affirmed the verdict and damages awards in all respects. On November 22, 2004, the California Court of Appeal modified its opinion without changing the verdict and denied Genentech’s request for rehearing. On November 24, 2004, we filed a petition seeking review by the California Supreme Court. On February 2, 2005, the California Supreme Court granted that petition. The amount of cash paid, if any, or the timing of such payment in connection with the COH matter will depend on the outcome of the California Supreme Court’s review of the matter, however, it may take longer than one year to further resolve the matter.

We recorded $13 million of accrued interest and bond costs related to the COH trial judgment for the three months ended March 31, 2006 and 2005. In conjunction with the COH judgment, we posted a surety bond and were required to pledge cash and investments of $735 million at March 31, 2006 and December 31, 2005 to secure the bond. These amounts are reflected in “restricted cash and investments” in the accompanying Condensed Consolidated Balance Sheets. We expect that we will continue to incur interest charges on the judgment and service fees on the surety bond each quarter through the process of appealing the COH trial results.

On April 11, 2003, MedImmune, Inc. (or “MedImmune”) filed a lawsuit against Genentech, COH, and Celltech R & D Ltd. in the U.S. District Court for the Central District of California (Los Angeles). The lawsuit relates to U.S. Patent No. 6,331,415 (or “the ‘415 patent” or “Cabilly patent”) that we co-own with COH and under which MedImmune and other companies have been licensed and are paying royalties to us. The lawsuit includes claims for

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~~violation~~possibly ofclinical ~~antitrust,~~trials patent, and unfair competition laws. MedImmune is seeking to have the ‘415 patent declared invalid and/or unenforceable, a determination that MedImmune does not owe royalties under the ‘415 patent on sales of ~~its~~other ~~Synagis® antibody~~collaboration ~~product~~products, anincluding ~~injunction to prevent us from enforcing the ‘415 patent~~Rituxan), ~~an award~~in ~~of actual and exemplary damages, and other relief. On January 14, 2004~~which ~~(amending~~case awe ~~December~~may ~~23,~~have ~~2003~~to ~~Order),~~alter ~~the~~or ~~U.S.~~cancel ~~District~~planned ~~Court~~clinical ~~granted~~trials ~~summary judgment~~ in ~~our~~order ~~favor~~to onobtain Biogen ~~all of MedImmune~~Idec’s ~~antitrust and unfair competition claims~~approval. OnThe ~~April~~hearing ~~23,~~of ~~2004,~~this ~~the~~matter ~~District~~is ~~Court~~scheduled ~~granted our motion~~ to ~~dismiss all remaining~~begin ~~claims~~ in September ~~the case~~2008. OnWe ~~October~~expect ~~18,~~a ~~2005,~~final ~~the~~decision ~~U.S.~~within ~~Court~~six ofmonths ~~Appeals for the Federal Circuit affirmed the judgment~~ of the ~~District Court in all respects.~~conclusion ~~MedImmune~~of ~~filed a petition for certiorari with~~ the ~~United States Supreme Court on November 10~~hearing, ~~2005,~~unless ~~seeking~~the ~~review~~parties ofare ~~the~~able ~~decision~~ to ~~dismiss~~resolve ~~certain~~the ~~of its claims.~~matter ~~The Supreme Court granted MedImmune’s petition on February 21, 2006 and~~earlier ~~the~~through ~~briefing~~settlement ondiscussions ~~the~~or ~~merits of this case before the Supreme Court is ongoing~~otherwise. The outcome of this matter cannot be determined at this time.

On ~~May~~June 1328, ~~2005~~2003, aMr. ~~request~~Ubaldo ~~was~~Bao Martinez filed by a ~~third~~lawsuit ~~party~~against ~~for~~Porriño ~~reexamination~~Town Council ofand Genentech España S.L. in the Contentious Administrative Court ~~‘415 or~~Number ~~Cabilly~~One ~~patent~~of Pontevedra, Spain. The ~~request~~lawsuit ~~sought~~challenges the Town Council’s ~~reexamination~~decision onto ~~the~~grant ~~basis~~licenses ~~of non-statutory~~to ~~double~~Genentech ~~patenting~~España ~~over U.~~S.L. for ~~Patent~~the construction ~~No.~~and 4operation of a warehouse and biopharmaceutical manufacturing facility in Porriño,~~816,567~~ Spain. On ~~July~~January 716, ~~2005~~2008, the Administrative UCourt ruled in favor of Mr.S. ~~Patent~~Bao ~~Office~~on one of the claims in the lawsuit and ordered ~~reexamination~~the closing and demolition of the ~~‘415~~facility, ~~patent~~subject to certain further legal proceedings. On ~~September 13~~February 12, ~~2005~~2008, ~~the~~we ~~Patent~~and ~~Office~~the ~~issued~~Town anCouncil filed ~~initial~~appeals ~~“non-final”~~of ~~Office~~the ~~action rejecting~~Administrative ~~the~~Court ~~claims~~decision ofat the ~~‘415~~High ~~patent~~Court in Galicia, Spain. WeIn ~~filed~~addition, ~~our~~we ~~response~~are toevaluating ~~the~~with ~~Office~~legal counsel in Spain whether there ~~action~~may onbe ~~November~~other ~~25,~~administrative ~~2005~~remedies available to overcome the Administrative Court’s ruling. ~~The~~We ~~Patent~~sold ~~Office~~the ~~has~~assets ~~not~~of ~~yet~~Genentech ~~acted~~España onS.L., ~~this~~including the ~~response~~Porriño facility, to Lonza Group Ltd. Onin December 232006, ~~2005,~~and aLonza ~~second~~has ~~request~~operated the ~~for~~facility ~~reexamination~~since that time. Under the terms of that sale, we retained control of the ~~‘415~~defense of this lawsuit and agreed to indemnify Lonza against ~~patent~~certain ~~was~~contractually ~~filed~~defined byliabilities ~~another~~up ~~third~~to ~~party~~a specified limit, which is currently estimated to be approximately $100 million. OnThe ~~January~~outcome 23of this matter, ~~2006~~and our indemnification obligation to Lonza, ~~the~~if ~~Patent~~any, ~~office~~cannot be ~~granted~~determined ~~the~~at ~~reexamination~~this ~~request~~time.

~~Because~~On ~~the~~May ~~two~~30, ~~above-described~~2008, ~~reexamination~~Centocor, ~~proceedings~~Inc. ~~are~~filed ~~ongoing,~~a ~~the~~patent ~~final~~lawsuit ~~outcome~~against Genentech and COH in ofthe ~~these~~U.S. ~~matters~~District ~~cannot~~Court befor ~~determined~~the atCentral ~~this~~District ~~time~~of California. The ~~‘415~~lawsuit relates to the Cabilly patent, ~~which~~that ~~expires~~we inco-own ~~2018,~~with ~~relates~~COH toand ~~methods~~under wewhich Centocor and ~~others~~other ~~use~~companies have been licensed and are paying royalties to us. The ~~make~~lawsuit ~~certain~~seeks ~~antibodies~~a ordeclaratory ~~antibody~~judgment ~~fragments,~~of aspatent ~~well~~invalidity asand ~~cells~~unenforceability with regard to the Cabilly patent and ~~DNA~~of ~~used~~patent non-infringement with regard to inCentocor’s marketed product ReoPro® ~~these~~(Abciximab) ~~methods~~and its unapproved product CNTO 1275 (Ustekinumab). WeCentocor ~~have~~also seeks ~~licensed~~to recover the ~~‘415~~royalties ~~patent~~it has paid to ~~other~~Genentech ~~companies~~for ReoPro® and ~~derive~~the ~~significant~~monies ~~royalties~~it ~~from~~alleges ~~those~~that ~~licenses~~Celltech has paid to Genentech for Remicade® (infliximab), a product marketed by Centocor under an agreement between Centocor and Celltech. ~~The~~Genentech ~~claims~~is ofscheduled to respond to the ~~‘415~~complaint ~~patent~~on ~~remain~~August 7, ~~valid~~2008. ~~and~~The ~~enforceable~~outcome ~~throughout~~of ~~the~~this ~~reexamination~~matter ~~process~~cannot be determined at this time.

~~Note~~On May 5.8, ~~Relationship~~2008 and June 11, 2008, Genentech was named as a defendant, along with InterMune, ~~Roche~~Inc. and ~~Related~~its ~~Party~~former ~~Transactions~~chief executive officer, W. Scott Harkonen, in two separate class-action complaints in the U.S. District Court for the Northern District of California. Both complaints seek relief for a specific class of plaintiffs who allegedly received Actimmune® for the treatment of idiopathic pulmonary fibrosis and they allege violations of federal racketeering laws, unfair competition laws, and consumer protection laws, and also seek damages for unjust enrichment. Actimmune® is an interferon-gamma product that was licensed by Genentech to Connectics Corporation and was subsequently assigned to InterMune. InterMune currently sells Actimmune® in the U.S. The complaints are related in part to royalties that we received in connection with the Actimmune® product. The outcome of this matter cannot be determined at this time.

On July 21, 2008, we announced that we received an unsolicited proposal from Roche to acquire all of the outstanding shares of our stock not owned by Roche at a price of $89.00 in cash per share. See also Note 9, “Subsequent Event,” for more information regarding the proposal. Subsequently, twenty-six shareholder lawsuits have been filed against Genentech and/or the members of its Board of Directors, and various Roche entities, including Roche Holdings, Inc., Roche Holding AG and Roche Holding Ltd. The lawsuits are currently pending in various state courts, including the Delaware Court of Chancery, San Francisco County Superior Court, and San Mateo County Superior Court, as well as one lawsuit in the United States District Court for the Northern District of California. The lawsuits generally assert class action claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty based in part on allegations that, in connection with Roche’s offer to purchase the remaining shares, some or ~~Ability~~all of the defendants have failed to ~~Maintain~~properly ~~Its~~value ~~Percentage~~Genentech, ~~Ownership~~have ~~Interest~~failed to solicit other potential acquirers and are engaged in ~~Our~~improper self-dealing. Two ~~Stock~~of the lawsuits allege derivative claims alleging breaches of fiduciary duty by defendants in connection with adoption of the July 1999 Affiliation Agreement with RHI (Affiliation Agreement), and those two and one other of the lawsuits seek the invalidation, in whole or in part, of the Affiliation Agreement. One of the lawsuits seeks an order deeming Articles 8 and 9 of the Company’s Amended and Restated Certificate of Incorporation inapplicable or invalid to a potential transaction with Roche. The outcome of these matters cannot be determined at this time.

We issue additional shares of Common Stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. Our affiliation agreement with Roche provides, among other things, that with respect to any issuance of Common Stock by Genentech in the future, we will repurchase a sufficient number of shares so that immediately after such issuance the percentage of Genentech Common Stock owned by Roche will be no lower than 2% below the “Minimum Percentage” (as defined below), provided however, as long as Roche’s percentage ownership is greater than 50%, prior to issuing any shares, we will repurchase a sufficient number of shares of our Common Stock such that, immediately after our issuance of shares, Roche’s percentage ownership will be greater than 50%. The Minimum Percentage equals the lowest number of shares of Genentech Common Stock owned by Roche since the July 1999 offering (adjusted for dispositions of shares of Genentech Common Stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704, the number of shares of Genentech Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. We have repurchased shares of our Common Stock since 2001. The affiliation agreement also provides that, upon Roche’s request, we will repurchase shares of our Common Stock to increase Roche’s ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. The Minimum Percentage at March 31, 2006 was 57.7% and, under the terms of the affiliation agreement, Roche’s ownership percentage is to be no lower than 55.7%. At March 31, 2006, Roche’s ownership percentage was 55.7%.

Related Party Transactions

We enter into transactions with our related parties, Roche and other Roche affiliates (including Hoffmann-La Roche) and Novartis, under existing agreements in the ordinary course of business. The accounting policies we apply to our transactions with our related parties are consistent with those applied in transactions with independent third-parties.

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~~Hoffmann-La~~ Note 6. Relationship with Roche Holdings, Inc. and Related Party Transactions

~~Under our existing arrangements with Hoffmann-La~~ Roche, ~~including our licensing and marketing agreements~~Holdings, we recognized contract revenue from Hoffmann-La Roche, including amounts earned related to ongoing development activities, of $18 million and $16 million in the first quarters of 2006 and 2005, respectivelyInc.’s ~~All~~Ability other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, totaled $224 million and $155 million in the first quarters of 2006 and 2005, respectively. Cost of sales (or “COS”) included amounts related to ~~Hoffmann-La~~Maintain ~~Roche of~~Percentage ~~$49 million~~Ownership ~~and~~Interest ~~$47 million~~ in ~~the first quarters of 2006 and 2005, respectively.~~ Our reported research and development (or “R&D”) expenses in each of the first quarters of 2006 and 2005 included $43 million and $34 million, respectively, related to development activities undertaken on projects on which we collaborate with Hoffmann-La Roche. Stock

~~Novartis~~We issue shares of Common Stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. Our Affiliation Agreement with RHI provides, among other things, that with respect to any issuance of our Common Stock in the future, we will repurchase a sufficient number of shares so that immediately after such issuance, the percentage of our Common Stock owned by RHI will be no lower than 2% below the “Minimum Percentage” (subject to certain conditions). The Minimum Percentage equals the lowest number of shares of Genentech Common Stock owned by RHI since its July 1999 offering of our Common Stock (to be adjusted in the future for dispositions of shares of Genentech Common Stock by RHI as well as for stock splits or stock combinations) divided by 1,018,388,704 (to be adjusted in the future for stock splits or stock combinations), which is the number of shares of Genentech Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. We have repurchased shares of our Common Stock since 2001. The Affiliation Agreement also provides that, upon RHI’s request, we will repurchase shares of our Common Stock to increase RHI’s ownership to the Minimum Percentage. In addition, RHI will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. Under the terms of the Affiliation Agreement, RHI’s Minimum Percentage is 57.7%, and RHI’s ownership percentage is to be no lower than 55.7%. RHI’s ownership percentage of our outstanding shares was 55.9% as of June 30, 2008 and 55.6% as of July 31, 2008. Future share repurchases under our share repurchase program, including the May 2008 prepaid share repurchase arrangement (see also Note 8, “Capital Stock”), may increase Roche’s ownership percentage. However, significant option exercises and stock purchases by employees could result in further dilution, and limitations in the number of shares we receive under, or modification or cancellation of, our existing prepaid share repurchase arrangement could negatively affect our ability to offset dilution.

~~Based~~See onalso ~~information~~Note ~~available~~8, to“Capital usStock,” atand ~~the~~Note ~~time~~9, of“Subsequent ~~filing~~Event,” ~~this~~regarding ~~Form 10-Q,~~our weprepaid ~~believe~~share ~~the~~repurchase ~~Novartis~~arrangement ~~Group~~and ~~holds approximately 33.3% of the outstanding voting shares of~~ Roche’s ~~Holding~~proposal ~~Ltd. As a result of this ownership, the Novartis Group is deemed~~ to ~~have~~acquire ~~an indirect beneficial ownership interest under FAS~~all ~~57 “Related~~outstanding ~~Party~~shares ~~Disclosures”~~ of ~~more~~our ~~than~~stock ~~10%~~not ofowned ~~our~~by ~~voting stock~~Roche.

WeRelated ~~have~~Party an agreement with Novartis Ophthalmics (now merged into Novartis AG) under which Novartis Ophthalmics has the exclusive right to develop and market Lucentis outside of the U.S. and Canada for indications related to diseases or disorders of the eye. As part of this agreement, the parties share the cost of certain of our ongoing Phase III and related development expenses.Transactions

We, ~~along~~enter ~~with~~into ~~Novartis~~transactions ~~Pharma~~with AGrelated ~~(a wholly~~parties, ~~owned~~Roche ~~subsidiary~~Holding ~~of Novartis~~ AG) and affiliates ~~Tanox,~~(Roche) ~~Inc., are co-developing Xolair in the U.S. We~~ and Novartis ~~are co-promoting~~AG ~~Xolair~~and inaffiliates ~~the U~~(Novartis).S. ~~and~~The weaccounting ~~both~~policies ~~make certain joint and individual~~that ~~payments~~we apply to ~~Tanox;~~our ~~Genentech’s~~transactions ~~joint~~with ~~and~~our ~~individual~~related ~~payments~~parties are inconsistent ~~the~~with ~~form of~~those ~~royalties.~~applied ~~We record all sales and cost of sales~~ in ~~the~~transactions ~~U.S.~~with ~~and~~independent ~~Novartis markets~~third ~~the product~~ parties, and ~~records~~ all ~~sales and cost of sales in Europe. We and~~related ~~Novartis~~party ~~share~~agreements ~~the resulting U.S. and European operating profits, respectively, according to prescribed profit-sharing percentages. We~~ are ~~currently~~negotiated ~~supplying the~~on ~~product~~an ~~and receive cost plus a mark~~arm’s-uplength ~~similar to other supply arrangements~~basis. On January 20, 2006, Novartis received FDA approval to manufacture bulk supply of Xolair at their Huningue production facility in France. Future production costs of Xolair may initially be higher than those currently reflected in our COS as a result of the production shift from us to Novartis until production economies of scale can be achieved by Novartis.

~~Contract~~In ~~revenue~~our ~~from~~royalty ~~Novartis~~and ~~related~~supply toarrangements ~~manufacturing,~~with ~~commercial~~related ~~and~~parties, ~~ongoing development~~we ~~activities~~are ~~was~~the ~~$10~~principal, as ~~million~~defined inunder ~~the~~Emerging ~~first~~Issues ~~quarters~~Task ofForce ~~2006~~(EITF) Issue ~~and 2005~~No. ~~Revenue~~ ~~from~~99-19, ~~Novartis~~“Reporting ~~related~~Revenue toGross ~~product~~as ~~sales~~a Principal ~~and~~versus ~~COS~~Net ~~was~~as ~~not~~an ~~material~~Agent” ~~in the first~~(EITF ~~quarters~~99-19), ofbecause ~~2006 and 2005.~~we ~~Our~~bear ~~reported R&D expenses in each of~~ the ~~first~~manufacturing ~~quarters~~risk, ofgeneral ~~2006~~inventory risk, and ~~2005~~the ~~included~~risk ~~approximately $10 million related~~ to ~~development~~defend ~~activities~~our intellectual ~~undertaken~~property. onFor ~~products~~circumstances onin which we ~~collaborate~~ ~~with~~are ~~Novartis.~~the ~~Collaboration~~principal ~~profit~~in ~~sharing~~the transaction, ~~payments~~we ~~from~~record usthe ~~to Novartis~~transaction ~~were~~on ~~$43~~a ~~million~~gross ~~and~~basis ~~$24 million~~ in ~~the~~accordance ~~first~~with ~~quarters~~EITF 99-19; otherwise, ofour ~~2006~~transactions ~~and~~are ~~2005,~~recorded ~~respectively.~~on a net basis.

~~Note 6. Income Taxes~~Roche

~~The~~We ~~effective~~signed ~~income~~two ~~tax~~product ~~rate~~supply ~~was~~agreements ~~38%~~with Roche in ~~the~~July ~~first~~2006, ~~quarter~~each of ~~2006,~~which ~~as compared~~was ~~to 36%~~amended in ~~the~~November ~~first~~2007. ~~quarter~~The ofUmbrella ~~2005~~Manufacturing Supply Agreement (Umbrella Agreement) supersedes our previous product supply agreements with Roche. The Short-Term ~~increase~~Supply inAgreement (Short-Term Agreement) supplements the ~~income~~terms ~~tax~~of ~~rate~~the Umbrella ~~primarily~~Agreement. Under the Short-Term Agreement, Roche has agreed to purchase ~~reflects~~specified ~~higher~~amounts ~~income~~of ~~before~~Herceptin, ~~taxes~~Avastin, and ~~the~~Rituxan ~~December~~through 312008. Under the Umbrella Agreement, ~~2005~~Roche ~~expiration~~has agreed to purchase specified amounts of Herceptin ~~provisions~~and inAvastin ~~federal~~through ~~tax~~2012, ~~law~~and ~~for~~on a perpetual basis, either party may order other collaboration products from the ~~R&D~~other ~~tax~~party, ~~credit.~~including ~~Currently~~Herceptin ~~there~~and ~~are~~Avastin ~~bills~~after in2012, ~~Congress~~pursuant to ~~extend~~certain ~~the~~forecast ~~R&D~~terms. ~~tax~~The ~~credit~~Umbrella ~~retroactively~~Agreement also provides that either party may terminate its obligation to ~~January~~purchase 1,and/or ~~2006.~~supply IfAvastin ~~such~~and/or ~~legislation~~Herceptin iswith ~~passed,~~six ~~then~~years atnotice ~~that~~on ~~time~~or after December 31, 2007. To date, we ~~will~~have ~~record~~not areceived ~~tax benefit~~such ~~for~~notice ~~R&D~~of ~~tax~~termination ~~credits~~from Roche.

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~~Note~~Under the 7July 1999 amended and restated licensing and marketing agreement and the July 1998 licensing and marketing agreement related to anti-HER2 antibodies (including Herceptin and pertuzumab), Roche has the right to opt in to development programs we undertake on our products at certain pre-defined stages of development. ~~Subsequent~~When ~~Event~~Roche opts in to a program, we record the opt-in payments received as deferred revenue, which we recognize over the expected development periods or product life, as appropriate. As of June 30, 2008, the amounts in short-term and long-term deferred revenue related to opt-in payments received from Roche were $48 million and $193 million, respectively. For the second quarter and first six months of 2008, we recognized $13 million and $24 million, respectively, as contract revenue related to opt-in payments previously received from Roche. For the second quarter and first six months of 2007, we recognized $11 million and $23 million, respectively, as contract revenue related to opt-in payments previously received from Roche.

~~Stock~~In ~~Repurchase~~February ~~Program~~2008, Roche acquired Ventana Medical Systems, Inc., and as a result of the acquisition, Ventana is considered a related party. We have engaged in transactions with Ventana prior to and since the acquisition, but these transactions have not been material to our results of operations.

OnIn ~~April~~May 192008, ~~2006,~~Roche ~~our~~acquired ~~Board~~Piramed ofLimited, ~~Directors~~a ~~authorized~~privately ~~the~~held ~~extension~~entity ofbased ~~our~~in ~~current stock repurchase program for~~ the ~~repurchase of up to an additional $2 billion~~ ~~of our~~United ~~common~~Kingdom, ~~stock~~and ~~for~~as a ~~total~~result of $6the ~~billion through June 30~~transaction, ~~2007.~~Piramed ~~Our~~is ~~Board~~considered a ~~of Directors~~related ~~also~~party. ~~amended~~We ~~the~~have ~~current~~a ~~repurchase~~previously ~~program~~existing bylicensing ~~increasing~~agreement ~~the~~with ~~maximum~~Piramed ~~number~~related ofto ~~shares~~a ~~that~~molecule ~~can~~in beour ~~repurchased~~development ~~from 80 million to 100 million shares~~pipeline.

~~Under~~In ~~our~~June ~~stock~~2008, ~~repurchase~~we ~~program~~entered weinto ~~repurchased~~a ~~approximately~~licensing ~~664~~agreement with Roche,~~000~~ ~~shares~~under ofwhich we ~~our common~~obtained ~~stock,~~rights atto a ~~cost~~preclinical ofsmall ~~approximately~~molecule drug development program. We recorded $5335 million ~~during~~in research and development (R&D) expense in the ~~period~~second quarter ~~from~~of 2008 related to this agreement. The future R&D costs incurred ~~April~~under 1the ~~through~~agreement ~~April~~and ~~25,~~any ~~2006~~profit and loss from global commercialization will be shared equally with Roche.

In July 2008, we signed an agreement with Chugai-Pharmaceuticals Co., Ltd., a Japan-based entity and a member of Roche, under which we agreed to manufacture Actemra, a product of Chugai, at our Vacaville, California facility. After an initial term of five years, the agreement may be terminated subject to certain terms and conditions under the contract.

We currently have no commercialized products subject to profit sharing arrangements with Roche.

Under our existing arrangements with Roche, including our licensing and marketing agreements, we recognized the following amounts (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Product sales to Roche	$	144	$	253	$	281	$	516

Royalties earned from Roche	$	391	$	283	$	762	$	538

Contract revenue from Roche	$	20	$	30	$	40	$	60

Cost of sales on product sales to Roche	$	89	$	137	$	152	$	258

Research and development expenses incurred on joint development projects with Roche	$	77	$	70	$	148	$	128

Certain R&D expenses are partially reimbursable to us by Roche. Amounts that Roche owes us, net of amounts reimbursable to Roche by us on these projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts we owe Roche on R&D expenses that Roche incurred on joint development projects, less amounts reimbursable to us by Roche on these projects.

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Novartis

Based on information available to us at the time of filing this Quarterly Report on Form 10-Q, we believe that the Novartis Group holds approximately 33.3% of the outstanding voting shares of Roche. As a result of this ownership, the Novartis Group is deemed to have an indirect beneficial ownership interest under FAS No. 57, “Related Party Disclosures” (FAS 57), of more than 10% of our voting stock.

We have an agreement with Novartis Pharma AG (a wholly owned subsidiary of Novartis AG; Novartis Pharma AG and affiliates are collectively referred to hereafter as Novartis) under which it has the exclusive right to develop and market Lucentis outside the U.S. for indications related to diseases or disorders of the eye. As part of this agreement, the parties will share the cost of certain of our ongoing development expenses for Lucentis.

We and Novartis are co-developing and co-promoting Xolair in the U.S. We record all sales, COS, and marketing and sales expenses in the U.S.; Novartis markets the product in and records all sales, COS, and marketing and sales expenses in Europe. We and Novartis share the resulting U.S. and European operating profits according to prescribed profit sharing percentages. Generally, we evaluate whether we are a net recipient or payor of funds on an annual basis in our cost and profit sharing arrangements. Net amounts received on an annual basis under such arrangements are classified as contract revenue, and net amounts paid on an annual basis are classified as profit sharing expense. With respect to the U.S. operating results, for the full year in 2007 we were a net payor to Novartis, and for the full year in 2008 we similarly anticipate being a net payor to Novartis. As a result, for the second quarters and first six months of 2008 and 2007, the portion of the U.S. operating results that we owed to Novartis was recorded as collaboration profit sharing expense. With respect to the European operating results, for the full year in 2007 we were a net payor to Novartis, and for the full year in 2008 we anticipate being a net recipient from Novartis. As a result, for the second quarter and first six months of 2008, the portion of the European operating results that Novartis owed us was recorded as contract revenue. For the same periods in 2007, however, our portion of the European operating results was recorded as collaboration profit sharing expense. Effective with our acquisition of Tanox, Inc. on August 2, 2007, Novartis also makes: (1) additional profit sharing payments to us on U.S. sales of Xolair, which reduces our profit sharing expense; (2) royalty payments to us on sales of Xolair worldwide, which we record as royalty revenue; and (3) manufacturing service payments related to Xolair, which we record as contract revenue.

Under our existing arrangements with Novartis, we recognized the following amounts (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Product sales to Novartis	$	2	$	3	$	5	$	6

Royalties earned from Novartis	$	60	$	13	$	112	$	19

Contract revenue from Novartis	$	15	$	4	$	26	$	44

Cost of sales on product sales to Novartis	$	1	$	3	$	4	$	7

Research and development expenses incurred on joint development projects with Novartis	$	12	$	9	$	20	$	19

Collaboration profit sharing expense to Novartis	$	48	$	49	$	89	$	96

Contract revenue in the first six months of 2007 included a $30 million milestone payment from Novartis for European Union approval of Lucentis for the treatment of neovascular (wet) age-related macular degeneration (AMD).

-16-

expenses may include the net settlement of amounts we owe Novartis on R&D expenses that Novartis incurred on joint development projects, less amounts reimbursable to us by Novartis on those projects.

Note 7.

Income Taxes

Our effective income tax rate was 40% in the second quarter of 2008 compared to 37% in the second quarter of 2007, mainly due to a $33 million settlement with the Internal Revenue Service (IRS) for an item related to prior years. Our effective income tax rate was 39% in the first six months of 2008 compared to 37% in the first six months of 2007, mainly due to the IRS settlement.

Note 8.

Capital Stock

In May 2008, we entered into a prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $500 million to the investment bank. The investment bank is obligated to deliver to us, by September 30, 2008, not fewer than five million shares of our Common Stock based on a pre-determined formula, subject to a possible reduction in the number of shares received, an extension of the date on which shares are to be delivered, or other modifications or cancellation of the plan in certain circumstances. The prepaid amount has been reflected as a reduction of our stockholders’ equity as of June 30, 2008. There was no effect on EPS for the three or six months ended June 30, 2008 as a result of entering into this agreement.

Note 9.

Subsequent Event

On July 21, 2008, we announced that we received an unsolicited proposal from Roche to acquire all of the outstanding shares of our stock not owned by Roche at a price of $89.00 in cash per share. Roche’s ownership percentage of our outstanding shares was 55.9% as of June 30, 2008 and 55.6% as of July 31, 2008. A special committee of our Board of Directors, composed of the independent directors, has been formed to review, evaluate, and, in the special committee’s discretion, negotiate and recommend or not recommend the proposal. The Board of Directors has resolved that it will not recommend any possible transaction with Roche without the prior favorable recommendation of such transaction by the special committee. The outcome of the process has not been pre-determined, and there can be no assurance that the special committee will approve any transaction with Roche.

-17-

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Genentech, Inc.

We have reviewed the condensed consolidated balance sheet of Genentech, Inc. as of ~~March~~June 3130, ~~2006~~2008, and the related condensed consolidated statements of income for the three-month and ~~cash~~ six-month periods ended June 30, 2008 and 2007 and cash flows for the ~~three~~six-month periods ended ~~March~~June 3130, ~~2006~~2008 and ~~2005~~2007. These ~~financial~~ financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated ~~interim~~ financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Genentech, Inc. as of December 31, ~~2005~~2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated February 105, ~~2006~~2008, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the change in method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-based Payment.” In our opinion, the information set forth in the accompanying condensed consolidated ~~balance~~ balance sheet as of December 31, ~~2005~~2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ~~ERNST~~Ernst & ~~YOUNG~~Young LLP

Palo Alto, California

~~April~~July 730, ~~2006,~~2008

~~except for Note 7, as to which the date is~~ -18-

April 25, 2006

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

GENENTECH, INC.

FINANCIAL REVIEW

Overview

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.

The Company

Genentech is a leading biotechnology company that discovers, develops, manufactures, and commercializes ~~biotherapeutics~~medicines for patients with significant unmet medical needs. We commercialize multiple biotechnology products, and also receive royalties from companies that are licensed to market products based on our technology.

Major Developments inDuring the ~~First~~Second Quarter of ~~2006~~2008

InWe primarily earn revenue and income and generate cash from product sales and royalty revenue. In the ~~first~~second quarter of ~~2006~~2008, our total operating ~~revenues~~revenue ~~were~~ was $13,~~986~~ 236 million, an increase of 368% from $13,~~462~~004 million in the ~~first~~second quarter of ~~2005~~ 2007. Our net income for the second quarter of 2008 was $~~421~~ 782 million, an increase of 485% from $~~284~~747 million in the ~~first~~second quarter of ~~2005~~2007. ~~Net income~~ In in the first ~~quarter~~six months of ~~2006~~2008, ~~includes~~our ~~the~~total ~~effect~~operating ofrevenue ~~stock-based compensation~~was ~~expense~~$6,299 ~~related~~million, toan increase ~~employee~~of ~~stock~~8% ~~options~~from ~~and~~$5,847 ~~employee~~million ~~stock purchases~~in ~~under~~the ~~Statement~~first ofsix ~~Financial~~months ~~Accounting~~of ~~Standards No~~2007. ~~123~~Our ~~(revised~~net ~~2004),~~income ~~“Share-Based~~for ~~Payment”~~the ~~(or~~first ~~“FAS~~six ~~123R”),~~months ~~which~~of ~~decreased~~2008 ~~our~~was ~~net~~$1,764 ~~income~~million, byan increase of 21% from $471,453 million ~~after~~in ~~taxes~~the first six months of 2007.

~~Significant~~On ~~milestones~~April ~~during~~14, ~~the~~2008, ~~first~~we ~~quarter~~and Biogen Idec announced that OLYMPUS, a Phase II/III study of ~~2006~~Rituxan ~~were~~for primary-progressive multiple sclerosis (PPMS), did not meet its primary endpoint as ~~follows:~~measured by the time to confirmed disease progression during the 96-week treatment period. However, we did observe evidence of biologic activity in a subset of patients. We will continue to analyze the results of the study with Biogen Idec and expect to submit the data for presentation at an upcoming medical meeting.

WeOn ~~received~~April 20, 2008, we announced an update to the ~~following~~previously Ureported results from B017704, the Roche-sponsored international Phase III clinical study of Avastin in combination with gemcitabine and cisplatin chemotherapy in patients with advanced, non-squamous, non-small cell lung cancer (NSCLC).S. ~~Food~~The update confirmed the clinically and ~~Drug~~statistically ~~Administration~~significant improvement in the primary endpoint of progression-free survival (orPFS) ~~“FDA”~~for the two different doses of Avastin studied in the trial (15 mg/kg/every-three-weeks and 7.5 mg/kg/every-three-weeks) compared to chemotherapy alone. The study did not ~~approvals:~~demonstrate a statistically significant prolongation of overall survival, a secondary endpoint, for either dose in combination with gemcitabine and cisplatin chemotherapy compared to chemotherapy alone. Median survival of patients in all arms of the study exceeded one year, which is longer than previously reported survival times in this indication.

·On April ~~Rituxan~~24, -2008, ~~for~~we ~~use~~announced that the California Supreme Court overturned the award of $200 million in ~~first-line~~punitive ~~treatment~~damages to COH but upheld the award of ~~patients~~$300 million ~~with~~in ~~diffuse~~compensatory ~~large~~damages ~~B-cell~~resulting from a contract dispute brought by COH. The punitive damages were part of a 2004 decision of the California Court of Appeal, ~~CD20-positive~~which upheld a 2002 Los Angeles County Superior Court jury verdict awarding these amounts. As a result of the California Supreme Court decision, ~~non-Hodgkin’s~~we ~~lymphoma~~reversed ~~(or~~a $300 million net litigation accrual related to the punitive damages and accrued interest, which was recorded as “~~DLBCL~~Special items: litigation-related”); in our Condensed Consolidated Statements of Income for the first quarter and first six months of 2008. We paid $476 million to COH in the second quarter of 2008, reflecting the amount of compensatory damages awarded, plus interest thereon from the date of the original decision in 2002.

·On April ~~Rituxan~~29, -2008, towe ~~treat~~announced ~~patients~~that ~~with~~EXPLORER, ~~active~~the ~~rheumatoid~~Phase ~~arthritis~~II/III study of Rituxan for systemic lupus erythematosus (orSLE, ~~“RA”~~commonly called lupus), ~~who~~did ~~have~~not ~~had~~meet anits primary ~~inadequate~~endpoint, defined as the proportion of Rituxan treated patients who achieved a major clinical response to(MCR) ~~tumor~~or ~~necrosis~~partial ~~factor~~clinical ~~antagonist~~response ~~therapy.~~(PCR), measured

~~We submitted the following FDA filings:~~-19-

·by the aBritish ~~Supplemental~~Isles ~~Biologics~~Lupus ~~License~~Assessment ~~Application~~Group (~~or “sBLA”~~BILAG), ~~for~~a ~~use~~lupus ofactivity ~~Herceptin~~response index, compared to ~~treat~~placebo ~~early-stage,~~at ~~HER2-positive~~52 ~~breast~~weeks. ~~cancer;~~The study also did not meet any of the six secondary endpoints.

·On June 11, 2008, we announced that we settled the patent litigation with ~~Biogen~~MedImmune involving ~~Idec,~~the anCabilly ~~sBLA~~patent. The settlement resolves disputed issues with respect to MedImmune’s marketed product Synagis® as well as a related product for ~~use~~which ofMedImmune ~~Rituxan~~is seeking regulatory approval. The settlement also permits MedImmune to ~~treat~~obtain ~~indolent~~licenses ~~front-line~~for ~~non-Hodgkin’s~~certain ~~lymphoma~~additional pipeline ~~(or~~products ~~“NHL”);~~under ~~and~~the Cabilly patent family.

·On July ~~on April 11~~21, ~~2006~~2008, we announced that we received an ~~sBLA~~unsolicited ~~for~~proposal ~~use~~from Roche to acquire all of ~~Avastin~~the outstanding shares of our stock not owned by Roche at a price of $89.00 in ~~first-line~~cash ~~treatment~~per share. Roche’s ownership percentage of ~~advanced~~our outstanding shares was 55.9% as of June 30, ~~non-squamous~~2008 and 55.6% as of July 31, 2008. A ~~non~~special committee of our Board of Directors, composed of the independent directors, has been formed to review, evaluate, and, in the special committee’s discretion, negotiate and recommend or not recommend the proposal. The Board of Directors has resolved that it will not recommend any possible transaction with Roche without the prior favorable recommendation of such transaction by the special committee. The outcome of the process has not been pre-~~small~~determined, ~~cell~~and ~~lung~~there ~~cancer~~can be no assurance that the special committee will approve any transaction with Roche.

OnOur ~~February~~Strategy ~~28,~~and 2006, the FDA accepted our Biologics License Application (or “BLA”) for the use of Lucentis in the treatment of neovascular wet age-related macular degeneration with an action date of June 30, 2006.Goals

InAs ~~January~~announced in 2006, ~~the~~our ~~FDA~~business ~~approved~~objectives for the ~~production~~years of2006 ~~Xolair~~through ~~bulk~~2010 include ~~drug~~bringing ~~substance~~ at least 20 new molecules into clinical development, bringing ~~Novartis’~~at ~~production~~least ~~facility~~15 inmajor ~~Huningue~~new products or indications onto the market, ~~France~~becoming the number one U.S. Inoncology ~~addition,~~company in ~~February 2006~~sales, weand ~~acquired~~achieving acertain ~~second~~financial growth ~~facility~~measures. These objectives are reflected in ~~Oceanside,~~our ~~California~~revised ~~from~~Horizon ~~Biogen~~2010 strategy ~~Idec~~and goals summarized on our website at www.gene.com/gene/about/corporate/growthstrategy. ~~The~~In ~~facility~~2007, ~~was~~we ~~purchased~~announced ~~for~~an ~~$29~~internal ~~million~~stretch ~~and~~goal ~~includes~~to ~~approximately~~add ~~5,500 liters~~a total of ~~capacity~~30 tomolecules into bedevelopment ~~used~~during ~~for~~the ~~clinical~~five-year ~~bulk~~period ~~manufacturing~~from the beginning of ~~new~~2006 ~~molecular~~through ~~entities~~the end of 2010.

-17-

On January 1, 2006, we adopted FAS 123R, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. Employee stock-based compensation expense recognized under FAS 123R for the three months ended March 31, 2006 was $74 million, or approximately $0.04 per diluted share. For the full year 2006, we expect employee stock-based compensation expense to be in the range of $0.15 to $0.17 per diluted share. See also Note 2, “Employee Stock-Based Compensation” in the Condensed Consolidated Financial Statements of Part 1, Item 1 of this Form 10-Q for further information.

Our Strategy

Our business objectives for the years 2006 through 2010 are reflected in our revised Horizon 2010 strategy and goals summarized below and on our website at http://www.gene.com.

· To bring at least 20 new molecules into clinical development.

· To bring at least 15 major new products or indications onto the market.

· To become the number one U.S. oncology company in sales.

· To achieve compound annual non-GAAP earnings per share(1) growth of 25 percent.

· To achieve cumulative free cash flow(2) of $12 billion.

___________

	Non-GAAP financial goals are included because our management uses non-GAAP financial measures to monitor and evaluate Genentech’s operating results and trends on an ongoing basis and to facilitate internal comparison to historical operating results. Excluding the effects of charges related to employee stock-based compensation expense, Roche’s redemption of our special common stock, litigation, and changes in accounting principles from our operating results provides users of our financial statements an important insight into our operating results and related trends that affect our business. In addition, our management uses non-GAAP financial information and measures internally for operating, budgeting and financial planning purposes, including the establishment of corporate, functional, departmental and individual performance goals.
(1)	The non-GAAP EPS goal for 2006 through 2010 excludes the after-tax effect of the following items: employee stock-based compensation expense associated with our adoption of FAS 123R, recurring charges related to the redemption of our special common stock by Roche, litigation-related special charges for accrued interest and associated bond costs on the City of Hope judgment and other potential special charges related to existing or future litigation or its resolution, and changes in accounting principles, all of which may be significant. GAAP EPS for 2006 through 2010 will include the items described above.
(2)	Our free cash flow measure is defined as cash from ongoing operations less gross capital expenditures. Cash from ongoing operations is derived from the “net cash provided by operating activities” line in our consolidated statements of cash flows, but this number may be adjusted for items that would allow the measure to better reflect our operational performance. These adjustments include, for example, cash receipts or payments related to litigation settlements, investments in trading securities and other potential items, any of which may be significant.

Economic and Industry-wide Factors

Our ~~goals~~strategy and ~~objectives~~goals are challenged by economic and industry-wide factors that affect our business. ~~Some~~Key offactors ~~the~~that ~~most~~affect ~~important~~our ~~factors~~future growth are discussed below:.

·Ÿ ~~Successful~~We ~~development~~face ofsignificant ~~biotherapeutics~~competition isin ~~highly~~the ~~difficult~~diseases ~~and~~of ~~uncertain.~~interest ~~Our long-term business growth depends upon our ability~~ to ~~commercialize~~us ~~important~~from ~~new~~pharmaceutical ~~therapeutics~~and tobiotechnology ~~treat unmet medical needs such as cancer~~companies. ~~Since~~The ~~the~~introduction ~~underlying biology~~ of ~~these~~new ~~diseases~~competitive isproducts ~~not~~or ~~completely~~follow-on ~~understood~~biologics, itnew isinformation ~~very~~about ~~challenging~~existing ~~to discover and develop safe and effective treatments~~products, and ~~the~~pricing ~~majority of potential new therapeutics fail to generate the safety~~ and ~~efficacy~~distribution ~~data~~decisions ~~required~~by tous ~~obtain~~or ~~regulatory~~our ~~approval.~~competitors Inmay ~~addition,~~result ~~we face tremendous competition~~ in ~~the~~lost ~~diseases~~market ofshare ~~interest~~for to us., ~~Our~~reduced ~~business~~utilization ~~requires~~of ~~significant~~our ~~investments~~products, inlower ~~research~~prices, and ~~development (~~/or ~~“R&D”)~~reduced ~~over~~product ~~many years~~sales, ~~often~~even for products ~~that~~protected ~~fail~~by ~~during the R&D process~~patents. InWe ~~addition,~~monitor ~~after~~the ~~our~~competitive ~~products~~landscape ~~receive~~and ~~FDA~~develop ~~approval,~~strategies ~~they~~in ~~remain~~response ~~subject~~ to ~~ongoing FDA regulation, including changes to the product label,~~ new ~~or revised regulatory requirements for manufacturing practices, written advisement to physicians, and/or product recalls~~information.

Ÿ Our long-~~18-~~term business growth depends upon our ability to continue to successfully develop and commercialize important novel therapeutics to treat unmet medical needs. We recognize that the successful development of pharmaceutical products is highly difficult and uncertain, and that it will be challenging for us to continue to discover and develop innovative treatments. Our business requires significant investment in R&D over many years, often for products that fail during the R&D process. Once a product receives FDA approval, it remains subject to ongoing FDA regulation, including changes to the product label, new or revised regulatory requirements for manufacturing practices, written advisement to physicians, and product recalls or withdrawals.

·Ÿ ~~Intellectual~~Our ~~property~~business ~~protection~~model ofrequires ~~our~~appropriate ~~products~~pricing isand ~~crucial~~reimbursement tofor our ~~business.~~products ~~Loss~~to ofoffset ~~effective~~the ~~intellectual~~costs ~~property~~and ~~protection~~risks onof ~~one~~drug ordevelopment. ~~more~~Some ~~products~~of ~~could~~the ~~result~~pricing inand ~~lost~~distribution ~~sales~~of toour ~~competing~~ products ~~and~~have ~~may~~received ~~negatively~~negative ~~affect~~press ~~our~~coverage ~~sales,~~and ~~royalty~~public ~~revenues~~ and ~~operating~~governmental ~~results~~scrutiny. We ~~are~~will ~~often~~continue ~~involved~~to inmeet ~~disputes~~with ~~over~~patient ~~contracts~~groups, payers, and ~~intellectual~~other ~~property~~stakeholders ~~and~~in wethe ~~work~~healthcare system to ~~resolve~~understand ~~these~~their ~~disputes~~issues inand ~~confidential~~concerns. ~~negotiations~~The orpricing ~~litigation.~~and Wereimbursement ~~expect~~environment ~~legal~~for ~~challenges~~our products may change in ~~this~~the ~~area~~future toand ~~continue.~~become Wemore ~~plan~~challenging due to, ~~continue~~among toother ~~build~~reasons, ~~upon~~new ~~and~~policies ~~defend~~of ~~our~~the ~~intellectual~~next ~~property~~presidential ~~position~~administration or new healthcare legislation passed by congress.

· Manufacturing biotherapeutics is difficult and complex, and requires facilities specifically designed and validated to run biotechnology production processes. The manufacture of a biotherapeutic requires developing and maintaining a process to reliably manufacture and formulate the product at an appropriate scale, obtaining regulatory approval to manufacture the product, and is subject to changes in regulatory requirements or standards that may require modifications to the manufacturing process or FDA action (see “Difficulties or delays in product manufacturing or in obtaining materials from our suppliers could harm our business and/or negatively affect our financial performance” of “Risk Factors” in Part II, Item 1A of this Form 10-~~Q).~~20-

·Ÿ ~~The~~As ~~Medicare~~the ~~Prescription Drug Improvement and Modernization Act (or “~~Medicare ~~Act”) was enacted into law in December 2003~~ and onMedicaid ~~November~~programs 3,are ~~2004,~~ the ~~2005~~largest ~~Physician~~payers ~~Fee~~for ~~Schedule~~our ~~and~~products, ~~Hospital~~rules ~~Outpatient~~related ~~Prospective~~to ~~Payment~~the ~~System~~programs’ ~~Final~~coverage ~~Rules were announced. As Centers for Medicare~~ and ~~Medicaid~~reimbursement ~~Services (or “CMS”) is our single largest payer, the new rules~~ continue to represent an important ~~area~~issue offor ~~focus~~our business. ToNew ~~date,~~regulations werelated ~~have~~to ~~not~~hospital ~~seen any detectable effects of the new rules on our product sales,~~ and wephysician ~~anticipate~~payment ~~minimal~~continue ~~effects~~to onbe ~~our~~implemented ~~revenues in 2006~~annually. OnAs ~~November~~a 2,result ~~2005,~~of ~~CMS released its Final Rule with comment on~~ the ~~Medicare~~Deficit ~~Part~~Reduction BAct ~~Competitive~~of ~~Acquisition Program (or “CAP”). The CAP option~~2005, ~~which~~new ~~the~~regulations ~~CMS~~became ~~expects~~effective ~~to begin~~ in ~~July~~the ~~2006,~~fourth ~~required~~quarter ~~under~~of ~~the~~2007 ~~Medicare~~that ~~Act,~~ will beaffect ~~available to physicians providing services under Part B of Medicare. Under~~ the ~~CAP,~~discounted ~~physicians~~price ~~could~~for ~~choose~~our toproducts ~~either~~paid ~~obtain~~by ~~drugs~~Medicaid ~~directly from qualified CAP vendors, or continue to purchase drugs directly~~ and begovernment-affiliated ~~reimbursed~~customers. byWe ~~CMS~~consider atthese ~~the~~rules ~~Average~~as ~~Selling~~we ~~Price~~plan +our 6%business ~~rate.~~and ~~Although~~work ~~CMS~~to isrepresent ~~still~~our ~~finalizing~~point ~~details~~ of ~~the~~view ~~program,~~to ~~we anticipate that~~ the ~~impact~~legislators ofand ~~the program on our sales will be minimal~~payers.

·Ÿ ~~Our~~Intellectual ~~ability~~property protection of our products is crucial to ~~attract~~our ~~and~~business. ~~retain~~Loss ~~highly~~of ~~qualified~~effective ~~and~~intellectual ~~talented~~property ~~people~~protection could result in ~~all~~lost ~~areas~~sales to competing products and loss of ~~the~~royalty ~~company~~payments (for example, ~~and~~royalty ~~our~~income ~~ability~~associated towith ~~maintain~~the ~~our~~Cabilly ~~unique~~patent) ~~culture~~from licensees, ~~will~~and bemay ~~critical~~negatively toaffect our ~~success~~sales, ~~over~~royalty ~~the~~revenue, ~~long-term~~and operating results. InWe ~~the~~are ~~first~~often ~~quarter~~involved ofin ~~2006~~disputes weover ~~grew~~contracts toand ~~over~~intellectual 10property,~~000~~ ~~employees.~~and Wewe ~~are~~work ~~working~~to ~~diligently~~resolve ~~across~~these ~~the~~disputes ~~company~~in toconfidential ~~make~~negotiations ~~sure~~or ~~that~~litigation. weWe ~~successfully~~expect ~~hire,~~legal ~~train~~challenges ~~and~~in ~~integrate~~this ~~new~~area ~~employees~~to ~~into~~continue. ~~the~~We ~~Genentech~~plan ~~culture~~to continue to build upon and ~~environment~~defend our intellectual property position.

Manufacturing pharmaceutical products is difficult and complex, and requires facilities specifically designed and validated to run biotechnology production processes. Difficulties or delays in product manufacturing or in obtaining materials from our suppliers, or difficulties in accurately forecasting manufacturing capacity needs or complying with regulatory requirements, could negatively affect our business. Additionally, we have had, and may continue to have, an excess of available capacity, which could lead to idling of a portion of our manufacturing facilities, during which time we would incur unabsorbed or idle plant charges or other excess capacity charges, resulting in an increase in our COS. We use integrated demand management and manufacturing processes to optimize our production processes.

Our ability to attract and retain highly qualified and talented people in all areas of the company, and our ability to maintain our unique culture, will be critical to our success over the long-term. We are working diligently across the company to make sure that we successfully hire, train, and integrate new employees into the Genentech culture and environment.

Marketed Products

We commercialize in the ~~United~~pharmaceutical ~~States~~products ~~(or~~listed ~~“U.S.”)~~below in the ~~biotechnology products listed~~ ~~below~~U.S.:

Avastin (bevacizumab) is an anti-VEGF (vascular endothelial growth factor) humanized antibody approved for use in combination with intravenous 5-fluorouracil -based chemotherapy as a treatment for patients with first-~~line~~ (or ~~previously~~second-line ~~untreated)~~ metastatic cancer of the colon or rectum. It is also approved for use in combination with carboplatin and paclitaxel chemotherapy for the first-line treatment of unresectable, locally advanced, recurrent or metastatic non-squamous NSCLC. On February 22, 2008, ~~rectum~~we received accelerated approval from the FDA to market Avastin in combination with paclitaxel chemotherapy for the treatment of patients who have not received prior chemotherapy for metastatic HER2-negative breast cancer (BC).

Rituxan (rituximab) is an anti-CD20 antibody ~~which~~that we commercialize with Biogen Idec ~~Inc~~. It is approved for first-line ~~the~~ treatment of patients with ~~relapsed or refractory, low-grade or~~ follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma, ~~including~~(NHL) ~~retreatment~~in combination with cyclophosphamide, vincristine, and ~~bulky~~prednisone (CVP) chemotherapy regimens or following CVP chemotherapy in patients with stable disease, ~~and~~or onwho ~~February~~achieve 10a partial or complete response following first-line treatment with CVP chemotherapy. Rituxan is also approved for treatment of patients with relapsed or refractory, ~~2006~~low-grade or follicular, CD20-positive, itB-cell ~~was~~NHL, ~~approved~~including ~~for~~retreatment ~~use~~and inbulky diseases. Rituxan is indicated for first-line treatment of patients with diffuse large B-cell, CD20-positive~~, non-Hodgkin’s~~ ~~lymphoma~~NHL ~~(or “DLBCL”)~~ in combination with ~~CHOP (~~cyclophosphamide, doxorubicin, vincristine, and prednisone (CHOP) or other anthracycline-based ~~chemotherapy~~ ~~regimens~~chemotherapy. ~~On February 28, 2006~~ Rituxan ~~was~~is ~~approved~~also indicated for use in combination with methotrexate ~~for~~to ~~reducing~~ reduce signs and symptoms and slow the progression of structural damage in adult ~~patients~~ patients with ~~moderately~~moderate-to-~~severely~~severe ~~active~~ rheumatoid arthritis (~~or “~~RA”) who have had an an inadequate response to one or more tumor necrosis factor (~~or “~~TNF”) ~~antagonist~~ antagonist therapies.

Herceptin (trastuzumab) is a humanized anti-HER2 antibody approved for ~~the~~ treatment of ~~certain~~ patients ~~with~~ ~~metastatic~~(who ~~breast cancer. Herceptin is approved for use as a first-line~~have ~~therapy in combination with paclitaxel and as a~~tumors

-1921-

~~single~~that ~~agent~~overexpress inthe ~~second~~HER2 protein) with node-positive ~~and~~or ~~third~~node-~~line~~negative ~~therapy~~(Estrogen Receptor/Progesterone ~~for~~Receptor ~~patients~~negative or with ~~metastatic~~one ~~breast~~high-risk feature) BC as ~~cancer~~part ~~who~~of ~~have~~an ~~tumors~~adjuvant ~~that~~treatment ~~overexpress~~regimen ~~the~~containing ~~human~~1) doxorubicin, ~~epidermal~~cyclophosphamide, ~~growth~~and ~~factor~~either ~~receptor~~paclitaxel or docetaxel; 2) (docetaxel and carboplatin and as a single agent following multi-modality anthracycline-based therapy. It is also approved for use as a first-line therapy in combination with paclitaxel and as a single agent in patients who have received one or ~~“HER2”)~~more ~~protein~~chemotherapy regimens for metastatic disease.

~~Tarceva~~ Lucentis (~~erlotinib~~ranibizumab)~~, which~~ ~~we commercialize with OSI Pharmaceuticals, Inc.,~~ is ~~a small-molecule~~an ~~tyrosine~~anti-VEGF ~~kinase~~antibody ~~inhibitor~~fragment ~~of the HER1/epidermal growth factor receptor (or “EGFR”) signaling pathway. Tarceva is~~ approved for the treatment of ~~patients with~~neovascular ~~locally advanced or metastatic non-small cell lung cancer~~ (~~or “NSCLC”~~wet) ~~after failure of at least one prior chemotherapy regimen~~AMD. ~~It is also approved, in combination with gemcitabine chemotherapy, for the first-line treatment of patients with locally advanced, unresectable or metastatic pancreatic cancer.~~

Xolair (omalizumab) is a humanized anti-IgE (immunoglobulin E) antibody, ~~which~~that we commercialize with Novartis AGPharma ~~(or “Novartis”)~~AG. Xolair is approved for ~~the~~adults ~~treatment~~and ofadolescents (age 12 or older) with moderate-to-severe persistent ~~allergic~~ asthma who have a positive skin test or in ~~adults~~vitro reactivity to a perennial aeroallergen and ~~adolescents~~whose 12symptoms are ~~years and~~inadequately ~~older.~~controlled with inhaled corticosteroids.

~~Raptiva~~ Tarceva (~~efalizumab~~erlotinib), which we commercialize with OSI Pharmaceuticals, Inc., is a ~~humanized anti~~small-~~CD11a~~molecule ~~antibody~~tyrosine kinase inhibitor of the HER1/epidermal growth factor receptor signaling pathway. Tarceva is approved for the treatment of patients with locally advanced or ~~chronic~~metastatic ~~moderate-to-severe~~NSCLC ~~plaque~~after ~~psoriasis~~failure inof ~~adults~~at ~~age~~least 18one orprior ~~older~~chemotherapy ~~who~~regimen. ~~are~~It is ~~candidates~~also approved, in combination with gemcitabine chemotherapy, for ~~systemic~~the first-line ~~therapy~~treatment of patients with locally advanced, unresectable, or metastatic ~~phototherapy~~pancreatic cancer.

Nutropin (somatropin [rDNA origin] for injection) and Nutropin AQ are ~~growth~~ growth hormone products approved for the treatment of growth hormone deficiency in in children and adults, growth failure associated with chronic renal ~~insufficiency~~ insufficiency prior to kidney transplantation, short stature associated with Turner syndrome , and long-term treatment of idiopathic short stature.

Activase (alteplase~~, recombinant~~) is a tissue -plasminogen activator (~~or “~~t-PA”) approved for the treatment of acute myocardial infarction (heart attack), acute ischemic stroke (blood clots in the brain) within three hours of the onset of symptoms, and acute massive pulmonary embolism (blood clots in the lungs).

TNKase (tenecteplase) is a modified form of t-PA approved for the treatment of acute myocardial infarction (heart attack).

Cathflo Activase (alteplase, recombinant) is a t-PA approved in adult and pediatric patients for the restoration of function to central venous access devices that have become occluded due to a blood clot.

Pulmozyme (dornase alfa, recombinant) is an inhalation solution of deoxyribonuclease ~~(rhDNase)~~ I, approved for the treatment of cystic fibrosis.

Raptiva (efalizumab) is a humanized anti-CD11a antibody approved for the treatment of chronic moderate-to-severe plaque psoriasis in adults age 18 or older who are candidates for systemic therapy or phototherapy.

Licensed Products

We receive ~~royalties~~royalty revenue from F.various ~~Hoffmann-La~~licensees, ~~Roche~~including ~~(or~~significant ~~“Hoffmann-La~~royalty revenue from Roche”) on sales of:

·Ÿ Herceptin, Pulmozyme, and Avastin outside of the U.S.,;

·Ÿ Rituxan outside of the U.S., excluding Japan,; and

·Ÿ Nutropin products, Activase, and TNKase in Canada.

See Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding certain patent-related legal proceedings.

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Available Information

The following information can be found on our website at ~~http://~~www.gene.com, or can be be obtained free of charge by contacting our Investor Relations Department at (650) 225-~~1599~~4150 or by sending an e-mail message to investor.relations@gene.com:

·Ÿ ~~our~~Our ~~annual~~Annual ~~report~~Report on Form 10-K, ~~quarterly~~Quarterly ~~reports~~Reports on Form 10-Q, ~~current~~Current ~~reports~~Reports on Form 8-K, and all amendments to those reports as soon as is reasonably practicable after such material is electronically filed with the U.S. Securities and Exchange Commission;

~~-20-~~Ÿ Our policies related to corporate governance, including our Principles of Corporate Governance, Good Operating Principles, and Code of Ethics, which apply to our Chief Executive Officer, Chief Financial Officer, and senior financial officials; and

·Ÿ ~~our~~The ~~policies~~charters ~~related to corporate governance, including Genentech’s Principles~~ of ~~Corporate~~the ~~Governance,~~Audit ~~Good~~Committee ~~Operating Principles (Genentech’s code of ethics applying to Genentech’s directors, officers~~ and ~~employees)~~the asCompensation ~~well~~Committee ~~as Genentech’s Code~~ of ~~Ethics applying to~~ our ~~CEO,~~Board ~~CFO~~of ~~and senior financial officials and;~~Directors.

· the charter of the Audit Committee of our Board of Directors.

Critical Accounting Policies and the Use of Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based ~~upon~~on our Condensed Consolidated Financial Statements and ~~the~~ the related disclosures, which have been prepared in accordance with ~~accounting principles~~U.S. ~~generally accepted in the United States (or “~~GAAP”). The ~~preparation~~ preparation of these Condensed Consolidated Financial Statements requires management to make estimates, assumptions, and judgments that affect the reported amounts in our Condensed Consolidated Financial Statements and accompanying notes. These estimates form the basis for ~~making judgments about~~ the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and we have established internal controls related to the preparation of these estimates. Actual results and the timing of the results could differ materially from these estimates.

We believe the following policies to be critical to understanding our financial condition, results of operations, and ~~our~~ expectations for ~~2006~~2008, because these policies require management to make significant estimates, assumptions, and judgments about matters that are inherently uncertain.

~~Legal~~Loss Contingencies

We are currently, orand have been, involved in certain legal proceedings, ~~as discussed~~including inlicensing and contract disputes, shareholder lawsuits, and other matters. See Note 45, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements ofin Part I, Item 1 of this Quarterly Report on Form 10-Q. for more information on these matters. We assess the likelihood of any adverse judgments or outcomes for these legal matters as well as potential ranges of probable losses. ~~Included~~We ~~in “litigation-related~~record ~~and~~an ~~other~~estimated ~~long-term~~loss ~~liabilities”~~as ina ~~the~~charge ~~accompanying Condensed~~to ~~Consolidated~~income ~~Balance~~if ~~Sheet~~we atdetermine ~~March 31~~that, based ~~2006~~on isinformation ~~$689~~available ~~million,~~at ~~which represents~~the ~~our~~time, ~~estimate~~the ofloss ~~the~~is ~~costs~~probable ~~for~~and the ~~current~~amount of ~~resolution~~loss ofcan ~~these matters~~be reasonably estimated. The nature of these matters is highly uncertain and subject to change; as a result, the amount of our liability for certain of these matters could exceed or be less than the amount of our current estimates, depending on the final outcome of these matters. An outcome of such matters ~~different~~that ~~than~~differs ~~previously~~from ~~estimated~~ our current estimates could have a material effect on our financial position or our results of operations in any one quarter.

Revenue Recognition–Avastin U.S. Product Sales and Patient Assistance Program

In February 2007, we launched the Avastin Patient Assistance Program, which is a voluntary program that enables eligible patients who have received 10,000 mg of Avastin in a 12-month period to receive free Avastin in excess of the 10,000 mg during the remainder of the 12-month period. Based on the current wholesale acquisition cost, the 10,000 mg is valued at $55,000 in gross revenue. Eligible patients include those who are being treated for an FDA-approved indication and who meet the financial eligibility requirements for this program. The program is available for eligible patients who enroll, regardless of whether they are insured. We defer a portion of our gross Avastin product sales revenue to reflect our estimate of the commitment to supply free Avastin to eligible patients who elect to enroll in the program.

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In order to estimate the amount of free Avastin to be provided to patients under the Avastin Patient Assistance Program, we need to estimate several factors, most notably: the number of patients who are currently being treated for FDA-approved indications and the start date for their treatment regimen, the extent to which patients may elect to enroll in the program, the number of patients who will meet the financial eligibility requirements of the program, and the duration and extent of treatment for the FDA-approved indications, among other factors. We have based our enrollment assumptions on physician surveys and other information that we consider relevant. We will continue to update our estimates in each reporting period as new information becomes available. If the actual results underlying this deferred revenue accounting vary significantly from our estimates, we will need to adjust these estimates. Based on these estimates, we defer a portion of Avastin revenue on product vials sold through normal commercial channels. The deferred revenue will be recognized when free Avastin vials are delivered. In the second quarter and first six months of 2008, we deferred $1 million and $2 million, respectively, of Avastin product sales, resulting in a total deferred revenue liability in connection with the Avastin Patient Assistance Program of $4 million in our Condensed Consolidated Balance Sheet as of June 30, 2008. In the first six months of 2007, we deferred $3 million of Avastin product sales in connection with the Avastin Patient Assistance Program. Usage of the Avastin Patient Assistance Program may increase with the approval of Avastin for the treatment of metastatic HER2-negative BC. As we continue to evaluate the amount of revenue to defer related to the Avastin Patient Assistance Program, we may recognize previously deferred revenue in Avastin U.S. product sales in future periods or increase the amount of revenue deferred.

Product Sales Allowances

~~Revenues~~Revenue from ~~product sales, which are principally generated in the~~ U.S., ~~are~~product sales is recorded net of allowances and accruals for rebates, healthcare ~~wholesaler~~provider contractual chargebacks, prompt -pay sales discounts, product returns, and wholesaler ~~incentives,~~inventory ~~and~~management ~~bad debts~~allowances, all of which ~~are~~ are established at the time of sale. Sales allowances and accruals are based on estimates of the amounts earned or to be claimed on the related sales. The amounts reflected in our Condensed Consolidated Statements of Income as product sales allowances have been relatively consistent at approximately seven to eight percent of gross sales. In order to prepare our Condensed ~~Consolidated~~ Consolidated Financial Statements, we are required to make estimates regarding the amounts earned or to be claimed on the related product sales.

~~Rebate~~Definitions reserves and accruals represent our estimated obligations to wholesalers and third parties (clinics, hospitals and pharmacies), respectively. These reserves and accruals result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth. As a result, the calculation for ~~these rebates requires an estimate of~~ the ~~customer’s~~product ~~buying patterns~~sales ~~and~~allowance ~~the~~types ~~resulting~~are ~~applicable~~as contractual rebate rate(s) to be earned over a contractual period. If our estimate of a customer’s buying patterns is incorrect, we may need to adjust our estimates in future periods. In the first quarter of 2006, the majority of these reserves and accruals relate to our non-oncology products.follows:

~~To date,~~Ÿ weRebate ~~have~~allowances ~~not~~and ~~recorded~~accruals ~~any~~include ~~adjustments~~both todirect ~~our~~and ~~estimates~~indirect ofrebates. ~~product~~Direct ~~sales allowances~~rebates ~~that~~are ~~were~~contractual ~~material~~price toadjustments ~~our~~payable ~~Condensed~~to ~~Consolidated~~direct ~~Financial Statements. However~~customers, itmainly isto ~~possible~~wholesalers ~~that~~and wespecialty ~~may~~pharmacies ~~need~~that topurchase ~~adjust~~products ~~our~~directly ~~estimates in future~~from ~~periods~~us. AsIndirect ofrebates ~~March~~are ~~31,~~contractual ~~2006,~~price ~~our~~adjustments ~~Condensed~~payable ~~Consolidated~~to ~~Balance~~healthcare ~~Sheet reflected~~providers ~~product~~and ~~sales~~organizations ~~allowance~~such ~~reserves~~as ~~and~~clinics, ~~accruals~~hospitals, ~~totaling~~pharmacies, ~~approximately $134~~Medicaid, ~~million~~ and ~~for~~group ~~the~~purchasing ~~three~~organizations ~~months~~that ~~ended~~do ~~March~~not ~~31,~~purchase ~~2006,~~products ~~our net~~directly from us.

~~-21-~~Ÿ Product return allowances are established in accordance with our Product Returns Policy. Our returns policy allows product returns within the period beginning two months prior to and six months following product expiration.

~~product~~ Ÿ Prompt-pay sales ~~were~~discounts ~~approximately~~are ~~$1,644~~credits ~~million~~granted to wholesalers for remitting payment on their purchases within established cash payment incentive periods.

Wholesaler inventory management allowances are credits granted to wholesalers for compliance with various contractually defined inventory management programs. These programs were created to align purchases with underlying demand for our products and to maintain consistent inventory levels, typically at two to three weeks of sales depending on the product.

Ÿ	Healthcare provider contractual chargebacks are the result of our contractual commitments to provide products to healthcare providers at specified prices or discounts.

We believe that our estimates related to wholesaler inventory management payments are not material amounts, based on the historical levels of credits and allowances as a percentage of product sales. We believe that our estimates related to healthcare provider contractual chargebacks and prompt-pay sales discounts do not have a high degree of estimation complexity or uncertainty, as the related amounts are settled within a short period of time. We

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consider rebate allowances and accruals and product returns allowances to be the only estimations that involve material amounts and require a higher degree of subjectivity and judgment to account for the obligations. As a result of the uncertainties involved in estimating rebate allowances and accruals and product returns allowances, there is a possibility that materially different amounts could be reported under different conditions or using different assumptions.

Our rebates are based on definitive agreements or legal requirements (such as Medicaid). These rebates are primarily estimated using historical and other data, including patient usage, customer buying patterns, applicable contractual rebate rates, and contract performance by the benefit providers. Direct rebates are accrued at the time of sale and recorded as allowances against trade accounts receivable; indirect rebates (including Medicaid) are accrued at the time of sale and recorded as liabilities. Rebate estimates are evaluated quarterly and may require changes to better align our estimates with actual results. As part of this evaluation, we review changes to Medicaid legislation and state rebate contracts, changes in the level of discounts, and significant changes in product sales trends. Although rebates are accrued at the time of sale, rebates are typically paid out, on average, up to six months after the sale. We believe that our rebate allowances and accruals estimation process provides a high degree of confidence in the annual allowance amounts established. Based on our estimation, the changes in rebate allowances and accruals estimates related to prior years have not exceeded 3%. To further illustrate our sensitivity to changes in the rebate allowances and accruals process, a 10% change in our annualized rebate allowances and accruals provision experienced to date in 2008 (which is in excess of three times the level of variability that we reasonably expect to observe for rebates) would have an approximate $20 million unfavorable effect on our results (or approximately $0.01 per share). The total rebate allowances and accruals recorded in our Condensed Consolidated Balance Sheets were $78 million as of June 30, 2008 and $70 million as of December 31, 2007.

At the time of sale, we record product returns allowances based on our best estimate of the portion of sales that will be returned by our customers in the future. Product returns allowances are established in accordance with our returns policy, which allows buyers to return our products with two months or less remaining prior to product expiration and up to six months following product expiration. As part of the estimating process, we compare historical return data to the related sales on a production lot basis. Historical rates of return are then determined by product and may be adjusted for known or expected changes in the marketplace. Actual annual product returns processed were less than 0.5% of gross product sales in all periods between 2005 and 2007, while annual provisions for expected future product returns were less than 1% of gross product sales in all such periods. Although product returns allowances are recorded at the time of sale, the majority of the returns are expected to occur within two years of sale. Therefore, our provisions for product returns allowances may include changes in the estimate for a prior period due to the lag time. However, to date such changes have not been material. For example, in 2007, changes in estimates related to prior years were approximately 0.3% of 2007 gross product sales. To illustrate our sensitivity to changes in the product returns allowances, if we were to experience an adjustment rate of 0.5% of 2007 gross product sales, which is nearly twice the level of annual variability that we have historically observed for product returns, that change in estimate would likely have an unfavorable effect of approximately $50 million (or approximately $0.03 per share) on our results of operations. Product returns allowances recorded in our Condensed Consolidated Balance Sheets were $87 million as of June 30, 2008 and $60 million as of December 31, 2007.

All of the aforementioned categories of allowances and accruals are evaluated quarterly and adjusted when trends or significant events indicate that a change in estimate is appropriate. Such changes in estimate could materially affect our results of operations or financial position; however, to date they have not been material. It is possible that we may need to adjust our estimates in future periods. Our Condensed Consolidated Balance Sheets reflected estimated product sales allowance reserves and accruals totaling $214 million as of June 30, 2008 and $176 million as of December 31, 2007.

Royalties

For substantially all of our agreements with licensees, we estimate royalty revenue and royalty receivables in the ~~periods~~period ~~these~~the royalties are earned, inwhich ~~advance~~is in advance of collection. Royalties from Roche, which are approximately 60% of our total royalty revenue, are reported based on actual sales reports from Roche. Our ~~estimate~~estimates of royalty revenue and receivables infrom ~~those~~non-Roche ~~instances~~licensees are isprimarily based ~~upon~~on communication with some licensees, historical information ~~and~~, forecasted sales trends, and our assessment of collectibility. Differences between actual ~~revenues~~royalty revenue and estimated royalty ~~revenues~~revenue are adjusted for in the period in which they become known, ~~typically~~ ~~the following quarter. Historically, such adjustments have not been material to our condensed consolidated financial condition or results of operations.~~typically

-25-

the following quarter. Since 2005, the adjustment to our royalty revenue related to prior periods has not exceeded 1% of total annual royalty revenue. However, on a quarterly basis, adjustments related to prior quarters have been higher than 1% of total royalty revenue for the respective quarter. To further illustrate our sensitivity to the royalty estimation process, a 1% adjustment to total annual royalty revenue, which is at the upper end of the range of our historic experience, would result in an adjustment to total 2007 annual royalty revenue of approximately $25 million (or approximately $0.01 to $0.02 per share, net of any related royalty expenses).

For cases in which the collectibility of a royalty amount is doubtful, royalty revenue is not recorded in advance of payment, but is recognized as cash is received. In the case of a receivable related to previously recognized royalty revenue that is subsequently determined to be uncollectible, the receivable is reserved for by reversing the previously recorded royalty revenue in the period in which the circumstances that make collectibility doubtful are determined, and future royalties from the licensee are recognized on a cash basis until it is determined that collectibility is reasonably assured.

We have confidential licensing agreements with a number of companies under which we receive royalty revenue on sales of products that are covered by the Cabilly patent. The Cabilly patent, which expires in 2018, relates to methods that we and others use to make certain antibodies or antibody fragments, as well as cells and DNA used in those methods. The Patent Office is performing a reexamination of the patent, and on February 25, 2008 issued a final Patent Office action rejecting all the claims of the Cabilly patent. We filed our response to that final Patent Office action on June 6, 2008. On July 19, 2008, the Patent Office mailed an advisory action replying to our response and confirming the rejection of all claims of the Cabilly patent. We intend to file a notice of appeal challenging the rejection. The claims of the patent remain valid and enforceable throughout the reexamination and appeals processes. In addition, in May 2008, Centocor, Inc. filed a lawsuit against us challenging the Cabilly patent. See also Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our Cabilly patent litigation and reexamination.

Cabilly patent royalties are generally due 60 days after the end of the quarter in which they are earned and recorded by us as royalty revenue. Additionally, we pay COH a percentage of our Cabilly patent royalty revenue 60 days after the quarter in which we receive payments from our licensees. As of June 30, 2008, our Condensed Consolidated Balance Sheet included Cabilly patent receivables totaling approximately $69 million and related COH payables totaling approximately $30 million.

Income Taxes

~~Income~~Our income tax ~~expense~~provision is based on income before taxes and is computed using the ~~liability~~ liability method in accordance with FAS No. ~~Deferred~~109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using ~~enacted~~ tax rates projected to be in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, or the findings or expected results from any tax examinations. Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations, and/or rates,; the results of any tax examinations; changing interpretations of existing tax laws or regulations,; changes in estimates of prior years’ items, ; past and future levels of R&D spending,; acquisitions; changes in our corporate structure; and changes in overall levels of income before taxes all of which may result in periodic revisions to our effective income tax rate. For example, the effective income tax rates in the second quarter and first six months of 2008 were unfavorably affected by a $33 million settlement with the IRS for an item related to prior years. Uncertain tax positions are accounted for in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” We accrue tax-related interest and penalties related to uncertain tax positions, and include these items with income tax expense in the Condensed Consolidated Statements of Income.

Inventories

Inventories ~~consist~~may ofinclude currently marketed products, ~~products~~ manufactured under ~~contract, product~~a ~~candidates~~new ~~awaiting~~process ~~regulatory~~or ~~approval, currently marketed products manufactured~~ at facilities awaiting regulatory ~~approval,~~licensure. ~~which~~These inventories are capitalized based on ~~management’s~~our judgment of probable near -term ~~commercialization,~~regulatory ~~and include employee stock-based compensation costs capitalized under FAS 123R~~licensure. ~~The valuation~~ ofExcess ~~inventory requires us to estimate the value of inventory that may become obsolete prior to use~~ or ~~that may fail to be released. The determination~~idle ofcapacity obsolete inventory requires us to estimate the future demands for our products, and in the case of pre-approval inventories, an estimate of the regulatory approval date for the product. We may be required to expense previously capitalized inventory costs ~~upon a change in our judgment~~, ~~due~~resulting ~~to, among~~from ~~other~~utilization ~~potential~~below ~~factors,~~ a ~~denial~~plant’s ornormal delay of approval by the necessary regulatory bodies or new information that suggests that the inventory will not be saleable. In the event that a pre-approval product candidate receives regulatory approvalcapacity, ~~subsequent sales of previously reserved inventory may~~are ~~result~~expensed in ~~increased gross margins.~~

~~Employee Stock~~-~~Based Compensation—Adoption of FAS 123R~~26-

~~Beginning~~the ~~January~~period 1,in ~~2006,~~which wethey ~~account~~are ~~for employee stock-based compensation in accordance with FAS 123R~~incurred. ~~Under~~The ~~the~~valuation ~~provisions~~ of ~~FAS~~inventory ~~123R,~~requires weus to estimate the ~~fair~~ value of ~~our~~inventory ~~employee~~that ~~stock~~may ~~awards~~expire atprior ~~the~~to ~~date~~use ofor ~~grant~~that ~~using~~may ~~the~~fail ~~Black-Scholes~~to ~~option-pricing~~be ~~model,~~released ~~which~~for ~~requires~~commercial ~~the use of certain subjective assumptions~~sale. ~~The~~ ~~most~~For ~~significant~~example, ofin ~~these~~the ~~assumptions~~second ~~are~~quarter ~~our estimates~~ of ~~the~~2008, ~~expected~~we ~~volatility~~recognized ofa ~~the~~$50 ~~market~~million ~~price~~charge ofrelated ~~our~~to ~~stock~~failed ~~and~~lots ~~the~~from ~~expected~~a ~~term~~manufacturing start-up ~~of the award~~campaign. ~~Due~~ toThe ~~the~~determination ~~redemption~~ of ~~our~~obsolete ~~Special~~inventory ~~Common~~requires ~~Stock~~us into estimate ~~June~~the ~~1999~~future ~~(or~~demands ~~“Redemption”) by~~for ~~Roche~~our ~~Holdings~~products, ~~Inc.~~and ~~(or~~in ~~“Roche”),~~the ~~there~~case isof ~~limited historical information~~pre-approval ~~available~~inventories, to ~~support our~~ estimate ofthe ~~certain~~regulatory ~~assumptions~~approval ~~required~~date tofor ~~value our stock~~the ~~options.~~product ~~When~~or ~~establishing~~for anthe licensure ~~estimate~~ of either the ~~expected~~manufacturing ~~term~~facility ofor anthe ~~award,~~new manufacturing process. weWe ~~consider~~may ~~the~~be ~~vesting~~required ~~period~~to ~~for~~expense ~~the~~previously ~~award,~~capitalized ~~our~~inventory ~~historical~~costs ~~experience~~upon ofa ~~employee~~change ~~stock~~in ~~option~~our ~~exercises (including forfeitures)~~estimate, ~~the~~due ~~expected volatility~~to, ~~and~~among aother ~~comparison~~potential tofactors, ~~relevant~~the ~~peer~~denial ~~group~~or delay ~~data.~~of Asapproval ~~required~~of ~~under the accounting~~a ~~rules,~~product weor ~~review~~the ~~our~~licensure ~~valuation~~of ~~assumptions~~either ata ~~each~~manufacturing facility ~~grant~~or ~~date and, as~~ a ~~result,~~new wemanufacturing ~~are~~process ~~likely~~by tothe ~~change~~necessary ~~our~~regulatory ~~valuation~~bodies, ~~assumptions~~or new ~~used~~information tothat ~~value employee~~suggests ~~stock-based~~that ~~awards~~the ~~granted~~inventory inwill ~~future~~not ~~periods~~be salable.

~~Further,~~Valuation ~~FAS 123R requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms~~ of ~~compensation~~Acquired ~~paid~~Intangible to employees. Accordingly, in the first quarter of 2006, we recognized employee stock-based compensation as part of our operating expenses with an allocation of $33 million to R&D, $41 million to marketing, general and administrative (or “MG&A”), and we recognized a related tax benefit of $27 million. In addition, we capitalized $16 million ofAssets

We have acquired intangible assets in connection with our acquisition of Tanox. These intangible assets consist of developed product technology and core technologies associated with intellectual property and rights thereon, primarily related to the Xolair molecule, and assets related to the fair value write-22up of Tanox’s royalty contracts, as well as goodwill. When significant identifiable intangible assets are acquired, we determine the fair value of these assets as of the acquisition date, using valuation techniques such as discounted cash flow models. These models require the use of significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows from product sales resulting from completed products and in-process projects, and developing appropriate discount rates and probability rates by project.

~~employee~~We ~~stock-based~~believe ~~compensation~~that ~~costs in inventory as a cost of production during~~ the ~~first~~ ~~quarter~~fair ofvalue ~~2006.~~assigned Weto ~~adopted FAS 123R on a modified prospective basis. Substantially all of~~ the ~~products~~intangible ~~sold~~assets inacquired ~~the~~is ~~first quarter of 2006 were manufactured in previous periods when we did not include employee stock-~~based ~~compensation~~on ~~expense~~reasonable inestimates ~~our~~and ~~production costs; therefore~~assumptions, wegiven ~~did~~the ~~not~~available ~~record~~facts and ~~any employee~~circumstances ~~stock-based compensation expense~~ as ~~a component~~ of ~~cost of sales in~~ the ~~first~~ ~~quarter~~acquisition ~~of 2006~~date. ~~In future periods~~However, ~~when~~we ~~product~~may ~~manufactured~~record ~~after~~adjustments ~~the~~to ~~adoption~~goodwill ofresulting ~~FAS~~from ~~123R~~our isacquisition ~~sold~~of orTanox ~~written off, or reserves are required~~ for ~~obsolescence~~ orthe ~~lack~~resolution of ~~demand, we will recognize employee stock-based~~ ~~compensation expense in cost of sales. The allocation of employee stock~~pre-~~based compensation~~acquisition ~~costs~~contingencies, toour ~~each~~restructuring ~~operating~~activities, ~~expense~~tax ~~line~~matters, and ~~to inventory are estimated~~ ~~based~~other onestimates ~~specific~~related ~~employee~~to ~~headcount~~the ~~information~~acquisition atfor ~~each grant date and revised, if necessary, in future periods if actual employee headcount information differs materially from those estimates. As~~ a ~~result,~~period ~~the amount~~ of ~~employee~~up ~~stock-based compensation~~to ~~costs~~one weyear ~~record in future periods in each operating expense line~~after ~~and capitalize in inventory may differ significantly from what we have recorded in~~ the ~~current~~acquisition ~~period~~date. ~~As of March 31~~Further, ~~2006,~~we ~~total~~will ~~compensation~~have ~~cost related~~ to ~~nonvested~~ ~~stock~~continually ~~options~~evaluate ~~not~~whether ~~yet recognized was $734 million, which is expected~~the tofair bevalue ~~allocated~~of toany ~~expense~~or ~~and~~all ~~production~~intangible ~~costs~~assets ~~over~~has abeen ~~weighted-average period of 27 months~~impaired.

~~There~~Employee ~~was no stock~~Stock-~~based~~Based ~~compensation expense related to employee stock options and employee stock purchases recognized under FAS 123R during the three months ended March 31, 2005.~~Compensation

Under the provisions of FAS 123R, employee stock-23based compensation is estimated at the date of grant based on the employee stock award’s fair value using the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite service period in a manner similar to other forms of compensation paid to employees. The Black-Scholes option-pricing model requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. Due to the redemption of our Special Common Stock in June 1999 (Redemption) by RHI, there is limited historical information available to support our estimate of certain assumptions required to value our stock options. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our recent historical experience of employee stock option exercises (including forfeitures), the expected volatility, and a comparison to relevant peer group data. As required under GAAP, we review our valuation assumptions at each grant date, and, as a result, our valuation assumptions used to value employee stock-based awards granted in future periods may change. See Note 2, “Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

-27-

Results of Operations

(In millions, except per share amounts)

	Three Months Ended March 31,
	Three Months Ended June 30,											Six Months Ended June 30,
	2006			2005			% Change
	2008				2007				% Change			2008			2007			% Change
Product sales	$	12,~~644~~536		$	~~1,186~~$	2,443		39	%	4	%	$	4,915		$	4,773			3	%
Royalties		~~286~~629			~~232~~	484		23		30			1,244			903			38
Contract revenue		5671			44	77		27		(8	)		140			171			(18	)
Total operating revenues		1,986			1,462			36
Total operating revenue		3,236				3,004				8			6,299			5,847			8
Cost of sales		~~262~~441			~~256~~	429		2		3			831			821			1
Research and development		~~374~~649			~~243~~	603		54		8			1,266			1,213			4
Marketing, general and administrative		~~441~~559			~~310~~	532		42		5			1,076			1,023			5
Collaboration profit sharing		~~226~~313			~~176~~	277		28		13			592			529			12
Recurring charges related to redemption		26			35			(26	)
Recurring amortization charges related to redemption and acquisition		43				26				65			86			52			65
Special items: litigation-related		132			11	13		18		(85	)		(300	)		26			*
Total costs and expenses		12,~~342~~007			~~1,031~~	1,880		30		7			3,551			3,664			(3	)
Operating income		~~644~~1,229			~~431~~	1,124		49		9			2,748			2,183			26
Other income (expense):
Interest and other income, net		5393			18	75		~~194~~		24			166			149			11
Interest expense		(1915	)		(3	)(17	)	~~533~~		(12	)		(32	)		(35	)		(9	)
Total other income, net		3478			15	58		~~127~~		34			134			114			18
Income before taxes		~~678~~1,307			~~446~~	1,182		52		11			2,882			2,297			25
Income tax provision		~~257~~525			~~162~~	435		59		21			1,118			844			32
Net income	$	~~421~~782		$	~~284~~$	747		48		5		$	1,764		$	1,453			21
Earnings per share:
Basic	$	0.4074		$	~~0.27~~$	0.71		48		4	%	$	1.68		$	1.38			22	%
Diluted	$	0.3973		$	~~0.27~~$	0.70		44		4		$	1.65		$	1.36			21
Pretax operating margin		32	%		29	%
Cost of sales as a % of product sales		17	%			18	%						17	%		17	%
Cost of sales as a % of product sales		16			22
Research and development as a % of operating revenue		20				20							20			21
Research and development as a % of operating revenues		19			17
Marketing, general and administrative as a % of operating revenue		17				18							17			17
Marketing, general and administrative as a % of operating revenues		22			21
Pretax operating margin		38	%			37	%						44	%		37	%
Net income as a % of operating revenues		21			19
Effective income tax rate		40	%			37	%						39	%		37	%

~~___________~~________________________

* Calculation not meaningful. Percentages in this table and throughout ~~management’s~~the discussion and analysis of our financial condition and results of operations may reflect rounding adjustments.

Total Operating ~~Revenues~~Revenue

Total operating ~~revenues~~revenue increased 368% in the ~~first~~second quarter ofand ~~2006~~first six months of 2008 from the comparable ~~period~~periods in ~~2005~~2007. These increases were primarily due to higher product sales and royalty ~~income~~revenue, and are ~~further~~ discussed below.

-2428-

Total Product Sales

(In millions)

	Three Months Ended March 31,
	Three Months Ended June 30,										Six Months Ended June 30,
	2006		2005			% Change
	2008			2007				% Change			2008		2007		% Change
Net U.S. Product Sales
Net U.S. product sales
Rituxan	$	477	$	440			8	%
Avastin	$	650		$	564				15	%	$	1,250	$	1,097		14	%
Avastin		398		203			96
Rituxan		651			582				12			1,255		1,117		12
Herceptin		~~290~~338		~~130~~	329		~~123~~		3			678		640		6
Tarceva		93		48			94
Lucentis		216			209				3			414		420		(1	)
Xolair		95129		65	120		46		8			246		231		6
Raptiva		21		17			24
Tarceva		119			102				17			230		203		13
Nutropin products		8789		90	94		(3	)	(5	)		173		185		(6	)
Thrombolytics		5968		50	67		18		1			135		135		0
Pulmozyme		4963		44	55		11		15			120		107		12
Total U.S. product sales	$	1,569	$	1,087			44
Raptiva		28			27				4			54		51		6
Net product sales to collaborators		75		99			(24	)
Total U.S. product sales(1)		2,351			2,149				9			4,556		4,186		9
Total product sales	$	1,644	$	1,186			39
Net product sales to collaborators		185			294				(37	)		359		587		(39	)
Total product sales	$	2,536		$	2,443				4		$	4,915	$	4,773		3

Total product sales increased 39% to $1,644 million in the first quarter of 2006 from the comparable period in 2005. Total U.S. product sales increased 44% to $1,569 million in the first quarter of 2006 from the comparable period in 2005. The increase in U.S. product sales was due to higher sales across most products, in particular higher sales of our oncology products. Increased U.S. sales volume accounted for 88%, or $429 million, of the increase in U.S. net product sales in the first quarter of 2006, and 92%, or $346 million, in the first quarter of 2005. Changes in net U.S. sales prices across the portfolio accounted for most of the remaining increase in net U.S. product sales in the first quarter of 2006.______________________

(1)	The totals may not appear to equal the sum of the individual line items due to rounding.

Total product sales increased 4% in the second quarter and 3% in the first six months of 2008 from the comparable periods in 2007. Total U.S. product sales increased 9% to $2,351 million in the second quarter and 9% to $4,556 million in the first six months of 2008 from the comparable periods in 2007. The increases in U.S. sales were due to higher sales across most products, in particular higher sales of our oncology products. Increased U.S. sales volume accounted for 65%, or $131 million, of the increase in U.S. net product sales in the second quarter of 2008, and 67%, or $247 million, of the increase in the first six months of 2008. Changes in net U.S. sales prices across the majority of products in the portfolio accounted for most of the remainder of the increases in U.S. net product sales in the second quarter and first six months of 2008.

Our references below to market adoption and penetration, as well as patient share, are derived from our analyses of market tracking studies and surveys that we undertake with physicians. We consider these tracking studies and surveys indicative of trends and information with respect to our end users’ buying patterns. We use statistical analyses and management judgment to interpret the data that we obtain, and as such, the adoption, penetration, and patient share data presented herein represent estimates. Limitations in sample size and the timeliness in receiving and analyzing this data result in inherent margins of error; thus, where presented, we have rounded our percentage estimates to the nearest 5%.

Avastin

Net U.S. sales of Avastin increased 9615% to $~~398~~ 650 million in the ~~first~~second quarter ofand 14% ~~2006~~to ~~from~~$1,250 ~~the~~million ~~comparable period~~ in ~~2005. The increase~~the infirst ~~sales~~six ~~was~~months ~~primarily a result~~ of ~~increased~~2008 ~~use~~from ofthe ~~Avastin~~comparable periods in ~~first-line~~ ~~metastatic~~2007. ~~colorectal~~Net ~~cancer~~U.S. ~~(or~~sales ~~“mCRC”)~~ in ~~combination~~the ~~with 5FU-based~~second ~~chemotherapies~~quarter ~~(our approved indication)~~ and in first~~-line~~ ~~non~~six ~~small~~months of ~~cell~~2008 ~~lung~~excluded ~~cancer~~net ~~(or~~revenue ~~“NSCLC”)~~of ~~(an~~$1 ~~unapproved~~million ~~use).~~and In$2 ~~first-line mCRC patients~~million, we ~~estimate~~ respectively that ~~Avastin penetration~~ was ~~over~~deferred ~~70%~~in ~~during~~connection ~~the~~with ~~first~~our ~~quarter of 2006~~Avastin ~~compared~~Patient toAssistance ~~penetration of 61% during the first quarter of 2005~~Program. ~~Duration~~The ofincreases ~~treatment among patients~~ in ~~the~~sales ~~first-line~~were ~~mCRC~~primarily ~~setting~~due ~~who~~to ~~completed Avastin therapy~~ increased ~~modestly~~use ~~relative to the first quarter~~ of ~~2005,~~Avastin ~~but~~for ~~was~~first-line ~~comparable~~treatment ~~to the fourth quarter~~ of ~~2005.~~metastatic ~~Due to competing products entering the market in the first quarter of 2006~~BC, wewhich ~~have~~received ~~seen~~accelerated aapproval ~~slight~~from ~~decline in~~ the ~~adoption~~ ofFDA ~~Avastin~~ in ~~renal cell carcinoma, an unapproved use of~~ ~~Avastin. Net U.S. sales in~~ the first quarter of ~~2006~~2008, ~~include~~and ~~a $3 million reimbursement~~ for ~~a shipment that was destroyed while in transit to a wholesaler in the~~ first ~~quarter~~-line oftreatment ~~2005. There were no price increases in the first quarter~~ of ~~2006~~metastatic ~~or in 2005~~NSCLC.

~~While~~Avastin ~~there~~received ~~has~~accelerated ~~been~~approval ~~increased~~on ~~uptake~~February 22, 2008 for use in ~~the~~combination with paclitaxel chemotherapy for patients who have not received prior chemotherapy for metastatic HER2-negative BC. For first-line ~~mCRC~~treatment ~~setting,~~of ~~opportunities~~metastatic ~~remain~~HER2-negative toBC ~~continue~~patients, towe ~~appropriately~~estimate ~~identify~~that ~~eligible~~Avastin ~~patients.~~penetration Wein ~~also~~the second ~~anticipate~~quarter ~~growth~~of in2008 ~~2006~~was approximately 35%, an increase from ~~use~~the rate of adoption in the ~~potential~~second ~~new~~quarter ~~(but~~of ~~currently~~2007 and ~~unapproved)~~the first quarter of 2008. With respect to ~~indications~~dose, ~~including~~the ~~relapsed~~percentage ~~mCRC,~~of metastatic ~~first~~BC patients receiving the high dose of Avastin, defined as 5 mg/kg/weekly-~~line~~equivalent, ~~NSCLC~~remained ~~and~~approximately ~~metastatic~~75% ~~first~~in the second quarter of 2008, in-line ~~breast~~with ~~cancers.~~the first quarter

~~In December 2005, we submitted an sBLA to the FDA for Avastin in relapsed mCRC, and priority review has been granted with an action date of June 20, 2006.~~-29-

Onof ~~April~~2008. 11The U.S. labeled dose of Avastin in metastatic BC is 10 mg/kg, administered ~~2006~~intravenously every two weeks. Data from AVADO, wethe Roche-sponsored, ~~submitted~~placebo-controlled anPhase ~~sBLA~~III totrial, was presented at the American ~~FDA~~Society ~~for~~of Clinical Oncology (ASCO) annual meeting in June 2008. In the AVADO study, two dose levels of Avastin, a 7.5 mg/kg/every-three-weeks dose and a 15 mg/kg/every-three-week dose, in combination with docetaxel chemotherapy, showed a statistically ~~platinum-based~~significant improvement in PFS and response rate compared to docetaxel chemotherapy alone. While the study was not designed to detect a difference between the Avastin doses, positive trends towards the higher dose were seen across the primary and secondary end points. The overall survival data for AVADO is anticipated in the first~~-line~~ ~~treatment~~half of ~~advanced~~2009. No new safety signals were detected in this study. We are required to submit the results of the AVADO study and RIBBON I, ~~non~~a Phase III study in first-~~squamous~~line metastatic BC, to the FDA by mid-2009 for the ~~NSCLC~~FDA to consider converting the accelerated approval into a full approval. The RIBBON I study results are expected later this year, with a primary endpoint of PFS.

For first-25line treatment of metastatic NSCLC patients, among the approximately 50% to 60% of patients with first-line metastatic lung cancer who are eligible for Avastin therapy, we estimate that penetration in the second quarter of 2008 was approximately 65%, an increase from approximately 60% reported in previous quarters. With respect to dose, the percentage of lung cancer patients receiving the high dose of Avastin, defined as at least 5 mg/kg/weekly-equivalent, was approximately 70% in the second quarter of 2008, in-line with the second quarter of 2007 and the first quarter of 2008. The labeled dose of Avastin in lung cancer is 15 mg/kg, administered intravenously every three weeks. However, we expect dose in metastatic NSCLC to continue to be a source of uncertainty for Avastin. The Roche-sponsored BO17704 study, which was presented at the ASCO annual meeting in June 2007, evaluated a 15 mg/kg/every-three-weeks dose of Avastin (the dose approved in the U.S. for use in combination with carboplatin and paclitaxel) and a 7.5 mg/kg/every-three-weeks dose of Avastin (a dose not approved for use in the U.S.) in combination with gemcitabine and cisplatin chemotherapy compared to chemotherapy alone in patients with previously untreated, advanced NSCLC. Both doses met the primary endpoint of prolonging PFS compared to chemotherapy alone. Although the study was not designed to compare the Avastin doses, a similar treatment effect in PFS was observed between the two arms. On April 20, 2008, we announced that the study did not demonstrate a statistically significant prolongation of overall survival, a secondary endpoint, for either dose in combination with gemcitabine and cisplatin chemotherapy compared to chemotherapy alone. Median survival of patients in all arms of the study exceeded one year, which is longer than previously reported survival times in this indication. Based on these results, additional physicians may adopt Avastin at the lower dose of 7.5 mg/kg/every-three-weeks or choose not to prescribe Avastin.

In both first- and second-line treatment of metastatic colorectal cancer (CRC), penetration in the second quarter of 2008 increased from the second quarter of 2007, but was in-line compared to the first quarter of 2008.

At the ASCO meeting in June 2008, we also presented data on our adjuvant colon cancer study, C-08, sponsored by the National Cancer Institute and conducted by the National Surgical Adjuvant Breast and Bowel Project (NSABP). The preliminary safety analysis showed no new or unexpected safety events in the Avastin arm and supports the decision by the NSABP to continue the study as planned. We expect the NSABP to conduct an interim analysis of the study in the fourth quarter of 2008, and if the study continues past the interim analysis, we expect the final analysis in 2009.

In the second quarter of 2008, we and Roche distributed a Dear Healthcare Provider Letter describing the previously reported findings of microangiopathic hemolytic anemia (MAHA) in patients treated with Avastin and Sutent® in two metastatic renal cell cancer trials, an investigator sponsored trial and the SABRE-R clinical trial. The events were reversible upon discontinuation of Avastin and Sutent®, and to date, MAHA has been observed in Avastin treatment only when it is combined with Sutent®. All of our SABRE studies evaluating this combination have been discontinued.

Rituxan

Net U.S. sales of Rituxan increased 812% to $~~477~~ 651 million in ~~the first quarter of 2006 from the comparable period~~ in ~~2005. Net U.S. sales in~~ the ~~first~~second quarter ~~of 2005 included $10 million for a reorder~~and ~~to replace~~12% ~~a shipment that was destroyed while in transit~~ to ~~a wholesaler. The sales growth resulted from increased use of Rituxan in NHL and chronic lymphocytic leukemia (or “CLL”)~~$1,255 ~~including~~million ~~areas of unapproved use. We estimate that Rituxan’s overall adoption rate~~ in ~~combined~~the ~~markets~~first ofsix ~~NHL~~months ~~and CLL, including areas~~ of ~~unapproved~~2008 ~~use,~~from ~~was 82% at~~ the ~~end of the first quarter~~comparable ~~of 2006~~periods ~~compared~~in ~~to 77% at the end of the first quarter of 2005~~2007. ~~Also~~In ~~contributing to~~ the ~~increase~~oncology insetting, ~~product~~ sales ~~were~~growth ~~price~~continues ~~increases~~to ~~that~~be ~~were effective on~~driven ~~July~~primarily 6,by ~~2005~~use ~~and~~of ~~October 5, 2005. U.S.~~ Rituxan ~~sales~~following ~~in the~~ first-line ~~quarter~~therapy ~~of 2006 decreased 1% from $484 million~~ in ~~the~~indolent ~~fourth quarter of 2005 and the~~NHL. ~~overall~~Overall adoption ~~rate remained flat at 82% as compared to the fourth quarter~~ of ~~2005.~~ Rituxan ~~for the treatment of adult patients with moderately-to-severely active RA was launched~~ in ~~the~~other ~~first~~areas ~~quarter~~ of ~~2006.~~NHL ~~There are~~and ~~significant~~chronic ~~hurdles to reliably measuring the portion of Rituxan sales~~lymphocytic ~~attributable to RA~~leukemia, ~~and~~an weunapproved doindication, ~~not~~remained ~~expect~~stable tocompared ~~be able~~ to ~~precisely attribute revenues to~~ the ~~RA indication (or any other non-oncology indication) in the~~second ~~foreseeable~~quarter ~~future~~of 2007.

~~On March~~ -30~~, 2006, we and Biogen Idec submitted an sBLA to the FDA for the use of Rituxan as first~~-line treatment of previously-untreated patients with low-grade or follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma in combination with CVP (cyclophosphamide, vincristine, prednisone) or CHOP chemotherapy or following CVP chemotherapy in those patients who achieved a response of stable disease or better.

In the RA setting, the primary driver of growth was an increased share of patients who have failed anti-TNF therapies. It remains difficult to precisely determine the sales split between Rituxan use in oncology and immunology settings since many treatment centers treat both types of patients. In June 2008, we received a report of a fatal progressive multifocal leukoencephalopathy (PML) case in a patient who received Rituxan in the REFLEX trial and extension study for Rituxan in RA. The final course of Rituxan was completed 18 months prior to the development of PML and the patient had multiple confounding factors associated with immunosuppression. Immunology investigators have been informed, and we will continue to work with the FDA to discuss what additional steps need to be taken.

On April 14, 2008, we and Biogen Idec announced that OLYMPUS, a Phase II/III study of Rituxan for PPMS, did not meet its primary endpoint as measured by the time to confirmed disease progression during the 96-week treatment period. We observed biologic activity in a subset of patients, and will continue to analyze the results of the study with Biogen Idec and will submit the data for presentation at an upcoming medical meeting.

On April 29, 2008, we announced that EXPLORER, the Phase II/III study of Rituxan for SLE, did not meet its primary endpoint defined as the proportion of Rituxan treated patients who achieved a MCR or PCR measured by BILAG, a lupus activity response index, compared to placebo at 52 weeks. The study also did not meet any of the six secondary endpoints. Our market research indicates that approximately one percent of U.S. Rituxan sales are attributable to Rituxan use in the lupus setting (an unapproved use).

Herceptin

Net U.S. sales of Herceptin increased ~~123~~ 3% to $~~290~~ 338 million in the ~~first~~second quarter ofand 6% ~~2006~~to ~~from~~$678 ~~the~~million ~~comparable period~~ in ~~2005. The~~ ~~sales~~the ~~growth~~first ~~resulted~~six ~~from~~months ~~increased~~of ~~treatment~~2008 offrom ~~first-line~~the ~~HER2-positive~~comparable periods ~~metastatic~~in ~~breast~~2007. ~~cancer~~The ~~and~~sales ~~increased~~growth ~~cumulative~~was ~~treatment~~primarily ~~duration~~due ~~relative~~ to ~~the~~ ~~comparable~~price ~~period~~increases in ~~2005,~~2008 asand ~~well~~2007 and as increased use of Herceptin in ~~adjuvant breast~~the ~~cancer~~treatment ~~(an~~of ~~unapproved~~early-stage ~~use)~~HER2-positive BC. We ~~believe~~estimate that ~~continued~~ Herceptin ~~sales growth~~penetration ~~will primarily occur~~ in the adjuvant setting~~. Also~~ was ~~contributing~~approximately to85% ~~the increase~~ in ~~product~~the ~~sales,~~second toquarter aof ~~lesser extent~~2008, ~~was~~an ~~as a price~~ increase ~~effective~~from onthe ~~February~~second quarter ~~24,~~of ~~2005~~2007. ~~Net U.S.~~In ~~sales in the~~ first-line ~~quarter~~treatment of ~~2006~~metastatic ~~include~~HER2-positive ~~a $2 million reimbursement~~BC ~~for~~patients, ~~a shipment~~Herceptin ~~that~~penetration was ~~destroyed~~approximately ~~while~~75% infor ~~transit~~the tosecond aquarter ~~wholesaler~~of 2008, inan increase from the ~~first~~ second quarter of ~~2005~~2007.

On ~~February~~May 1522, ~~2006~~2008, wethe ~~submitted~~FDA anapproved ~~sBLA~~two ~~with~~additional ~~the~~label ~~FDA~~expansions for Herceptin in HER2-positive, adjuvant BC. One of the label expansions added the use of a new treatment option with Herceptin toin combination with docetaxel and carboplatin ~~treat~~chemotherapies, ~~early-stage~~which ~~HER2-positive~~provides ~~breast~~a ~~cancer~~shorter, ~~and~~less ~~priority~~cardiotoxic ~~review~~regimen ~~was~~as ~~granted~~an ~~with~~alternative anfor ~~action~~some ~~date~~patients. The other label expansion added the use of ~~August~~a 17new treatment option with Herceptin in combination with anthracycline, cyclophosphamide, ~~2006~~and docetaxel chemotherapies.

~~Tarceva~~Lucentis

Net U.S. sales of ~~Tarceva~~Lucentis increased 943% to $93216 million in the ~~first~~second quarter ofand ~~2006 from~~decreased 1% to $48414 million in the first ~~quarter~~six months of ~~2005,~~2008 ~~driven~~from bythe ~~growth~~comparable periods in ~~penetration~~ 2007. The launch of improved patient access programs in ~~second-line~~March 2008, ~~NSCLC~~a revised promotional campaign, and ~~first-line~~enhanced ~~pancreatic~~distribution ~~cancer.~~options Infor Lucentis that began in May 2008, along with a more stable market environment, contributed to the ~~first~~sales growth in the second quarter of 2008. We believe that the percentage of newly diagnosed patients who were treated with Lucentis during ~~2006,~~the wesecond ~~estimate~~quarter ~~that~~of ~~Tarceva’s~~2008 ~~penetration~~was ~~averaged~~approximately 3445% incompared ~~second-line~~to ~~NSCLC and~~approximately 40% during inthe first~~-line~~ ~~pancreatic~~quarter ~~cancer.~~of ~~Also~~2008 ~~affecting~~and ~~our~~55% ~~product~~during ~~sales~~the ~~were price~~second ~~increases~~quarter ~~that~~of ~~were~~2007. Although ~~effective~~sales onincreased ~~April~~in 5,the ~~2005~~second ~~and~~quarter ~~November~~of 92008, ~~2005.~~it is difficult to ~~Future~~interpret a sales ~~growth~~trend induring ~~NSCLC~~a ~~will~~period ~~depend~~that onhas ~~further~~a ~~gains~~change in ~~penetration~~distribution, ~~against~~and ~~chemotherapy~~while ~~within~~the ~~second-line~~continued ~~NSCLC~~unapproved use of Avastin and reimbursement concerns from retinal specialists remain challenges.

Xolair

Net U.S. sales of Xolair increased 468% to $95 129 million in the ~~first~~second quarter ofand ~~2006 from the comparable period in~~6% ~~2005. The~~to ~~sales~~$246 ~~growth~~million ~~was primarily driven by an increase~~ in ~~our~~the ~~patient~~first ~~and prescriber~~six ~~base~~months ~~and,~~of to2008 afrom ~~lesser~~the ~~extent,~~comparable aperiods ~~price increase that was effective~~in ~~on July 21, 2005~~2007.

~~Raptiva~~On April 10, 2008, we and Novartis announced that a Phase III study evaluating Xolair in patients 6 to 11 years of age with moderate-to-severe, persistent, inadequately controlled allergic asthma met its primary endpoint, demonstrating a statistically significant reduction in exacerbations in Xolair-treated patients compared to placebo

Net U.S. sales of Raptiva increased 24% to $21 million in the first quarter of 2006 from the comparable period in 2005. Contributing to the increase in product sales were price increases that were effective on April 21, 2005 and November 17, 2005.-31-

~~-26-~~treated patients, with no new safety signals reported. We will work with Novartis to evaluate the complete study results, including feedback from the FDA, to determine the next steps.

Tarceva

Net U.S. sales of Tarceva increased 17% to $119 million in the second quarter and 13% to $230 million in the first six months of 2008 from the comparable periods in 2007. The sales growth was primarily due to price increases in 2008 and 2007 and lower return reserve requirements in the second quarter and first six months of 2008. We estimate that Tarceva penetration in second-line treatment of NSCLC in the second quarter of 2008 remained stable at approximately 30% compared to the same period in 2007. In the first-line pancreatic cancer setting, we estimate that Tarceva penetration in the second quarter of 2008 was approximately 40%, an increase from the second quarter of 2007.

Nutropin Products

Combined net U.S. sales of our Nutropin products decreased 35% to $87 89 million in the second ~~first~~ quarter ~~of 2006 from the comparable period in 2005. Nutropin sales have decreased due to declining market share of new patients~~ and ~~loss~~ of6% ~~managed care product placement due~~ to ~~price~~$173 ~~discounting.~~million ~~The decrease~~ in ~~sales~~ ~~volume~~the ~~was~~first ~~partially~~six ~~offset~~months byof a2008 ~~price~~from ~~increase that was effective on~~the ~~March~~comparable 3,periods ~~2005~~in 2007.

Thrombolytics

Combined net U.S. sales of our three thrombolytics products, —Activase, Cathflo Activase, and TNKase, —increased 181% to $59 68 million in the ~~first~~second quarter ofand ~~2006~~remained ~~from~~flat in the ~~comparable~~first ~~period~~six ~~in 2005. The~~months ~~increase~~of ~~was~~2008 ~~due~~from tothe ~~growth~~comparable periods in ~~Cathflo~~2007. ~~Activase~~Sales ~~sales~~ in the ~~catheter clearance~~second ~~market~~quarter and ~~increased~~first ~~Activase~~six ~~sales~~months inof ~~the~~2008 ~~acute~~were ~~ischemic~~favorably ~~stroke market.~~affected ~~Also~~by ~~contributing~~price increases ~~to the increase~~ in ~~product~~2008 ~~sales~~and ~~were~~2007 ~~price~~and increases ~~effective~~ onin ~~January~~sales ~~11, 2005~~volume. ~~Aggressive~~However, ~~price discounting by competitors~~these ~~affected~~increases ~~our~~were ~~acute~~offset ~~myocardial~~by ~~infarction~~increased ~~business~~product inreturn ~~some~~reserve ~~hospitals~~requirements.

Pulmozyme

Net U.S. sales of Pulmozyme increased 1115% to $49 63 million in the ~~first~~second quarter ~~of 2006 from the comparable period in~~and ~~2005. The~~12% ~~increase primarily reflects a price increase effective on April 26, 2005 and,~~ to a$120 ~~lesser~~million ~~extent,~~in athe ~~greater~~first ~~focus~~six onmonths ~~aggressive treatment~~ of ~~cystic fibrosis~~2008 ~~early~~from in the ~~course~~comparable ofperiods in ~~the disease~~2007.

~~Product Distribution—Changes in Commercial Terms~~Raptiva

WeNet ~~recently~~U.S. ~~renegotiated~~sales ~~our distribution agreements with a number~~ of ~~our~~Raptiva ~~major wholesalers~~increased ~~which~~4% ~~will~~to ~~result~~$28 inmillion ~~a number of changes~~ in ~~commercial terms effective July 1, 2006, most notably resulting in~~ the ~~reduction~~second ofquarter ~~certain allowances~~and ~~provided~~ 6% to ~~the~~$54 ~~wholesalers~~million onin ~~certain products. Further, our commercial shipping terms with all our domestic customers and~~ the ~~resulting point~~first atsix ~~which~~months ~~we recognize products sales revenue for all~~ of ~~our~~2008 ~~products will change~~ from the ~~time~~comparable atperiods ~~which we ship the product to the time at which our~~in ~~products arrives at a designated receiving location~~2007. ~~We do not expect the 2006 annual net effect of these changes to be material to our results of operations.~~

Sales to Collaborators

Product sales to collaborators, ~~the majority of~~ which were for non-U.S. markets, decreased 2437% to $75185 million in the second quarter and 39% to $359 million in the first ~~quarter~~six months of 2008 ~~2006~~ from the comparable ~~period~~ periods in ~~2005~~2007. The ~~decrease~~decreases were primarily ~~reflects~~due to the ~~discontinuation~~quarterly timing of ~~our Enbrel®~~Herceptin and Avastin sales to ~~Amgen~~Roche. ~~due~~For to2008, ~~the~~we forecast ~~cancellation~~sales ofto ~~our~~collaborators ~~manufacturing~~to ~~obligation in~~increase ~~the~~by ~~second~~approximately ~~quarter~~10% ofto ~~2005.~~15% ~~This~~over 2007 ~~decrease~~with ~~was~~quarterly ~~partially~~fluctuations ~~offset~~due byto anthe ~~increase in~~timing ~~sales~~ of ~~Avastin~~the toproduction ~~Hoffman-La~~and ~~Roche~~order plan.

~~For~~Herceptin sales to Roche since the ~~full~~third ~~year~~quarter of 2006, ~~given~~reflect ~~Roche’s~~more ~~higher~~favorable pricing terms that were part of the supply ~~needs,~~agreement wewith ~~expect~~Roche ~~sales~~signed toat that time. ~~collaborators~~These tofavorable ~~increase~~pricing byterms ~~approximately~~will ~~30%~~continue ~~over~~through the ~~$326~~end ~~million in~~of ~~2005~~2008.

Royalties

Royalty ~~revenues~~revenue increased 2330% to $~~286~~629 million in the ~~first~~second quarter ofand ~~2006~~37% ~~from~~to ~~the~~$1,244 ~~comparable~~million ~~period~~ in ~~2005.~~the ~~The~~first ~~increase~~six ~~was~~months of ~~due~~2008 tofrom ~~higher~~the ~~sales~~comparable byperiods ~~Hoffmann-La~~in ~~Roche~~2007. ~~primarily~~Excluding ofthe ~~our~~effect ~~Herceptin,~~of ~~Avastin~~a ~~and~~collaboration ~~Rituxan~~agreement ~~products.~~in Of the ~~overall royalties~~second ~~received~~quarter of 2007, ~~royalties~~which ~~from~~resulted ~~Hoffmann~~in one-Latime ~~Roche~~royalty ~~represented~~revenue of approximately ~~58%~~ in$65 ~~the~~million ~~first~~in that quarter, ofroyalty ~~2006.~~revenue ~~Royalties~~increased ~~from~~50% ~~other~~in ~~licensees~~the ~~include~~second ~~royalty~~quarter and 48% in the ~~revenue~~first onsix ~~our~~months ~~patents~~of ~~including~~2008 ~~our~~from ~~Cabilly~~the ~~patents~~comparable ~~noted~~periods ~~below~~in 2007. ~~For~~The ~~the~~majority ~~full~~of ~~year~~the ~~2006,~~increases wewere due ~~expect royalties~~ to ~~increase~~higher sales by ~~approximately~~Roche ~~30%~~of ~~compared~~our toAvastin, Herceptin, ~~$935 million~~and inRituxan ~~2005~~products, ~~based~~and on higher sales ~~forecasts~~by ~~from~~Novartis of our ~~licensees,~~Lucentis inproduct. In ~~particular~~addition, ~~Roche.~~approximately $40 million of

We have confidential licensing agreements with a number of companies on U.S. Patent No. 6,331,415 and No. 4,816,567 (the “Cabilly patents”), under which we receive royalty revenue on sales of products that are covered by one or more of the Cabilly patents. The ‘567 patent expired in March 2006, while the ‘415 patent expires in December 2018. The licensed products for which we receive the most significant Cabilly royalties are Humira®, Remicade®, Synagis® and ERBITUX®. Cabilly royalties impact three lines on our Condensed Consolidated Statement of Income: (i) We record gross royalties we receive from Cabilly patent licensees as royalty revenue; -32-

the increase in the second quarter of 2008 and approximately $85 million of the increase in the first six months of 2008 was due to net foreign-27exchange-related benefits from the weaker U.S. dollar during these periods compared to the same periods of 2007. Royalty revenue for the first six months of 2008 also included approximately $20 million of net adjustments increasing royalty revenue due to changes in estimates for amounts reported in 2007, compared to immaterial amounts of such net adjustments recorded in the first six months of 2007.

~~(ii)~~Cash Onflows ~~royalties~~from weroyalty ~~receive~~income ~~from~~include ~~Cabilly~~revenue ~~licensees,~~denominated we in ~~turn~~foreign ~~pay~~currencies. ~~City of Hope~~We ~~National~~currently ~~Medical~~enter ~~Center~~into ~~(or~~foreign ~~“COH”)~~currency aoption ~~percentage~~contracts of(options) ~~our royalty income~~ and ~~these payments~~forwards to ~~COH are recorded with our MG&A expenses as royalty expense;~~ ~~(iii)~~hedge Wea ~~pay~~portion ~~royalty expenses directly to COH on sales~~ of ~~our products that are covered by the Cabilly patents and~~ these ~~payments~~foreign tocurrency ~~COH~~cash ~~are recorded in cost of sales (or “COS”)~~flows. ~~The~~These ~~overall~~existing ~~net~~options ~~after-tax contribution from revenues~~ and ~~expenses~~forwards ~~related~~are due to ~~the~~expire ~~Cabilly~~between ~~patents~~2008 and ~~was approximately $19 million in the first quarter of 2006~~2010, orand ~~approximately~~we ~~$0.02 per diluted share. We~~ expect ~~our full~~ ~~year 2006 Cabilly related net income after taxes~~ to ~~be approximately $0.06~~continue ~~per~~to ~~diluted~~enter ~~share.~~into ~~See~~similar ~~also~~contracts ~~Note 4, “Contingencies”~~ in ~~the~~accordance ~~Notes~~with ~~to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for further information on~~ our ~~Cabilly patent reexamination~~hedging policy.

~~Cash~~Of ~~flows~~the ~~from~~overall ~~royalty~~royalties ~~income~~received, ~~include~~royalties ~~revenues~~from ~~denominated~~Roche inrepresented ~~foreign currencies.~~approximately ~~We currently~~62% ~~purchase~~in ~~simple~~the ~~foreign~~second ~~currency~~quarter ~~put option contracts (or “options”)~~ and ~~forwards~~61% toin ~~hedge~~the ~~these~~first ~~foreign~~six ~~currency~~months ~~cash~~of ~~flows.~~2008 ~~The~~compared ~~terms of these~~to ~~options~~approximately ~~and~~58% ~~forwards~~in ~~are~~the ~~generally~~second ~~one~~quarter toand ~~five~~60% ~~years.~~in ~~See~~the ~~also~~first ~~Note~~six 1,months ~~“Summary~~ of ~~Significant~~2007. Royalties ~~Accounting~~from ~~Policies—Derivative~~other ~~Financial~~licensees ~~Instruments”~~included inroyalty ~~the Notes~~revenue toon ~~Condensed~~our ~~Consolidated~~patent ~~Financial~~licenses, including ~~Statements~~our inCabilly ~~Part I~~patent, ~~Item~~as 1discussed ~~of this Form 10-Q~~below.

~~Contract~~We ~~Revenues~~have confidential licensing agreements with a number of companies under which we receive royalty revenue on sales of products covered by the Cabilly patent. The Cabilly patent expires in December 2018, but is the subject of litigation and an ongoing reexamination, and an appeals process. The net pretax contributions related to the Cabilly patent were as follows (in millions, except per share amounts):

Contract revenues increased 27% to $56 million in the first quarter of 2006 from the comparable period in 2005. The increase was primarily due to higher contract revenues from Hoffman-La Roche and our other collaborators, driven by higher reimbursements related to R&D development efforts on Avastin, Rituxan and second generation anti-CD20. See “Related Party Transactions” below for more information on contract revenue from Hoffmann-La Roche.

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Royalty revenue	$	75	$	46	$	159	$	108

Gross expenses(1)	$	35	$	27	$	71	$	57

Net of tax effect of Cabilly patent on diluted EPS	$	0.02	$	0.01	$	0.05	$	0.03

Contract revenues vary each quarter and are dependent on a number of factors, including the timing and level of reimbursements from ongoing development efforts, milestones and opt-in payments received, and new contract arrangements. For the full year 2006, we expect contract revenues to be relatively flat as compared to $210 million in 2005. ______________________

(1)	Gross expenses include COH’s share of royalty revenue and royalty COS on our U.S. product sales.

See also Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our Cabilly patent litigation and reexamination.

Royalties are difficult to forecast because of the number of products involved, the availability of licensee sales data, potential contractual and intellectual property disputes, and the volatility of foreign currency exchange rates. For 2008, we forecast royalty revenue to grow approximately 20% to 30% relative to 2007, but a number of factors could affect these results. Higher than forecasted licensed product sales could positively affect royalty revenue. However, royalty revenue growth could be negatively affected by a number of factors, including the strengthening of the U.S. dollar, lower than expected sales of licensees’ products, the termination of licenses, changes to the terms of contracts under which licenses have been granted, or the failure of licensees to meet their contractual payment obligations for any reason, including an adverse decision or ruling in litigation involving the Cabilly patent, the Cabilly patent reexamination or related proceedings.

Contract Revenue

Contract revenue decreased 8% to $71 million in the second quarter and 18% to $140 million in the first six months of 2008 from the comparable periods in 2007. The decreases were mainly due to lower reimbursements from Roche related to R&D efforts on Avastin. The decrease in the first six months of 2008 was also due to the receipt of a milestone payment from Novartis Pharma AG in the first quarter of 2007 related to European Union approval of Lucentis. Contract revenue in the second quarter and first six months of 2008 included manufacturing service payments related to Xolair, which Novartis pays us as a result of our acquisition of Tanox, and our share of European profits related to Xolair. See “Related Party Transactions” below for more information on contract revenue from Roche and Novartis.

-33-

For 2008, we forecast contract revenue to remain relatively flat compared to 2007. However, contract revenue varies each quarter and is dependent on a number of factors, including the timing and level of reimbursements from ongoing development efforts, milestones, opt-in payments received, new contract arrangements, and foreign currency exchange rates.

Cost of Sales

~~COS~~Cost of sales (COS) as a percentage of product sales was 1617% in the ~~first~~second quarter and first six months of ~~2006~~2008 compared to 2218% in the ~~first~~second quarter and 17% in the first six months of ~~2005~~2007. ~~This~~COS ~~decrease~~as isa ~~primarily~~percentage ~~due~~of toproduct ~~the~~sales during ~~discontinuation~~the second quarter and first six months of ~~our~~2008 was favorably affected by a decreased volume of lower margin ~~Enbrel®~~ sales to ~~Amgen~~collaborators. ~~and~~However, ~~higher~~COS ~~sales~~for these ~~volume~~periods included a $50 million charge related to failed lots from a manufacturing start-up campaign at one of our ~~higher~~facilities, ~~margin~~as ~~products~~well ~~(primarily~~as ~~oncology~~smaller charges ~~products~~related to the ongoing effect of our Voluntary Severance Program (VSP) and excess manufacturing capacity in our manufacturing network. The VSP gave certain manufacturing employees the opportunity to voluntarily resign from the company in exchange for a severance package. For the first six months of 2008, compensation charges related to the VSP included in COS were $27 million. Since a substantial majority of the employees enrolled under the VSP departed during the first six months of 2008, the remaining charges that will be recorded in the second half of 2008 are not expected to have a material effect on our results of operations.

For the full year 2006, we expect COS to be approximately 16% of net product sales, compared to 18% in 2005. We expect continued quarter-to-quarter variability based on product volume and mix changes, and there is always potential for an increase in COS if we have unforeseen manufacturing, contract manufacturing, or inventory related issues.

Research and Development

Research and development (R&D ) expenses increased 548% to $~~374~~649 million in the second quarter and 4% to $1,266 million in the first ~~quarter~~six months of ~~2006~~2008 ~~over~~from the comparable ~~period~~periods in ~~2005~~2007. The higher ~~level~~levels of expenses ~~reflect~~in ~~increased~~the second quarter ~~activity~~and ~~across~~first ~~our~~six ~~entire~~months ~~product~~of ~~portfolio,~~2008 ~~including~~reflected increased ~~spending~~development activity mainly as ~~on late-stage~~a ~~clinical~~result ~~trials~~of ~~(notably~~collaboration ~~Avastin~~arrangements ~~and~~entered ~~Rituxan~~into ~~Immunology)~~in ~~and~~2007, ~~early~~increased clinical ~~stage~~manufacturing ~~projects~~expenses, and higher research expenses. ~~due~~The toincreases ~~increased~~in ~~headcount and~~R&D ~~headcount~~expenses ~~related~~were ~~expenses~~offset ~~and~~by ~~higher~~a ~~clinical~~reduction ~~manufacturing~~of in-licensing expenses atof ~~our~~approximately ~~Oceanside~~$140 ~~manufacturing~~million in ~~facility.~~the ~~Also~~first ~~contributing~~six months of 2008 compared to the ~~increase~~first ~~were~~six ~~post-marketing~~months ~~studies~~of on2007, due ~~new~~to ~~and~~significant ~~existing~~new ~~indications~~collaborations ~~for~~entered ~~Avastin,~~into ~~Rituxan~~during ~~and Tarceva.~~the Infirst ~~addition,~~six months of 2007. R&D ~~expenses~~as ~~for~~a ~~the~~percentage ~~first~~of ~~quarter~~operating ofrevenue ~~2006~~was 20% in ~~included~~the second ~~$33~~quarter ~~million~~and offirst ~~employee~~six ~~stock-based~~months ~~compensation~~of ~~expense~~2008 ~~related~~compared to ~~FAS~~20% in the second quarter and ~~123R~~21% in the first six months of 2007.

R&D as a percentage of operating revenues was 19% in the first quarter of 2006 as compared to 17% in the first quarter of 2005. We expect R&D absolute dollar spending in 2006 to continue to increase over 2005 levels as we continue to invest in our late stage pipeline and continue to add new programs in the early stage pipeline.

-28-

The major components of R&D expenses were as follows (in millions):

	Three Months Ended March 31,
Research and Development	2006		2005		% Change
Product development (including post marketing)	$	283	$	178		59	%
Research		74		53		40
In-licensing		17		12		42
Total R&D	$	374	$	243		54

Marketing, General and Administrative

Marketing, general and administrative (MG&A ) expenses increased 425% to $~~441~~559 million in the second quarter and 5% to $1,076 million in the first ~~quarter~~six months of ~~2006~~2008 from the comparable ~~period~~periods in ~~2005~~2007. ~~The~~These ~~increase~~increases ~~was~~were primarily due to: ~~(i)~~ an increase ~~of $67~~ ~~million~~ in royalty ~~commercial~~expense, ~~activities~~primarily ~~in support of pre-launch activities related~~ to ~~Avastin~~Biogen inIdec, ~~lung~~resulting ~~and~~from ~~breast~~higher ~~cancer~~Roche ~~indications,~~sales of Rituxan. MG&A ~~Immunology,~~as ~~Lucentis and~~a ~~Herceptin~~percentage ~~(adjuvant~~of ~~setting);~~operating ~~(ii)~~revenue ~~$41~~was ~~million~~17% in ofthe ~~employee~~second ~~stock-based~~quarter ~~compensation~~and ~~expense~~in ~~related~~the tofirst ~~FAS~~six ~~123R;~~months ~~and~~of ~~(iii)~~2008 ancompared ~~increase~~to of18% ~~$23 million~~ in ~~general~~the ~~corporate~~second ~~expenses~~quarter toand 17% ~~support~~in ~~our~~the ~~continued~~first ~~growth~~six ~~and~~months ~~higher legal costs~~2007.

MG&A as a percentage of operating revenues was 22% in the first quarter of 2006 as compared to 21% for the comparable period in 2005. MG&A absolute dollar spending is expected to increase during the remainder of 2006 primarily driven by marketing and sales costs in support of anticipated product launches.

Collaboration Profit Sharing

Collaboration profit sharing expenses increased 2813% to ~~$226~~ $313 million in the ~~first~~ second quarter ofand ~~2006~~12% ~~from~~to ~~the~~$592 ~~comparable~~million ~~period~~ in ~~2005 due to~~the ~~higher~~first ~~sales~~six months of ~~Tarceva,~~2008 ~~Xolair~~from ~~and Rituxan and~~ the ~~related profit sharing~~ ~~expenses.~~comparable ~~For~~periods ~~the~~in ~~full year 2006~~2007, ~~our~~primarily ~~collaboration~~due ~~profit sharing expenses are expected~~ to ~~grow~~higher insales ~~proportion~~of ~~to our~~ Rituxan, ~~Xolair~~ and Tarceva ~~sales growth~~.

~~Recurring~~The ~~Charges~~following ~~Related~~table tosummarizes ~~Redemption~~the amounts resulting from the respective profit sharing collaborations for the periods presented (in millions):

We record recurring charges related to the June 1999 redemption of our Special Common Stock and push-down accounting (see discussion below in “Relationship with Roche—Redemption of Our Special Common Stock”). These charges were $26 million in the first quarter of 2006 and $35 million in the first quarter of 2005, and were comprised of the amortization of Redemption-related other intangible assets in the periods presented.

	Three Months Ended June 30,							Six Months Ended June 30,
	2008		2007		% Change			2008		2007		% Change
U.S. Rituxan profit sharing expense	$	213	$	188		13	%	$	404	$	354		14	%
U.S. Tarceva profit sharing expense		52		40		30			99		79		25
Total Xolair profit sharing expense		48		49		(2	)		89		96		(7	)
Total collaboration profit sharing expense	$	313	$	277		13		$	592	$	529		12

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We and Novartis share the U.S. and European operating profits for Xolair according to prescribed profit sharing percentages. Generally, we evaluate whether we are a net recipient or payor of funds on an annual basis in our cost and profit sharing arrangements. Net amounts received on an annual basis under such arrangements are classified as contract revenue, and net amounts paid on an annual basis are classified as profit sharing expense. With respect to the U.S. operating results, for the full year in 2007 we were a net payor to Novartis, and for the full year in 2008 we similarly anticipate being a net payor to Novartis. As a result, for the second quarters and first six months of 2008 and 2007, the portion of the U.S. operating results that we owed to Novartis was recorded as collaboration profit sharing expense. With respect to the European operating results, for the full year in 2007 we were a net payor to Novartis, and for the full year in 2008 we anticipate being a net recipient from Novartis. As a result, for the second quarter and first six months of 2008, the portion of the European operating results that Novartis owed us was recorded as contract revenue. For the same periods in 2007, however, our portion of the European operating results was recorded as collaboration profit sharing expense. Effective with our acquisition of Tanox on August 2, 2007, Novartis also makes additional profit sharing payments to us on U.S. sales of Xolair, which reduces our profit sharing expense.

Currently, our most significant collaboration profit sharing agreement is with Biogen Idec, with which we co-promote Rituxan in the U.S. Under the collaboration agreement, Biogen Idec granted us a worldwide license to develop, commercialize, and market Rituxan for multiple indications. In exchange for these worldwide rights, Biogen Idec has co-promotion rights in the U.S. and a contractual arrangement under which we share a portion of the pretax U.S. co-promotion profits of Rituxan and pay royalty expense based on sales of Rituxan outside the U.S. In June 2003, we amended and restated the collaboration agreement with Biogen Idec to include the development and commercialization of one or more anti-CD20 antibodies targeting B-cell disorders, in addition to Rituxan, for a broad range of indications.

Under the amended and restated collaboration agreement, our share of the current pretax U.S. co-promotion profit sharing formula is approximately 60% of operating profits, and Biogen Idec’s share is approximately 40%. For each calendar year or portion thereof following the approval date of the first new anti-CD20 product, after a period of transition, our share of the pretax U.S. co-promotion profits will change to approximately 70% of operating profits, and Biogen Idec’s share will be approximately 30%.

Collaboration profit sharing expense, exclusive of R&D expenses, related to Biogen Idec for the periods ended June 30, 2008 and 2007 consisted of the following (in millions):

	Three Months Ended June 30,							Six Months Ended June 30,
	2008		2007		% Change			2008		2007		% Change
Product sales, net	$	651	$	582		12	%	$	1,255	$	1,117		12	%
Combined commercial costs and expenses		150		146		3			294		276		7
Combined co-promotion profits	$	501	$	436		15		$	961	$	841		14
Amount due to Biogen Idec for their share of co-promotion profits–included in collaboration profit sharing expense	$	213	$	188		13	%	$	404	$	354		14	%

In addition to Biogen Idec’s share of the combined co-promotion profits for Rituxan, collaboration profit sharing expense includes the quarterly settlement of Biogen Idec’s portion of the combined commercial costs. Since we and Biogen Idec each individually incur commercial costs related to Rituxan and the spending mix between the parties can vary, collaboration profit sharing expense as a percentage of sales can also vary accordingly.

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Total revenue and expenses related to our collaboration with Biogen Idec included the following (in millions):

	Three Months Ended June 30,							Six Months Ended June 30,
	2008		2007		% Change			2008		2007		% Change
Contract revenue from Biogen Idec (R&D reimbursement)	$	32	$	34		(6	) %	$	65	$	55		18	%

Co-promotion profit sharing expense	$	213	$	188		13	%	$	404	$	354		14	%

Royalty expense on sales of Rituxan outside the U.S. and other patent costs–included in MG&A expenses	$	76	$	51		49	%	$	144	$	107		35	%

Recurring Amortization Charges Related to Redemption and Acquisition

On June 30, 1999, RHI exercised its option to cause us to redeem all of our Special Common Stock held by stockholders other than RHI. The Redemption was reflected as the purchase of a business, which under GAAP required push-down accounting to reflect in our financial statements the amounts paid for our stock in excess of our net book value.

On August 2, 2007, we acquired Tanox. In connection with the acquisition, we recorded approximately $814 million of intangible assets, representing developed product technology and core technology, which are being amortized over 12 years.

We recorded recurring charges related to the amortization of intangibles associated with the Redemption and our acquisition of Tanox. These charges were $43 million in the second quarter of 2008 and $86 million in the first six months of 2008, and were $26 million in the second quarter and $52 million in the first six months of 2007.

Special Items: Litigation-Related

WeThe ~~recorded~~California ~~$13~~Supreme ~~million~~Court ofheard ~~accrued~~our ~~interest~~appeal ~~and~~on ~~bond~~the ~~costs~~COH ~~related~~matter toon ~~the~~February ~~COH~~5, 2008, ~~trial judgment~~and inon ~~each~~April of24, ~~the~~2008 ~~first~~overturned ~~quarters~~the award of ~~2006~~$200 ~~and~~million ~~2005. We~~in ~~expect~~punitive ~~that~~damages to weCOH ~~will~~but ~~continue~~upheld tothe ~~incur~~award ~~interest~~of ~~charges~~$300 onmillion ~~the~~in ~~judgment~~compensatory ~~and~~damages. As a ~~service~~result ~~fees~~of on the ~~surety~~California ~~bond~~Supreme ~~each~~Court ~~quarter~~decision, ~~through~~we ~~the~~reversed ~~process~~a of$300 ~~appealing~~million net ~~the~~litigation ~~COH~~accrual ~~trial~~related ~~results. The~~to ~~amount~~the ofpunitive ~~cash~~damages and ~~paid,~~accrued ~~if any~~interest, which orwe ~~the~~recorded ~~timing~~as of“Special ~~such~~items: ~~payment~~litigation related” in ~~connection~~our Condensed ~~with~~Consolidated ~~the~~Statements ~~COH~~of ~~matter~~Income ~~will~~for ~~depend on~~ the ~~outcome~~first ofquarter ~~the~~and ~~California~~first ~~Supreme~~six ~~Court’s review~~months of 2008. In the ~~matter;~~second ~~however,~~quarter weand ~~expect~~first ~~that~~six itmonths ~~may~~of ~~take~~2007, ~~longer~~we ~~than one year~~recorded toaccrued ~~resolve~~interest ~~this~~and ~~matter.~~bond ~~Also included~~costs inon ~~this~~both ~~line~~the iscompensatory anand ~~amount~~punitive ~~received~~damages totaling ~~during~~$13 ~~the~~million ~~first~~and ~~quarter~~$26 ofmillion, ~~2005 for a litigation settlement~~respectively. See Note 45, “Contingencies,” in the Notes to the Condensed Consolidated Financial Statements ofin Part I, Item 1 of this Quarterly Report on Form 10-Q for ~~further~~more information regarding ~~our~~the COH litigation.

Operating Income

Operating income was $~~644~~1,229 million in the ~~first~~second quarter of ~~2006~~2008, a 499% increase from the ~~first~~second quarter of ~~2005~~2007, and $2,748 million in the first six months of 2008, a 26% increase from the comparable period in 2007. Our operating income as a percentage of operating ~~revenues~~ ~~(or~~revenue “(pretax operating margin”) was 3238% in the ~~first~~second quarter of 2008 and 37% in the second quarter of ~~2006~~2007, and was 44% in the first 29six months of 2008 and 37% in the first ~~quarter~~six months of ~~2005~~2007.

-2936-

Other Income, ~~Net~~(Expense)

	Three Months Ended March 31,
Other Income, Net	2006			2005			% Change
	(In millions)
Gains on sales of biotechnology equity securities and other	$	3		$	1			200	%
Write-downs of biotechnology debt, equity securities and other		-			(4	)		(100	)
Interest income		49			21			133
Interest expense		(19	)		(3	)		533
Other miscellaneous income		1			-			-
Total other income, net	$	34		$	15			127

The components of “Other income (expense)” were as follows (in millions):

The components of other income, net have changed primarily due to the effects of our debt issuance in July 2005. Investment income increased as a result of the higher average cash balances maintained and interest expense increased due to the debt service costs incurred in the first quarter of 2006.

	Three Months Ended June 30,									Six Months Ended June 30,
	2008			2007			% Change			2008			2007			% Change
Gains on sales of biotechnology equity securities, net	$	43		$	4			975	%	$	45		$	12			275	%
Write-downs of biotechnology debt and equity securities		(1	)		–			–			(1	)		(4	)		(75	)
Interest income(1)		51			70			(27	)		118			140			(16	)
Interest expense		(15	)		(17	)		(12	)		(32	)		(35	)		(9	)
Other miscellaneous income		–			1			(100	)		4			1			300
Total other income, net	$	78		$	58			34		$	134		$	114			18

We expect interest income, net of interest expense, in 2006 to be 30% higher than 2005 levels, subject to changes in interest rates. Also, in the second quarter of 2006, we will recognize a gain of approximately $30 million from Amgen’s acquisition of Abgenix, Inc, which closed on April 3, 2006.______________________

(1)	Interest income includes interest and dividend income, bond-related amortization, realized gains and losses on available-for-sale securities and trading securities, and changes in unrealized gains and losses on trading securities.

Other income, net for the second quarter of 2008 increased 34% to $78 million from the second quarter of 2007 and increased 18% to $134 million in the first six months of 2008 compared to the same period in 2007. Gains on sales of biotechnology equity securities increased due to gains recognized as a result of the acquisitions of Millennium Pharmaceuticals, Inc. by Takeda Pharmaceutical, and Agensys, Inc. by Astellas Pharma, Inc. These gains were offset by lower interest income, mainly due to lower interest rates in the second quarter and first six months of 2008 compared to the same periods in 2007.

For 2008, we forecast “Other income, net” to be generally flat relative to 2007.

Income Tax Provision

~~The~~Our effective income tax rate was 3840% in the ~~first~~second quarter of ~~2006,~~2008 as compared to 3637% in the ~~first~~second quarter of 2007, ~~2005. The increase~~mainly indue ~~the~~to ~~income~~a ~~tax~~$33 ~~rate~~million ~~primarily~~settlement ~~reflects higher income before taxes~~with ~~and~~ the ~~December~~IRS ~~31,~~for ~~2005~~an ~~expiration~~item ofrelated ~~provisions~~to inprior ~~federal~~years. ~~tax~~Our ~~law~~effective ~~for~~income ~~the R&D~~ tax ~~credit.~~rate ~~Currently~~was 39% ~~there are bills~~ in ~~Congress~~the tofirst ~~extend~~six ~~the~~months ~~R&D tax~~of ~~credit~~2008 ~~retroactively~~compared to ~~January~~37% 1,in ~~2006.~~the Iffirst ~~such~~six ~~legislation~~months ~~is passed,~~of ~~then at~~2007, ~~that~~mainly ~~time~~due weto ~~will~~the ~~record a tax benefit for R&D tax credits~~IRS settlement.

WeFinancial ~~anticipate~~Assets that our annual 2006 effective income tax rate will be fractionally above 37%, assuming the R&D tax credit is extended retroactive to January 1, 2006. Various factors may have favorable or unfavorable effects on our effective tax rate during the remainder of 2006 and in subsequent years. These factors include, but are not limited to, changing interpretations of existing tax laws, changes in tax laws and rates, past and future levels of R&D spending, and changes of estimates of prior years’ items, and changes in overall levels of income before taxes, all of which may result in periodic revisions to our effective tax rate.Liabilities

On January 1, 2008, we adopted FAS 157, which established a framework for measuring fair value in GAAP and clarified the definition of fair value within that framework. FAS 157 does not require assets and liabilities that were previously recorded at cost to be recorded at fair value. For assets and liabilities that are already required to be disclosed at fair value, FAS 157 introduced, or reiterated, a number of key concepts that form the foundation of the fair value measurement approach to be used for financial reporting purposes. The fair value of our financial instruments reflects the amounts that would be received in connection with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1—quoted prices in active markets for identical assets and liabilities

Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3—unobservable inputs

The adoption of FAS 157 did not have an effect on our financial condition or results of operations, but FAS 157 introduced new disclosures about how we value certain assets and liabilities. Much of the disclosure focuses on the inputs used to measure fair value, particularly for instances in which the measurement uses significant unobservable (Level 3) inputs. A substantial majority of our financial instruments are valued using quoted prices in active markets or are based on other observable inputs. Our Level 1 assets include cash, money market instruments, U.S. Treasury securities, marketable equity securities, and equity forwards. Level 2 assets include other government and agency

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securities, commercial paper, corporate bonds, asset-backed securities, municipal bonds, preferred securities, and other derivatives. Our Level 3 assets include student loan auction-rate securities and structured investment vehicle securities. As of June 30, 2008, we held $157 million of investments which were measured using Level 3 inputs, representing approximately 2% of our total fair value investment portfolio. Student loan auction-rate securities of $155 million and structured investment vehicle securities of $2 million were valued based on broker-provided valuations, which approximate fair value. In February 2008, the auction-rate securities market experienced a number of failed auctions for student loan-backed securities, such as those held by us, which severely limited the liquidity of those securities. Due to market liquidity constraints related to the failed auctions, we classified the auction-rate securities as non-current assets, consistent with the long-term maturity dates of the underlying student loans. As of June 30, 2008, we believed that the unrealized losses in the auction rate securities are temporary and that we have the ability to hold the assets to maturity. All of our auction-rate securities are AAA/Aaa-rated and are collateralized by student loans guaranteed by the U.S. government to be repaid at no less than 95% of par value. We held no auction rate securities as of December 31, 2007.

The following table sets forth the fair value of our financial assets and liabilities reported on a recurring basis, including those pledged as collateral, or restricted (in millions).

	June 30, 2008				December 31, 2007
	Assets		Liabilities		Assets		Liabilities
Cash and cash equivalents	$	2,891	$	–	$	2,514	$	–
Restricted cash		788		–		788		–
Short-term investments		1,614		–		1,461		–
Long-term marketable debt securities		1,458		–		1,674		–
Total fixed income investment portfolio		6,751		–		6,437		–

Long-term marketable equity securities		374		–		416		–
Total derivative financial instruments		28		82		30		19
Total	$	7,153	$	82	$	6,883	$	19

Liquidity and Capital Resources

Liquidity and Capital Resources	March 31, 2006		December 31, 2005
	(In millions)
Unrestricted cash, cash equivalents, short-term investments and long-term marketable debt and equity securities	$	3,942	$	3,814
Net receivable - equity hedge instruments		66		73
Total unrestricted cash, cash equivalents, short-term investments, long-term marketable debt and equity securities, and equity hedge instruments	$	4,008	$	3,887
Working capital	$	2,783	$	2,726
Current ratio		2.6:1		2.6:1

(In millions)

Unrestricted cash, cash equivalents, short-term investments and long-term marketable securities, including the fair value of the equity hedge instruments, were approximately $4.0 billion at March 31, 2006, an increase of approximately $121 million from December 31, 2005. This increase primarily reflects cash generated from operations, partially offset by cash used for capital expenditures and repurchases of our common stock. To mitigate the risk of market value fluctuation, certain of our biotechnology marketable equity securities are hedged with zero-cost collars and forward contracts, which are carried at fair value. See Note 1, “Summary of Significant Accounting

	June 30, 2008		December 31, 2007
Unrestricted cash, cash equivalents, short-term investments, and long-term marketable debt and equity securities	$	6,337	$	6,065
Net receivable—equity hedge instruments		17		24
Total unrestricted cash, cash equivalents, short-term investments, long-term marketable debt and equity securities, and equity hedge instruments	$	6,354	$	6,089
Working capital	$	6,348	$	4,835
Current ratio	3.3:1		2.2:1

Total unrestricted cash, cash equivalents, short-term investments, and long-term marketable securities, including the fair value of the equity hedge instruments, was $6,354 million as of June 30, 2008, an increase of $265 million from December 31, 2007. This increase primarily reflects cash generated from operations and increases from stock option exercises, partially offset by cash used for tax payments, the COH litigation settlement payment, capital expenditures, and share repurchases. To mitigate the risk of market value fluctuations, one of our most significant biotechnology equity security holdings is hedged with forward contracts, which are carried at estimated fair value. See Note 4, “Investment Securities and Financial Instruments,” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2007 for further information regarding activity in our marketable investment portfolio and derivative instruments.

~~Policies—Comprehensive~~In ~~Income,”~~conjunction inwith the ~~Notes~~COH judgment in 2002, we posted a surety bond and were required to pledge cash and investments of $788 million to secure the bond, and this balance was reflected in “Restricted cash and investments” in the accompanying Condensed Consolidated ~~Financial~~Balance ~~Statements~~Sheets. Subsequent ofto ~~Part~~June 30, I2008, ~~Item~~the 1court ofcompleted ~~this~~certain ~~Form~~administrative ~~10-Q~~procedures ~~for~~to ~~further~~dismiss ~~information~~the ~~regarding~~case. As ~~activity~~a inresult, ~~our marketable~~the ~~investment~~restrictions ~~portfolio~~were lifted from the restricted cash and investments ~~derivative~~accounts, ~~instruments~~and the funds became available for use in our operations.

~~See “Our affiliation agreement with Roche could limit our ability to make acquisitions” below in the “Forward~~-~~Looking Information and Cautionary Factors” section and Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of this Form 10~~38-~~Q for factors that could negatively affect our cash position.~~

Cash Provided by Operating Activities

Cash provided by operating activities is primarily driven by increases in our net income. However, operating cash flows differ from net income as a result of non-cash charges or differences in the timing of cash flows and earnings recognition. Significant components of cash provided by operating activities are as follows:

~~Our~~Accounts ~~“accounts receivable—product sales” was $615 million at March 31~~payable, ~~2006,~~other ~~an increase~~accrued ~~of $61 million from December 31~~liabilities, ~~2005. The increase is primarily due to higher product sales of Herceptin, Avastin~~ and ~~Tarceva.~~other ~~The~~long-term ~~average~~liabilities ~~collection~~decreased ~~period~~$455 ofmillion ~~our “accounts receivable—product sales” as measured~~ in ~~days sales outstanding (or “DSO”) was 34 days for~~ the first ~~quarter~~six ~~2006,~~months ~~compared to 52 days in the first quarter~~ of ~~2005.~~2008, ~~The~~mainly ~~decline~~due into ~~DSO~~payments ~~from the first quarter~~to ~~of 2005~~third-party ~~reflects~~vendors, ~~the~~tax ~~termination~~authorities, ofand ~~the~~employees ~~extended~~for ~~payment~~accrued ~~term incentive program~~bonus ~~in the first quarter of 2005~~costs.

~~Our~~Inventories ~~inventory~~decreased ~~balance was~~ $~~804~~83 million atin ~~March~~the ~~31,~~first ~~2006,~~six anmonths ~~increase~~ of ~~$101 million from December 31~~2008, ~~2005.~~as ~~The~~more ~~increase~~products ~~is primarily due to bulk campaign~~were ~~production~~sold ofthan ~~our~~produced ~~Avastin~~during ~~and Herceptin products. Inventory also increased in~~ the ~~first quarter of 2006 due to non-cash employee stock-based compensation costs of $16 million that were capitalized in inventory pursuant to our adoption of FAS 123R~~period.

Receivables and other current assets increased $59 million in the first six months of 2008. Accounts receivable—product sales increased $42 million from December 31, 2007, primarily due to increased product sales and a decrease in outstanding credit notes against accounts receivable balances as of June 30, 2008 compared to December 31, 2007, mainly due to the timing of their application. The average collection period of our accounts receivable—product sales as measured in days’ sales outstanding (DSO) was 32 days as of June 30, 2008, compared to 33 days as of December 31, 2007 and 40 days as of June 30, 2007. The decrease in DSO from the second quarter of 2007 was primarily due to the reduction in the extended payment terms that we offered to certain wholesalers in conjunction with the launch of Lucentis on June 30, 2006.

As a result of the April 24, 2008 California Supreme Court ruling on the COH matter, we reversed a $300 million net litigation accrual related to the punitive damages and accrued interest in the first six months of 2008, and we paid COH $476 million in the second quarter of 2008 for compensatory damages awarded plus interest, which reduced our cash from operations.

Cash Used in Investing Activities

Cash used in investing activities was primarily ~~relate~~due to ~~purchases, sales and maturities of investments and~~ capital expenditures. Capital expenditures were $~~253~~398 million during the first ~~quarter~~six months of ~~2006~~2008 compared to $~~144~~475 million during the first ~~quarter~~ six months of ~~2005~~2007. ~~Capital~~During ~~expenditures in~~ the first ~~quarter~~six months of 2008, ~~2006~~capital ~~included ongoing~~expenditures were related to construction of our ~~second manufacturing~~ fill-finish facility in ~~Vacaville~~Hillsboro, ~~California,~~ ~~ongoing~~Oregon ~~start-up~~ and ~~validation~~our ~~costs~~E. atcoli ~~our~~production ~~manufacturing~~ facility in ~~Oceanside,~~Singapore; leasehold ~~California,~~improvements ~~the~~for ~~purchase~~newly ofconstructed abuildings ~~second~~on ~~facility~~our inSouth ~~Oceanside,~~San ~~purchase~~Francisco, ofCalifornia ~~equipment~~campus; and ~~information~~purchases ~~systems,~~of equipment and ~~ongoing expenditures to~~information ~~support our corporate infrastructure needs~~systems.

We ~~currently~~forecast ~~anticipate~~ that our 2008 capital expenditures ~~for the full year 2006~~ will be approximately $~~1.5~~850 ~~billion~~million, excluding ~~primarily~~capitalized ~~driven~~costs byrelated ~~manufacturing expansion due~~ to ~~ongoing~~ construction ofcosts ~~our~~for ~~second~~which ~~manufacturing~~we ~~facility in Vacaville,~~are ~~start-up~~considered ~~and validation of our Oceanside manufacturing facilities, and for projects related~~ to ~~existing~~be ~~facilities,~~the ~~increases~~owner induring ~~office~~the ~~space,~~construction ~~and land purchases~~period.

In November 2006, we entered into a series of agreements with Lonza, including a supply agreement to purchase product produced by Lonza at their Singapore manufacturing facility, which is currently under construction, and a loan agreement to advance Lonza $290 million for the construction of that facility. The facility is expected to reach mechanical completion in the fourth quarter of 2008, at which time we expect to advance Lonza in excess of $200 million pursuant to the loan agreement, subject to certain conditions that are included in the loan agreement.

Cash Used in Financing Activities

Cash used in financing activities isincludes ~~primarily related to~~ activity under our ~~employee~~ stock ~~plans~~repurchase program and our employee stock ~~repurchase program~~plans. We used cash for stock repurchases of $~~227~~ 256 million during the first ~~quarter~~six months of ~~2006~~2008 and $~~156~~666 million during the first six ~~quarter~~months of ~~2005~~2007 pursuant to our stock repurchase program approved by our Board of Directors. We also received $89228 million during the first ~~quarter~~six months of 2008 ~~2006~~ and $~~106~~276 million during the first ~~quarter~~six months of ~~2005~~2007 related to stock option exercises and stock issuances under our employee stock ~~plans~~purchase plan. The excess tax benefits from stock-based compensation arrangements were $32 million in the first six months of 2008 and $127 million in the first six months of 2007.

~~Prior~~Under toa ~~our adoption of FAS 123R, the tax benefit from~~ stock ~~option~~repurchase ~~exercises~~program ~~was reported~~approved asby ~~operating~~our ~~cash~~Board ~~flows.~~of ~~FAS~~Directors ~~123R~~in ~~requires~~December ~~excess tax benefits be~~2003 ~~reported~~and asmost arecently ~~financing~~extended ~~cash~~in ~~inflow~~April ~~rather~~2008, ~~than~~we asare aauthorized ~~reduction~~to ofrepurchase ~~taxes~~up ~~paid.~~to ~~At March~~150 ~~31,~~million ~~2006,~~shares ~~the~~of ~~excess~~our ~~tax~~Common ~~benefit~~Stock ~~from~~for ~~stock-based compensation arrangements was $49 million.~~an

~~During 2006, our total cash, unrestricted cash equivalents, short~~-~~term investments and marketable securities are expected to decline modestly relative to the level at December 31, 2005 due to cash requirements for capital~~39-

~~-31-~~aggregate amount of up to $10.0 billion through June 30, 2009. In this program, as in previous stock repurchase programs, purchases may be made in the open market or in privately negotiated transactions from time to time at management’s discretion. We also may engage in transactions in other Genentech securities in conjunction with the repurchase program, including certain derivative securities, although as of June 30, 2008, we had not engaged in any such transactions. We use the repurchased stock to offset dilution caused by the issuance of shares in connection with our employee stock purchase plan. Although there are currently no specific plans for the shares that may be purchased under the program, our goals for the program are: (1) to address provisions of our Affiliation Agreement with RHI related to maintaining RHI’s minimum ownership percentage, (2) to make prudent investments of our cash resources, and (3) to allow for an effective mechanism to provide stock for our employee stock purchase plans. See “Relationship with Roche Holdings, Inc.” below for more information on RHI’s minimum ownership percentage.

~~expenditures, share repurchases under our stock repurchase program, and other uses of working capital.~~ We ~~believe our existing unrestricted funds, together with funds~~ ~~provided~~enter byinto ~~operations~~Rule ~~and~~10b5-1 ~~our~~trading ~~debt~~plans ~~issuance in July 2005 will be sufficient~~ to ~~meet~~ ~~our~~repurchase ~~foreseeable~~shares ~~future~~in ~~operating~~the ~~cash~~open ~~requirements. See “Our affiliation~~market ~~agreement~~during ~~with~~periods ~~Roche~~when ~~Holdings,~~trading ~~Inc.~~in ~~could adversely affect~~ our ~~cash~~stock ~~position” below~~is inrestricted ~~Part~~under ~~II, Item 1A “Risk Factors” of this Form 10-Q for factors that could negatively affect~~ our ~~cash~~insider ~~position~~trading policy.

OnIn ~~April~~November 192007, ~~2006,~~we ~~the~~entered ~~Board~~into ofa ~~Directors~~prepaid ~~approved~~share ~~an extension of our stock~~ repurchase ~~program~~arrangement ~~for~~with ~~the repurchase of up to~~ an ~~additional $2.0 billion of~~ ~~our common~~investment ~~stock~~bank ~~for~~pursuant ato ~~total~~which ofwe delivered $~~6.0~~300 ~~billion through June 30, 2007. The Board also amended the current repurchase program by increasing the maximum number of shares that can be repurchased from 80~~ million to ~~100 million shares. Under this stock repurchase program, purchases may be made in~~ the ~~open market or in~~investment ~~privately negotiated transactions from time to time at management’s discretion~~bank. ~~Genentech~~ ~~also~~The ~~may~~prepaid ~~engage~~amount inwas ~~transactions~~reflected inas ~~other~~a ~~Genentech~~reduction securities in conjunction with the repurchase program, including certain derivative securities. Genentech intends to use the repurchased stock to offset dilution caused by the issuance of ~~shares~~our ~~in connection with Genentech~~stockholders’~~s employee stock~~ ~~plans.~~equity ~~Although~~as ~~there~~of ~~are~~December ~~currently no specific plans for the shares that may be purchased under the program~~31, our goals for the program are (i) to make prudent investments of our cash resources; (ii) to allow for an effective mechanism to provide stock for our employee stock plans; and (iii) to address provisions of our affiliation agreement with Roche relating to maintaining Roche’s minimum ownership percentage2007. ~~See~~Under ~~below~~this inarrangement, ~~“Relationship with Roche” for more information on Roche’s minimum ownership percentage. We have entered into Rule 10b5-1 trading plans to repurchase shares in~~ the ~~open market~~investment ~~during those periods each quarter when trading in our stock is restricted~~bank ~~under~~delivered ~~our insider trading policy. The current trading plan covers~~ approximately 2 four million shares ~~and~~to ~~will~~us ~~run~~on March ~~through June 30~~31, ~~2006~~ 2008.

~~Our~~In ~~shares~~May ~~repurchased~~2008, ~~during~~we entered into a prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $500 million to the ~~first~~investment bank. ~~quarter~~The investment bank is obligated to deliver to us, by September 30, 2008, not fewer than five million shares of ~~2006~~our ~~were~~Common asStock ~~follows~~based upon a (pre-determined formula, subject to a possible reduction in the number of shares received, an extension of the date on which shares are to be delivered, or other modifications or cancellation of the plan in ~~millions):~~certain circumstances. The prepaid amount has been reflected as a reduction of our stockholders’ equity as of June 30, 2008. There was no effect on EPS for the three or six months ended June 30, 2008 as a result of entering into this agreement.

	Total Number of Shares Purchased in 2006		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2006		0.9	$	88.37
February 1-28, 2006		0.7		85.31
March 1-31, 2006		1.0		84.24
Total		2.6	$	85.95		52		48

Our shares repurchased during the second quarter of 2008 were as follows (shares in millions):

The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital with the amounts in excess of the estimated original sales price charged to accumulated deficit.

	Total Number of Shares Purchased		Average Price Paid per Share
April 1–30, 2008		0.9	$	74.76
May 1–31, 2008		1.5		68.77
June 1–30, 2008		1.2		73.68
Total		3.6	$	71.91

As of June 30, 2008, 83 million cumulative shares had been purchased under our stock repurchase program for $6.0 billion, and a maximum of 67 million additional shares for amounts totaling up to $4.0 billion may be purchased under the program through June 30, 2009.

The par value method of accounting is used for our Common Stock repurchases. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital, with the amounts in excess of the estimated original sales price charged to retained earnings.

Off-Balance Sheet Arrangements

We have certain contractual arrangements that create potential risk for ~~Genentech~~ us and are not recognized in our Condensed Consolidated Balance Sheets. ~~Discussed~~We believe that ~~below~~there ~~are~~have ~~those~~been no significant changes in the off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007 that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, ~~revenues~~revenue or expenses, results of ~~operation~~operations, liquidity, capital expenditures, or capital resources.

Leases

In December 2004, we entered into a Master Lease Agreement with Slough SSF, LLC for the lease of property adjacent to our South San Francisco campus. For accounting purposes, due to the nature of our involvement with the construction of the buildings, we are considered to be the owner of the assets during the construction period through the lease commencement date, even though the funds to construct the building shell and some infrastructure costs are paid by the lessor. In the first quarter of 2006, we capitalized $27 million of construction costs in property, plant and equipment, for a project-to-date capitalized total of $121 million. We have also recognized a corresponding amount as a construction financing obligation in “long-term debt” in the accompanying Condensed Consolidated Balance Sheets. We expect at the time of completion of the project, if all the buildings and infrastructure were completed by

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the lessor, our construction asset and related obligation may be as much as $365 million, excluding costs related to leasehold improvements. Our aggregate lease payments as contemplated by the Master Lease Agreement through 2020 will be approximately $544 million.

Contractual Obligations

During the first ~~quarter~~six months of ~~2006~~2008, we believe that there ~~have~~were ~~been~~ no significant changes in our payments due under contractual obligations, as disclosed in our Annual ~~Report~~ Report on Form 10-K for the year ended December 31, ~~2005~~2007, except as noted in “Cash Used in Investing Activities” above.

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Contingencies

We are party to various legal proceedings, including ~~patent infringement litigation and~~ licensing and contract disputes, and other matters. See Note 45, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of in Part 1I, Item 1 of this Quarterly Report on Form 10-Q for ~~further~~more information.

Relationship with Roche Holdings, Inc.

~~Redemption~~We issue shares of Common Stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. Our Affiliation ~~Special~~Agreement with RHI provides, among other things, that with respect to any issuance of our Common Stock in the future, we will repurchase a sufficient number of shares so that immediately after such issuance, the percentage of our Common Stock owned by RHI will be no lower than 2% below the “Minimum Percentage” (subject to certain conditions). The Minimum Percentage equals the lowest number of shares of Genentech Common Stock owned by RHI since its July 1999 offering of our Common Stock (to be adjusted in the future for dispositions of shares of Genentech Common Stock by RHI as well as for stock splits or stock combinations) divided by 1,018,388,704 (to be adjusted in the future for stock splits or stock combinations), which is the number of shares of Genentech Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. We have repurchased shares of our Common Stock since 2001 (see discussion above in “Liquidity and Capital Resources”). The Affiliation Agreement also provides that, upon RHI’s request, we will repurchase shares of our Common Stock to increase RHI’s ownership to the Minimum Percentage. In addition, RHI will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. Under the terms of the Affiliation Agreement, RHI’s Minimum Percentage is 57.7% and RHI’s ownership percentage is to be no lower than 55.7%. RHI’s ownership percentage of our outstanding shares was 55.9% as of June 30, 2008 and 55.6% as of July 31, 2008. Future share repurchases under our share repurchase program, including the May 2008 prepaid share repurchase arrangement (see also Note 8, “Capital Stock,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), may increase Roche’s ownership percentage. However, significant option exercises and stock purchases by employees could result in further dilution, and limitations in the number of shares we receive under, or modification or cancellation of, our existing prepaid share repurchase arrangement could negatively affect our ability to offset dilution.

OnSee ~~June~~also ~~30,~~Note ~~1999~~8, we“Capital ~~redeemed all of our outstanding Special Common~~ Stock,” ~~held by stockholders~~and ~~other~~Note ~~than Roche Holdings~~9, ~~Inc. (or~~ “~~Roche~~Subsequent Event,”) ~~at a price of $10.31 per share~~ in ~~cash~~the ~~with~~Notes ~~funds deposited by Roche for that purpose. We refer~~ to ~~this~~Condensed ~~event~~Consolidated asFinancial ~~the~~Statements ~~“Redemption.”~~in AsPart ~~a result~~I, onItem ~~that~~1 ~~date, Roche’s percentage ownership~~ of ~~our~~this ~~outstanding Common Stock increased from 65% to 100%.~~Quarterly ~~Consequently,~~Report ~~under~~on ~~GAAP,~~Form ~~we were required to use push~~10-~~down~~Q ~~accounting to reflect in our financial statements the amounts paid~~ for ~~our~~information ~~stock~~regarding ~~in excess of~~ our ~~net~~prepaid ~~book~~share ~~value. Push-down accounting required us to record $1,686 million~~repurchase ~~of goodwill~~arrangement and ~~$1,499~~Roche’s ~~million~~proposal ~~of other intangible assets on our balance sheet on June 30, 1999. Refer~~ to ~~Note~~acquire 3,all ~~“Condensed~~outstanding ~~Consolidated~~shares ~~Financial Statement Detail—Other Intangible Assets,” in the Notes to Condensed Consolidated Financial Statements~~ of ~~Part~~our ~~I, Item 1 of this Form 10-Q for further information~~stock ~~about~~not ~~these~~owned ~~intangible~~by ~~assets~~Roche.

Roche’s Ability to Maintain Its Percentage Ownership Interest in Our Stock

We issue additional shares of Common Stock in connection with our stock option and stock purchase plans, and we may issue additional shares for other purposes. Our affiliation agreement with Roche provides, among other things, that with respect to any issuance of Common Stock by Genentech in the future, we will repurchase a sufficient number of shares so that immediately after such issuance the percentage of Genentech Common Stock owned by Roche will be no lower than 2% below the “Minimum Percentage” (as defined below), provided however, as long as Roche’s percentage ownership is greater than 50%, prior to issuing any shares, we will repurchase a sufficient number of shares of our Common Stock such that, immediately after our issuance of shares, Roche’s percentage ownership will be greater than 50%. The Minimum Percentage equals the lowest number of shares of Genentech Common Stock owned by Roche since the July 1999 offering (to be adjusted for dispositions of shares of Genentech Common Stock by Roche as well as for stock splits or stock combinations) divided by 1,018,388,704, the number of shares of Genentech Common Stock outstanding at the time of the July 1999 offering, as adjusted for stock splits. We have repurchased shares of our Common Stock since 2001 (see discussion above in Liquidity and Capital Resources). The affiliation agreement also provides that, upon Roche’s request, we will repurchase shares of our Common Stock to increase Roche’s ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. The Minimum Percentage at March 31, 2006 was 57.7% and, under the terms of the affiliation agreement, Roche’s ownership percentage is to be no lower than 55.7%. At March 31, 2006, Roche’s ownership percentage was 55.7%.

Related Party Transactions

We enter into transactions with ~~our~~ related parties, Roche and ~~other Roche affiliates (including Hoffmann-La Roche) and~~ Novartis~~, under existing agreements in the ordinary course of business~~. The accounting policies that we apply to our transactions with our related parties are consistent with those applied in transactions with independent third~~-parties~~ parties, and all related party agreements are negotiated on an arm’s-length basis.

In our royalty and supply arrangements with related parties, we are the principal, as defined under EITF 99-3319, because we bear the manufacturing risk, general inventory risk, and the risk to defend our intellectual property. For circumstances in which we are the principal in the transaction, we record the transaction on a gross basis in accordance with EITF 99-19; otherwise our transactions are recorded on a net basis.

~~Hoffmann-La~~ Roche

~~Under~~We ~~our~~signed ~~existing~~two ~~arrangements~~product ~~with~~supply ~~Hoffmann-La~~agreements with Roche, ~~including~~in ~~our~~July ~~licensing and marketing agreement~~2006, weeach ~~recognized~~of ~~contract~~which ~~revenue from Hoffmann-La Roche,~~was ~~including~~amended ~~amounts~~in ~~earned~~November ~~related~~2007. toThe ~~ongoing~~Umbrella ~~development~~Agreement ~~activities,~~supersedes ofour ~~$18~~previous product ~~million~~supply inagreements ~~the~~with ~~first~~Roche. ~~quarter~~The ofShort-Term ~~2006~~Agreement ~~and~~supplements ~~$16 million in~~ the ~~first~~terms ~~quarter~~ of ~~2005.~~the ~~All~~Umbrella ~~other~~Agreement. ~~revenues~~Under ~~from~~the ~~Hoffmann~~Short-LaTerm Agreement, Roche ~~and~~has ~~their~~agreed ~~affiliates,~~to ~~principally~~purchase ~~royalties~~specified ~~and~~amounts ~~product~~of ~~sales~~Herceptin, ~~were~~Avastin, ~~$224~~and ~~million~~Rituxan inthrough ~~the first quarter~~2008. ofUnder ~~2006 and $155 million in~~ the ~~first~~Umbrella ~~quarter~~Agreement, ofRoche ~~2005.~~has ~~COS~~agreed ~~included amounts related~~ to ~~Hoffmann-La~~purchase ~~Roche~~specified amounts of Herceptin ~~$49~~and ~~million~~Avastin inthrough ~~the~~2012, ~~first quarter of 2006~~ and ~~$47 million~~ inon ~~the~~a ~~first~~perpetual ~~quarter~~basis, ofeither ~~2005.~~party ~~Our~~may order ~~reported~~other ~~R&D~~collaboration ~~expenses~~products ~~in each~~from of the ~~first~~other ~~quarters~~party, ofincluding ~~2006~~Herceptin and Avastin ~~2005~~after ~~included $43~~2012, ~~million~~pursuant ~~and~~to ~~$34~~certain ~~million,~~forecast ~~respectively,~~terms. ~~related~~The toUmbrella ~~development~~Agreement ~~activities~~also ~~undertaken~~provides onthat ~~projects~~either onparty ~~which~~may weterminate ~~collaborate with Hoffmann-La Roche.~~its

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obligation to purchase and/or supply Avastin and/or Herceptin with six years notice on or after December 31, 2007. To date, we have not received such notice of termination from Roche.

Under the July 1999 amended and restated licensing and marketing agreement and the July 1998 licensing and marketing agreement related to anti-HER2 antibodies (including Herceptin and pertuzumab), Roche has the right to opt in to development programs we undertake on our products at certain pre-defined stages of development. When Roche opts in to a program, we record the opt-in payments received from Roche as deferred revenue, which we recognize over the expected development periods or product life, as appropriate. As of June 30, 2008, the amounts in short-term and long-term deferred revenue related to opt-in payments received from Roche were $48 million and $193 million, respectively. For the second quarter and first six months of 2008, we recognized $13 million and $24 million, respectively, as contract revenue related to opt-in payments previously received from Roche. For the second quarter and first six months of 2007, we recognized $11 million and $23 million, respectively, as contract revenue related to opt-in payments previously received from Roche.

In February 2008, Roche acquired Ventana, and as a result of the acquisition, Ventana is considered a related party. We have engaged in transactions with Ventana prior to and since the acquisition, but these transactions have not been material to our results of operations.

In May 2008, Roche acquired Piramed, a privately held entity based in the United Kingdom, and as a result of the transaction, Piramed is considered a related party. We have a previously existing licensing agreement with Piramed related to a molecule in our development pipeline.

In June 2008, we entered into a licensing agreement with Roche under which we obtained rights to a preclinical small molecule drug development program. We recorded $35 million in R&D expense in the second quarter of 2008 related to this agreement. The future R&D costs incurred under the agreement and any profit and loss from global commercialization will be shared equally with Roche.

In July 2008, we signed an agreement with Chugai, a Japan-based entity and a member of Roche, under which we agreed to manufacture Actemra, a product of Chugai, at our Vacaville, California facility. After an initial term of five years, the agreement may be terminated subject to certain terms and conditions under the contract.

We currently have no commercialized products subject to profit sharing arrangements with Roche.

Under our existing arrangements with Roche, including our licensing and marketing agreement, we recognized the following amounts (in millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Product sales to Roche	$	144	$	253	$	281	$	516

Royalties earned from Roche	$	391	$	283	$	762	$	538

Contract revenue from Roche	$	20	$	30	$	40	$	60

Cost of sales on product sales to Roche	$	89	$	137	$	152	$	258

Research and development expenses incurred on joint development projects with Roche	$	77	$	70	$	148	$	128

Certain R&D expenses are partially reimbursable to us by Roche. Amounts that Roche owes us, net of amounts reimbursable to Roche by us on these projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts that we owe Roche for R&D expenses that Roche incurred on joint development projects, less amounts reimbursable to us by Roche on these projects.

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Novartis

Based on information available to us at the time of filing this Quarterly Report on Form 10-Q, we believe that the Novartis Group holds approximately 33.3% of the ~~outstanding~~ outstanding voting shares of Roche ~~Holding Ltd~~. As a result of this ownership, the Novartis Group is deemed to have an indirect beneficial ownership interest under FAS 57 ~~“Related Party Disclosures”~~ of more than 10% of our voting stock.

We have an agreement with Novartis ~~Ophthalmics~~Pharma ~~(now merged into Novartis~~ AG) under which Novartis ~~Ophthalmics~~Pharma AG has the exclusive right to develop and market Lucentis outside of the U.S. ~~and Canada~~ for indications related to diseases or disorders of the eye. As part of this agreement, the parties share the cost of certain of our ongoing ~~Phase III and related~~ development expenses for Lucentis.

We, ~~along~~and ~~with~~ Novartis ~~Pharma~~are AGco-developing ~~(a wholly~~and ~~owned~~co-promoting ~~subsidiary~~Xolair ofin ~~Novartis~~the ~~AG)~~U.S. ~~and~~We record all ~~Tanox~~sales, ~~Inc.~~COS, ~~are~~and ~~co-developing~~marketing ~~Xolair~~and sales expenses in the U.S.; WeNovartis markets the product in and ~~Novartis~~records ~~are co-promoting~~all ~~Xolair~~sales, COS, and marketing and sales expenses in Europe. We and Novartis share the resulting U.S. and weEuropean ~~both~~operating ~~make~~profits according ~~certain~~to ~~joint~~prescribed ~~and~~profit ~~individual payments~~sharing topercentages. ~~Tanox;~~Generally, ~~Genentech’s~~we ~~joint~~evaluate whether ~~and~~we ~~individual~~are ~~payments~~a ~~are~~net inrecipient ~~the~~or ~~form~~payor of funds on an annual basis in our cost ~~royalties~~and profit sharing arrangements. WeNet ~~record~~amounts ~~all~~received ~~sales~~on an annual basis under such arrangements are classified as contract revenue, and ~~cost~~net ofamounts ~~sales~~paid inon an annual basis are classified as profit sharing expense. With respect to the U.S. operating ~~and~~results, ~~Novartis markets~~for the ~~product~~full ~~and~~year ~~records~~in ~~all~~2007 ~~sales~~we were a net payor to Novartis, and ~~cost~~for ofthe ~~sales~~full year in ~~Europe.~~2008 Wewe ~~and~~similarly anticipate being a net payor to Novartis. ~~share~~As a result, for the ~~resulting~~second quarters and first six months of 2008 and 2007, the portion of the U.S. ~~and~~operating ~~European~~results ~~operating~~that ~~profits,~~we ~~respectively, according~~owed to ~~prescribed~~Novartis was recorded as collaboration profit- sharing ~~percentages~~expense. WeWith ~~are~~respect ~~currently~~to ~~supplying~~the European operating results, for the ~~product~~full ~~and~~year ~~receive~~in ~~cost~~2007 ~~plus~~we were a ~~mark-up~~net ~~similar~~payor to ~~other supply~~Novartis, ~~arrangements.~~and Onfor the full year in 2008 we anticipate being a net recipient from Novartis. ~~January~~As 20a result, ~~2006~~for the second quarter and first six months of 2008, ~~Novartis~~the ~~received~~portion ~~FDA~~of the ~~approval~~European tooperating ~~manufacture~~results ~~bulk~~that ~~supply~~Novartis owed us was recorded as contract revenue. For the same periods in 2007, however, our portion of the European ~~Xolair~~operating atresults ~~their~~was ~~Huningue~~recorded ~~production~~as ~~facility~~collaboration inprofit ~~France~~sharing expense. ~~Future~~Effective ~~production~~with ~~costs~~our acquisition of ~~Xolair~~Tanox ~~may~~on ~~initially~~August be2, ~~higher~~2007, ~~than~~Novartis ~~those~~also makes: (1) ~~currently~~additional profit sharing payments to us on U.S. sales of ~~reflected~~Xolair, inwhich reduces our ~~COS~~profit assharing aexpense; (2) ~~result~~royalty payments to us on sales of ~~the~~Xolair ~~production~~worldwide, ~~shift~~which ~~from~~we usrecord toas ~~Novartis~~royalty revenue; and (3) ~~until~~manufacturing ~~production~~service ~~economies~~payments ofrelated ~~scale~~to ~~can~~Xolair, bewhich ~~achieved~~we byrecord ~~Novartis~~as contract revenue.

~~Contract~~Under ~~revenue~~our ~~from~~existing ~~Novartis~~arrangements ~~related~~with ~~to manufacturing~~Novartis, commercial and ongoing development activities was $10 million in the first quarters of 2006 and 2005. Revenue from Novartis related to product sales and COS was not material in the first quarters of 2006 and 2005. Our reported R&D expenses in each of the first quarters of 2006 and 2005 included approximately $10 million related to development activities undertaken on products on which we ~~collaborate~~ ~~with~~recognized ~~Novartis. Collaboration profit sharing payments from us to Novartis were $43 million in~~ the ~~first~~following ~~quarter of 2006 and $24 million~~amounts (in ~~the first quarter of 2005.~~ millions):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Product sales to Novartis	$	2	$	3	$	5	$	6

Royalties earned from Novartis	$	60	$	13	$	112	$	19

Contract revenue from Novartis	$	15	$	4	$	26	$	44

Cost of sales on product sales to Novartis	$	1	$	3	$	4	$	7

Research and development expenses incurred on joint development projects with Novartis	$	12	$	9	$	20	$	19

Collaboration profit sharing expense to Novartis	$	48	$	49	$	89	$	96

Contract revenue in the first six months of 2007 included a $30 million milestone payment from Novartis for European Union approval of Lucentis for the treatment of AMD.

Certain R&D expenses are partially reimbursable to us by Novartis. The amounts that Novartis owes us, net of amounts reimbursable to Novartis by us on those projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts that we owe Novartis for R&D expenses that Novartis incurred on joint development projects, less amounts reimbursable to us by Novartis on those projects.

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Stock Options

Option Program Description

Our employee stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and to align stockholder and employee interests. Our program primarily consists of our ~~amended~~2004 ~~and~~Equity ~~restated~~Incentive ~~1999 Stock~~ Plan (the “Plan”), a broad-based plan under which stock options, restricted ~~are~~stock, stock appreciation rights, and performance shares and units may be granted to employees, directors, and other service providers. Substantially all of our employees participate in our stock option program. In the past, we granted options under our amended and restated ~~1996~~1999 Stock Plan, 1996 Stock Option/Stock Incentive Plan, our amended and restated 1994 Stock Option Plan , and our amended and restated 1990 Stock Option/Stock Incentive Plan. Although we no longer grant options under these plans, exercisable options granted under almost all of these plans are still outstanding. ~~In addition, our stockholders approved, in April 2004, our 2004 Equity Incentive Plan under which~~

~~-34-~~All stock option grants are made with the approval of the Compensation Committee of the Board of Directors or an authorized delegate. See “Compensation Discussion and Analysis” in our 2008 Proxy Statement for further information concerning the policies and procedures of the Compensation Committee regarding the use of stock options.

stock options, restricted stock, stock appreciation rights and performance shares and units may be granted to our employees, directors and consultants in the future.

All stock option grants are made with the approval of the Compensation Committee of the Board of Directors. See “The Compensation Committee Report” appearing in our 2006 Proxy Statement for further information concerning the policies and procedures of the Compensation Committee regarding the use of stock options.

General Option Information

Summary of Option Activity

(Shares in millions)

				~~Options Outstanding~~	Options Outstanding
	Shares Available for Grant			~~Number of Shares~~	Number of Shares		~~Weighted-Average Exercise Price~~		Weighted-Average Exercise Price
December 31, 2004		102			94		$	32.32
December 31, 2006		68.7				88.3			$	54.43
Grants		(2017.8	)		20	17.8		~~84.01~~		79.40
Exercises		-–			~~(29~~	)(10.4	)	~~25.88~~		32.76
Cancellations		23.5			(2	)(3.5	)	~~42.16~~		76.45
December 31, 2005		84			83		$	46.64
December 31, 2007		54.4				92.2			$	60.94
Grants		(10.7	)		1	0.7		~~88.10~~		72.86
Exercises		-–			(2	)(4.6	)	~~30.38~~		35.64
Cancellations		12.4			(1	)(2.4	)	~~57.63~~		80.25
March 31, 2006 (Year to date)		84			81		$	47.43
June 30, 2008 (Year to Date)		56.1				85.9			$	61.84

In-the-Money and Out-of-the-Money Option Information

(Shares in millions)

	Exercisable					~~Unexercisable~~		Unexercisable			~~Total~~			Total
As of March 31, 2006	Shares		Weighted-Average Exercise Price			Shares			Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
As of June 30, 2008	Shares			Weighted-Average Exercise Price				Shares			Weighted-Average Exercise Price			Shares		Weighted-Average Exercise Price
In-the-Money		3937	$	~~30.06~~$	36.41		24		$2	~~46.60~~	$	63.45	$	~~36.28~~	39	$	37.96
Out-of-the-Money(1)		-18		-	83.57		18		29	~~86.33~~		1880.65		~~86.33~~	47		81.76
Total Options Outstanding		3955					42		31			81			86

___________

(1) Out-of-the-money options ~~are~~have ~~those options with~~ an exercise price equal to or greater than the fair market value of Genentech Common Stock, which was $8475.~~51,~~90 at the close of business on ~~March~~June 3130, ~~2006~~2008.

Dilutive Effect of Options

~~Net~~Grants, ~~grants~~net of cancellations, as a percentage of outstanding shares, were (0.0216)% for the ~~three~~first six months ~~ended~~ ~~March~~of 312008, ~~2006,~~ 1.7036% for the year ended December 31, ~~2005~~2007, and 1.8343% for the year ended December 31, ~~2004~~ 2006.

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Equity Compensation Plan Information

Our stockholders have approved all of our equity compensation plans under which options are outstanding.

******

This report contains forward-looking statements regarding our ~~horizon~~Horizon 2010 strategy of bringing 20 new molecules into clinical development, 15bringing major new products or indications onto the market, becoming the number one U.S. oncology company in sales, and achieving ~~compound~~certain ~~annual~~financial ~~non-GAAP~~growth ~~earnings~~measures; ~~per~~our ~~share~~internal ~~growth~~stretch goal to add a total of ~~25 percent~~30 molecules into development; the availability, evaluation or presentation of data from clinical studies for Avastin and Rituxan; ~~achieving~~sales ~~cumulative~~to ~~free~~collaborators; ~~cash~~Herceptin ~~flow~~pricing terms; foreign currency option contracts and forwards; auction rate securities; royalty revenues; contract revenues; profit sharing with Novartis; other income net; compensation charges associated with voluntary severance; capital expenditures; share repurchases; construction of ~~$12~~manufacturing ~~billion~~facilities; ~~growth~~and ~~from~~payments to Lonza. These forward-looking statements involve risks and uncertainties, and the ~~use~~cautionary statements set forth below and those contained in ~~potential~~“Risk ~~new~~Factors” in this Quarterly Report on Form 10-Q identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but ~~unapproved~~are ~~uses~~not oflimited ~~Avastin;~~to, difficulty ~~Herceptin~~in ~~sales~~enrolling ~~growth~~patients in clinical trials; the need for additional ~~Cabilly~~data, ~~related~~data ~~net~~analysis ~~income~~or clinical studies; ~~royalty~~biologic license application (BLA) preparation and decision making; FDA actions or delays; failure to obtain or maintain FDA approval; difficulty in obtaining materials from suppliers; unexpected safety, efficacy or manufacturing issues for us or our contract/collaborator ~~revenues~~manufacturers; ~~cost~~increased capital expenditures including greater than expected construction and validation costs; product withdrawals; competition; efficacy data concerning any of ~~sales~~our asproducts which shows or is perceived to show similar or improved treatment benefit at a lower dose or shorter duration of therapy; pricing decisions by us or our competitors; our ability to protect our proprietary rights; the outcome of, and expenses associated with, litigation or legal settlements; increased R&D, MG&A, stock-based compensation, environmental and other expenses, and increased COS; variations in collaborator sales and expenses; our indebtedness and ability to pay our indebtedness; actions by Roche that are adverse to our interests; the unsolicited proposal from Roche to acquire all outstanding shares of our stock not owned by Roche; decreases in third party reimbursement rates; the modification or cancellation of our prepaid share repurchase arrangement; and greater than expected income tax rate. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Quarterly Report on Form 10-Q.

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percentage of net product sales; research and development and marketing, general and administrative spending; sales to collaborators; interest income; annual effective income tax rate; capital expenditures and construction costs; collaboration profit sharing expenses; the level of our cash, unrestricted cash equivalents, short-term investments and marketable securities, our ability to meet our foreseeable operating cash requirements; our level of contractual obligations; the effects of the Medicare Prescription Drug Improvement and Modernization Act on our revenues; the effect of product distribution changes on our results of operations; and employee stock-based compensation expense.

These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in “Risk Factors” identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors include, but are not limited to, unexpected safety, efficacy or manufacturing issues, additional time requirements for data analysis, BLA preparation and decision making, FDA actions or delays, failure to obtain FDA approval, competition, pricing, the ability to supply product and meet demand for our products, product withdrawals and new product approvals and launches, our ability to protect our proprietary rights, unanticipated expenses such as litigation or legal settlement expenses or equity securities write-downs, fluctuations in royalties and contract revenues, increased costs of sales, research and development and management, general and administrative expenses, fluctuations in tax and interest rates, increased capital expenditures including greater than expected construction and validation costs, our indebtedness and ability to pay our indebtedness, actions by Roche that are adverse to our interests, decreases in third party reimbursement rates, reaction to and acceptance by distributors of changes to our distribution strategy, and the number of options granted to employees, Genentech’s stock price and certain valuation assumptions concerning Genentech stock. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks atas ~~March~~of June 3130, ~~2006~~2008 ~~have~~had not changed materially from those ~~discussed~~ discussed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2005~~2007, on file with the U.S. Securities and Exchange Commission. See also Note 1, “Summary of Significant Accounting Policies—Derivative Financial Instruments” section in the Notes to Condensed Consolidated Financial Statements in Part I of this Form 10-Q.

See also Note 1, “Summary of Significant Accounting Policies—Derivative Instruments,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: ~~The Company’s~~ Our principal executive and financial officers reviewed and evaluated ~~the Company’s~~our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, ~~the~~our ~~Company’s~~ principal executive and financial officers concluded that ~~the~~our ~~Company’s~~ disclosure controls and procedures are effective in ~~timely~~ providing them with timely material information ~~relating~~related to ~~the Company~~ Genentech, as required to be disclosed in the reports ~~the~~that ~~Company~~we ~~files~~file under the ~~Exchange~~ Exchange Act of 1934.

Changes in Internal Controls over Financial Reporting: There were no changes in ~~the~~our ~~Company’s~~ internal control over financial reporting that occurred during ~~the~~our ~~Company’s~~ last fiscal quarter that have ~~materially~~ materially affected, or are reasonably likely to materially affect, ~~the~~our ~~Company’s~~ internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

See Note 45, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements ofin Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of legal proceedings as well as certain other matters.

See also Item 3, of“Legal Proceedings,” in our ~~report~~Annual Report on Form 10-K for the year ended December 31, 2007 and Part II, Item 1 of our Quarterly Report on Form ~~2005~~10-Q for the quarter ended March 31, 2008.

Item 1A. Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking information based on our ~~current~~ current expectations. Because our actual results may differ materially from any forward-looking statements ~~made~~that bywe make or onthat ~~behalf~~are ofmade ~~Genentech~~on our behalf, this ~~section~~ section includes a discussion of important factors that could affect our actual ~~future~~ future results, including, but not limited to, our product sales, royalties, ~~contract~~ ~~revenues~~contract revenue, expenses, net income, and earnings per share.

The successful development of ~~biotherapeutics~~pharmaceutical products is highly uncertain and ~~requires~~ requires significant expenditures and time.

Successful development of ~~biotherapeutics~~pharmaceutical products is highly uncertain. Products that appear promising in research or ~~early phases of~~ development may be delayed or fail to reach later stages of development or the market for several reasons , including:

·Ÿ Preclinical tests may show the product to be toxic or lack efficacy in animal models.

·Ÿ Clinical trial results may show the product to be less effective than desired or to have harmful or problematic side effects.

·Ÿ Failure to receive the necessary United States (U.S.) and international regulatory approvals or a delay in receiving such approvals. Among other things, such delays may be caused by slow enrollment in clinical studies,; extended length of time to achieve study endpoints,; additional time requirements for data analysis or ~~Biologic~~biologic ~~Licensing~~license ~~Application~~application (BLA) or ~~“BLA”~~new drug application (NDA) preparation,; discussions with the U.S. Food and Drug Administration (~~or “~~FDA”),; an FDA ~~request~~requests for additional preclinical or clinical data,; FDA delays due to staffing or resource limitations at the agency; analyses of or changes to study design; or unexpected safety, efficacy, or manufacturing issues.

·Ÿ Difficulties in formulating the product, scaling the manufacturing process, or in getting approval for manufacturing.

·Ÿ Manufacturing costs, pricing, or reimbursement issues, or other factors ~~that~~may make the product uneconomical.

·Ÿ The proprietary rights of others and their competing products and technologies ~~that~~ may prevent the product from being developed or commercialized.

~~Success in~~Ÿ ~~preclinical~~The ~~and~~contractual ~~early~~rights ~~clinical~~of ~~trials~~our ~~does~~collaborators ~~not~~or ~~ensure~~others ~~that large-scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that~~ may ~~delay, limit or~~ prevent ~~regulatory approvals.~~the ~~The~~product ~~length~~from ofbeing ~~time~~developed ~~necessary~~or ~~to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict~~commercialized. ~~If our large-scale clinical trials are not successful, we will not recover our substantial investments in the product.~~

Success in preclinical and early clinical trials does not ensure that large-~~38-~~scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit, or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. If our

Factors affecting our research and development (or “R&D”) productivity and the amount of our R&D expenses include, but are not limited to:

· The number of and the outcome of clinical trials currently being conducted by us and/or our collaborators. For example, our R&D expenses may increase based on the number of late-stage clinical trials being conducted by us and/or our collaborators.

· The number of products entering into development from late-stage research. For example, there is no guarantee that internal research efforts will succeed in generating sufficient data for us to make a positive development decision or that an external candidate will be available on terms acceptable to us.

· Decisions by F. Hoffmann-La Roche (or “Hoffmann-La Roche”) whether to exercise its options to develop and sell our future products in non-U.S. markets and the timing and amount of any related development cost reimbursements.

· In-licensing activities, including the timing and amount of related development funding or milestone payments. For example, we may enter into agreements requiring us to pay a significant upfront fee for the purchase of in-process R&D, which we may record as an R&D expense.

· Participation in a number of collaborative research arrangements. On many of these collaborations, our share of expenses recorded in our financial statements is subject to volatility based on our collaborators’ spending activities as well as the mix and timing of activities between the parties.

· Charges incurred in connection with expanding our product manufacturing capabilities, as described in “Difficulties or delays in product manufacturing or in obtaining materials from our suppliers could harm our business and/or negatively affect our financial performance” below.

· Future levels of revenue.

We may be unable to obtain or maintain regulatory approvals for our products

We are subject to stringent regulation with respect to product safety and efficacy by various international, federal, state and local authorities. Of particular significance are the FDA’s requirements covering R&D, testing, manufacturing, quality control, labeling and promotion of drugs for human use. A biotherapeutic cannot be marketed in the United States (or “U.S.”) until it has been approved by the FDA, and then can only be marketed for the indications approved by the FDA. As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a New Drug Application or a BLA, are substantial and can require a number of years. In addition, even if our products receive regulatory approval, they remain subject to ongoing FDA regulation, including, for example, changes to the product label, new or revised regulatory requirements for manufacturing practices, written advisements to physicians and/or a product recall.

We may not obtain necessary regulatory approvals on a timely basis, if at all, for any of the products we are developing or manufacturing or maintain necessary regulatory approvals for our existing products, and all of the following could have a material adverse effect on our business:

· Significant delays in obtaining or failing to obtain required approvals as described in “The successful development of biotherapeutics is highly uncertain and requires significant expenditures” above.

· Loss of, or changes to, previously obtained approvals, including those resulting from post-approval safety or efficacy issues.

· Failure to comply with existing or future regulatory requirements.

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· Changes to manufacturing processes, manufacturing process standards or Good Manufacturing Practices following approval or changing interpretations of these factors.

In addition, the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may affect our ability to obtain or maintain approval of our products or require us to make significant expenditures to obtain or maintain such approvals.

Difficulties or delays in product manufacturing or in obtaining materials from our suppliers could harm our business and/or negatively affect our financial performance

Manufacturing biotherapeutics is difficult and complex, and requires facilities specifically designed and validated for this purpose. It can take longer than five years to design, construct, validate, and license a new biotechnology manufacturing facility. We currently produce our products at our manufacturing facilities located in South San Francisco, California; Vacaville, California; Porriño, Spain; and increasingly, through various contract-manufacturing arrangements. Problems with any of our or our contractors’ manufacturing processes could result in failure to produce adequate product supplies or could result in product defects which could require us to delay shipment of products, recall products previously shipped or be unable to supply products at all. In addition, we may need to record period charges associated with manufacturing or inventory failures or other production-related costs or incur costs to secure additional sources of capacity. Furthermore, there are inherent uncertainties associated with forecasting future demand, especially for newly introduced products of ours or of those for whom we produce products, and as a consequence we may have inadequate capacity to meet our own actual demands and/or the actual demands of those for whom we produce product.

In order to maintain adequate supply to keep up with growing demand for our products, we must successfully implement a number of manufacturing capacity enhancement projects on schedule, utilize nearly 100 percent of our production capacity in the next several years and maintain a state of regulatory compliance at all production sites. If we, or any of our contract manufacturers, for any reason fail to obtain licensure for our capacity enhancement projects on schedule, fail to operate at or near full capacity utilization, fail to maintain a state of regulatory compliance, or if actual demand significantly exceeds our internal forecasts, we may be unable to maintain an adequate supply of our products to meet all demand. Key capacity enhancement projects, which we must successfully implement, include the following: (i) licensure of Wyeth Pharmaceuticals contract manufacturing facility at Andover, Massachusetts to produce Herceptin bulk drug substance by the end of 2006; (ii) licensure of additional capacity at our Porriño, Spain facility in 2006 to produce Avastin bulk drug substance; (iii) licensure of yield improvement processes for Rituxan and Avastin by the end of 2006; (iv) licensure of our Oceanside, California manufacturing facility during the first half of 2007; and (v) construction, qualification and licensure of our new plant in Vacaville, California in the second half of 2009.

If we experience a significant malfunction in our filling facility, we could experience a shortfall or stock out of one or more products, which, if it were to continue for a significant period of time, could result in a material adverse effect on our product sales and our business.

Furthermore, certain of our raw materials and supplies required for the production of our principal products or products we make for others are available only through sole source suppliers (the only recognized supplier available to us) or single source suppliers (the only approved supplier for us among other sources), and we may not be able to obtain such raw materials without significant delay or at all. If such sole source or single source suppliers were to limit or terminate production or otherwise fail to supply these materials for any reason, such failures could also have a material adverse impact on our products sales and our business.

Any prolonged interruption in the operations of our or our contractors’ manufacturing facilities could result in cancellations of shipments, loss of product in the process of being manufactured, or a shortfall or stock-out of available product inventory, any of which could have a material adverse impact on our business. A number of factors could cause prolonged interruptions, including:

· the inability of a supplier to provide raw materials used for manufacture of our products; equipment obsolescence, malfunctions or failures;

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· product contamination problems;

· damage to a facility, including our warehouses and distribution facilities, due to natural disasters, including, but not limited to, earthquakes as our South San Francisco, Oceanside and Vacaville facilities are located in areas where earthquakes could occur;

· changes in FDA regulatory requirements or standards that require modifications to our manufacturing processes;

· action by the FDA or by us that results in the halting or slowdown of production of one or more of our products or products we make for others due to regulatory issues;

· a contract manufacturer going out of business or failing to produce product as contractually required;

· other similar factors.

Because our manufacturing processes and those of our contractors are highly complex and are subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our or our contractors’ manufacturing and supply of existing or new products could increase our costs, cause us to lose revenue or market share, damage our reputation and could result in a material adverse effect on our product sales, financial condition and results of operations.

We face competition

We face competition from pharmaceutical companies, pharmaceutical divisions of chemical companies, and biotechnology companies.

The introduction of new competitive products or follow-on biologics or new information about existing products may result in lost market share for us, reduced utilization of our products, and/or lower prices, even for products protected by patents.

Avastin: Avastin competes with Erbitux® (Imclone/Bristol-Myers Squibb), which is an EGFR-inhibitor approved for the treatment of irinotecan refractory or intolerant metastatic colorectal cancer patients. While Erbitux® and Avastin are approved for use in different settings (Avastin in front-line and Erbitux® in relapsed patients), physicians use both products across all lines of therapy. In December 2005, the FDA approved Nexavar® (sorafenib Bayer Corporation/Onyx Pharmaceuticals, Inc.) for the treatment of patients with advanced renal cell carcinoma (or “RCC”), or kidney cancer (unapproved uses of Avastin). In January 2006, the FDA approved Sutent® (sunitinib malate, Pfizer, Inc.) for use in advanced RCC and Gleevec-refractory / intolerant gastrointestinal stromal tumor (unapproved uses of Avastin). Avastin could face competition from products in development that currently do not have regulatory approval, including panitumumab and AMG 706 (Amgen). Amgen has announced that it expects panitumumab to be approved for refractory metastatic colorectal cancer in late 2006, and that it will initiate head-to-head clinical trials between AMG 706 and Avastin this year. Additionally, there are more than 30 potential molecules which target VEGF inhibition, and over 130 companies that are developing molecules which, if approved, may compete with Avastin.

Rituxan: Rituxan’s competitors include Bexxar® (GlaxoSmithKline) and Zevalin® (Biogen Idec), both of which are radioimmunotherapies indicated for the treatment of patients with relapsed or refractory low-grade, follicular, or transformed B-cell non-Hodgkin’s lymphoma (or “NHL”). While indicated for the treatment of NHL, both products currently represent limited competition for Rituxan. Other competitors include Campath® (Berlex, Inc.), which is indicated for B-cell chronic lymphocytic leukemia (an unapproved use of Rituxan), and Velcade® (Millennium Pharmaceuticals, Inc.) which is indicated for multiple myeloma (an unapproved use of Rituxan).

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Rituxan’s current biologic competitors in rheumatoid arthritis include Enbrel® (Amgen/Wyeth), Humira® (Abbott), Remicade® (Johnson & Johnson), Orencia® (Bristol-Myers Squibb), and Kineret® (Amgen). These products are indicated for a broader RA patient population than Rituxan.

Herceptin: Herceptin could face competition in the future from experimental drugs and products in development that do not currently have regulatory approval for any use outside of clinical trials, including Tykerb® (lapatinib ditosylate), which is being developed by GlaxoSmithKline. On April 3, 2006, GlaxoSmithKline announced that it halted enrollment in its Phase III clinical trial to evaluate its drug Tykerb® because of positive results in treating HER2 positive metastatic breast cancer in women whose disease had progressed following treatment with Herceptin and other cancer therapies. GSK said it will file for regulatory approval of Tykerb® in the second half of this year.

Tarceva: Tarceva competes with the chemotherapeutic products Taxotere® (Sanofi-Aventis) and Alimta® (Eli Lilly and Company), both of which are indicated for the treatment of relapsed NSCLC. Although not FDA approved for use in pancreatic cancer, Xeloda® (Roche) and 5-FU represent competitors in this market. Tarceva could also face competition in the future from products in late-phase development that currently do not have regulatory approval for use in NSCLC or pancreatic cancer. Examples of potential competitors in Phase III NSCLC trials are Erbitux® (Bristol-Myers Squibb), Xyotax® (Cell Therapeutics Inc.), Telcyta® (Telik, Inc.), Nexavar® (sorafenib, Bayer/ Onyx) and Zactima® (Astra Zeneca). Examples of potential competitors in Phase III pancreatic cancer trials, in addition to Xeloda® (Roche), are Erbitux® (Bristol-Myers Squibb) Eloxatin® (oxaliplatin, Sanofi-Aventis) and Avastin.

Xolair: While Xolair has no direct competitors, it faces competition from other asthma therapies, including inhaled corticosteroids, long-acting beta agonists, combination products such as fixed dose inhaled corticosteroids/long-acting beta agonists and leukotriene inhibitors, as well as oral corticosteroids.

Raptiva: Raptiva competes with established therapies for moderate-to-severe psoriasis including oral systemics such as methotrexate and cyclosporin, as well as ultraviolet light therapies. In addition, Raptiva competes with FDA approved biologic agents Amevive® (Biogen Idec) and Enbrel® (Amgen). Raptiva also competes with the unapproved biologic agents Remicade® (Centocor, Inc.) and Humira® (Abbott Laboratories), both of which are currently used in the psoriasis market. In October 2005, Centocor filed with the FDA for approval of Remicade® for the treatment of psoriasis.

Nutropin: In the growth hormone market, we face competition from other companies currently selling growth hormone products. Nutropin’s current competitors are Genotropin® (Pfizer), Norditropin® (Novo Nordisk), Humatrope® (Eli Lilly and Company), Tev-Tropin® (Teva Pharmaceutical Industries Ltd.), and Saizen® (Serono, Inc.). As a result of multiple competitors, we have experienced, and may continue to experience, a loss of new patient share and increased competition for managed care product placement based on pricing; which may require that we discount our product in the future.

Thrombolytics: We face competition in our acute myocardial infarction market with sales of TNKase and Activase affected by the adoption by physicians of mechanical reperfusion strategies. We expect that the use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction will continue to grow. TNKase and Activase for acute myocardial infarction also face competition from aggressive price discounting on Retavase® (reteplase), marketed by ESP Pharma, Inc. (a wholly owned subsidiary of PDL BioPharma, Inc.). Cathflo Activase may face competition in the catheter clearance market from Nuvelo’s Alfimeprase®, currently in ongoing Phase III clinical trials.

Pulmozyme: Pulmozyme faces competition from an emerging, inexpensive approach to clearing the lungs of cystic fibrosis patients. Specifically, the use of hypertonic saline could limit or reduce penetration into specific segments of the cystic fibrosis population. Research continues on new approaches to disease modification of cystic fibrosis which could reduce the number of patients in need of therapy.

Lucentis: We are aware that some retinal specialists are currently using Avastin to treat the wet form of age-related macular degeneration (or “AMD”), an unapproved use, and that there may be continued Avastin use in this setting even after Lucentis has been approved for commercial use. Laser photocoagulation, Macugen® (Pfizer/OSI

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Pharmaceuticals), and Visudyne® (Novartis) alone, or in combination with the off-label steroid kenalog, are also currently being used to treat wet AMD.

In addition to the commercial and late stage development products listed above, there are numerous products in earlier stages of development at other biotechnology and pharmaceutical companies that, if successful in clinical trials, may compete with our products.

Decreases in third party reimbursement rates may affect our product sales, results of operations and financial condition

Sales of our products will depend significantly on the extent to which reimbursement for the cost of our products and related treatments will be available to physicians from government health administration authorities, private health insurers and other organizations. Third party payers and governmental health administration authorities are increasingly attempting to limit and/or regulate the reimbursement for medical products and services, especially branded prescription drugs. Changes in government legislation or regulation, such as the Medicare Act, or changes in private third-party payers’ policies toward reimbursement for our products may reduce reimbursement of our products’ costs to physicians. Decreases in third-party reimbursement for our products could reduce physician usage of the product and may have a material adverse effect on our product sales, results of operations and financial condition.

Protecting our proprietary rights is difficult and costly

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, we cannot predict with certainty the breadth of claims allowed in these companies’ patents. Patent disputes are frequent and can preclude the commercialization of products. We have in the past been, are currently, and may in the future be, involved in material litigation and other legal proceedings relating to our proprietary rights, such as the Cabilly reexaminations discussed in Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item I of this Form 10-Q. Such litigation and other legal proceedings are costly in their own right and could subject us to significant liabilities to third-parties. An adverse decision could force us to either obtain third-party licenses at a material cost or cease using the technology or commercializing the product in dispute. An adverse decision with respect to one or more of our patents or other intellectual property rights could cause us to incur a material loss of royalties and other revenue from licensing arrangements that we have with third-parties, and could significantly interfere with our ability to negotiate future licensing arrangements.

The presence of patents or other proprietary rights belonging to other parties may lead to our termination of the R&D of a particular product, a loss of our entire investment in the product and subject us to infringement claims.

If there is an adverse outcome in our pending litigation or other legal actions our business may be harmed

Litigation to which we are currently or have been subjected relates to, among other things, our patent and other intellectual property rights, licensing arrangements with other persons, product liability and financing activities. We cannot predict with certainty the eventual outcome of pending litigation, which may include an injunction against the manufacture or sale of a product or potential product or a judgment with significant monetary award, including the possibility of punitive damages, or a judgment that certain of our patent or other intellectual property rights are invalid or unenforceable. Furthermore, we may have to incur substantial expense in defending these lawsuits and these lawsuits could divert management’s attention from ongoing business concerns.

Our activities relating to the sale and marketing of our products are subject to regulation under the U.S. Federal Food, Drug and Cosmetic Act and other federal statutes. Violations of these laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). In 1999 we agreed to pay $50 million to settle a federal investigation relating to our past clinical, sales and marketing activities associated with human growth hormone. We are currently being investigated by the Department of Justice with respect to our promotional practices of Rituxan, and may in the future be investigated for our promotional practices relating to any of our products. If the

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government were to bring charges against or convict us of violating these laws, or if we were subject to third party litigation relating to the same promotional practices, there could be a material adverse effect on our business, including our financial condition and results of operations.

We are subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations or court decisions addressing some of our practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). If a court were to find us liable for violating these laws, or if the government were to allege against or convict us of violating these laws, there could be a material adverse effect on our business, including on our stock price.

We may be unable to manufacture certain of our products if there is BSE contamination of our bovine source raw material

Most biotechnology companies, including Genentech, have historically used bovine source raw materials to support cell growth in our production processes. Bovine source raw materials from within or outside the U.S. are increasingly subject to greater public and regulatory scrutiny because of the perceived risk of contamination with bovine spongiform encephalopathy (or “BSE”). Should BSE contamination occur during the manufacture of any of our products that require the use of bovine source raw materials, it would negatively impact our ability to manufacture those products for an indefinite period of time (or at least until an alternative process is approved), negatively affect our reputation and could result in a material adverse effect on our product sales, financial condition and results of operations.

We may be unable to retain skilled personnel and maintain key relationships

The success of our business depends, in large part, on our continued ability to (i) attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, (ii) successfully integrate large numbers of new employees into our corporate culture, and (iii) develop and maintain important relationships with leading research and medical institutions and key distributors. Competition for these types of personnel and relationships is intense.

Among other benefits, we use stock options to attract and retain personnel. The number of shares management and our board of directors choose to grant under our stock option plans may be affected by our affiliation agreement with Roche, which provides that we will establish a stock repurchase program designed to maintain Roche’s percentage ownership in our Common Stock if we issue or sell any shares. In addition, stock option accounting rules require us to recognize all employee stock-based compensation costs as expenses. These or other factors could reduce the number of shares management and our board of directors choose to grant. We cannot be sure that we will be able to attract or retain skilled personnel or maintain key relationships or that the costs of retaining such personnel or maintaining such relationships will not materially increase.

Other factors could affect our product sales

Other factors that could affect our product sales include, but are not limited to:

· The timing of FDA approval, if any, of competitive products.

· Our pricing decisions, including a decision to increase or decrease the price of a product, as well as the pricing decisions of our competitors, any of which could affect the utilization of our products.

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· Government and third-party payer reimbursement and coverage decisions that affect the utilization of our products and competing products.

· Negative safety or efficacy data from new clinical studies conducted either in the U.S. or internationally by any party could cause the sales of our products to decrease or a product to be recalled.

· Negative safety or efficacy data from post-approval marketing experience could cause sales of our products to decrease or a product to be recalled.

· The degree of patent protection afforded our products by patents granted to us and by the outcome of litigation involving our patents.

· The outcome of litigation involving patents of other companies concerning our products or processes related to production and formulation of those products or uses of those products.

· The increasing use and development of alternate therapies.

· The rate of market penetration by competing products.

· Our distribution strategy, including the termination of, or change in, an existing arrangement with any major wholesalers who supply our products.

Any of these factors could have a material adverse effect on our sales and results of operations.

Our results of operations are affected by our royalty and contract revenues

Royalty and contract revenues in future periods could vary significantly. Major factors affecting these revenues include, but are not limited to:

· Hoffmann-La Roche’s decisions whether to exercise its options and option extensions to develop and sell our future products in non-U.S. markets and the timing and amount of any related development cost reimbursements.

· Variations in Hoffmann-La Roche’s sales and other licensees’ sales of licensed products.

· The expiration or termination of existing arrangements with other companies and Hoffmann-La Roche, which may include development and marketing arrangements for our products in the U.S., Europe and other countries outside the U.S.

· The timing of non-U.S. approvals, if any, for products licensed to Hoffmann-La Roche and to other licensees.

· Fluctuations in foreign currency exchange rates.

· The initiation of new contractual arrangements with other companies.

· Whether and when contract milestones are achieved.

· The failure of or refusal of a licensee to pay royalties.

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· The expiration or invalidation of our patents or licensed intellectual property. For example, patent litigations, interferences, oppositions, and other proceedings involving our patents often include claims by third-parties that such patents are invalid or unenforceable. If a court, patent office, or other authority were to determine that a patent under which we receive royalties and/or other revenues is invalid or unenforceable, that determination could cause us to suffer a loss of such royalties and/or revenues, and could cause us to incur other monetary damages.

· Decreases in licensees’ sales of product due to competition, manufacturing difficulties or other factors that affect the sales of product.

Our affiliation agreement with Roche Holdings, Inc. could adversely affect our cash position

Our affiliation agreement with Roche provides that we establish a stock repurchase program designed to maintain Roche’s percentage ownership interest in our Common Stock based on an established Minimum Percentage. For more information on our stock repurchase program, see discussion below in “Liquidity and Capital Resources—Cash Used in Financing Activities.” See Note 5, “Relationship with Roche and Related Party Transactions,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for information regarding the Minimum Percentage.

While the dollar amounts associated with future stock repurchase programs cannot currently be determined, future stock repurchases could have a material adverse impact on our liquidity, credit rating and ability to access additional capital in the financial markets.

Our affiliation agreement with Roche could limit our ability to make acquisitions

The affiliation agreement between us and Roche contains provisions that:

· Require the approval of the directors designated by Roche to make any acquisition or any sale or disposal of all or a portion of our business representing 10% or more of our assets, net income or revenues.

· Enable Roche to maintain its percentage ownership interest in our Common Stock.

· Require us to establish a stock repurchase program designed to maintain Roche’s percentage ownership interest in our Common Stock based on an established Minimum Percentage. For information regarding Minimum Percentage, see Note 5, “Relationship with Roche and Related Party Transactions,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

These provisions may have the effect of limiting our ability to make acquisitions.

Future sales of our Common Stock by Roche could cause the price of our Common Stock to decline

As of March 31, 2006, Roche owned 587,189,380 shares of our Common Stock, or 55.7% of our outstanding shares. All of our shares owned by Roche are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon Roche’s request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our Common Stock. Sales of a substantial number of shares of our Common Stock by Roche in the public market could adversely affect the market price of our Common Stock.

Roche Holdings, Inc., our controlling stockholder, may seek to influence our business in a manner that is adverse to us or adverse to other stockholders who may be unable to prevent actions by Roche

Roche, as our majority stockholder, controls the outcome of most actions requiring the approval of our stockholders. Our bylaws provide, among other things, that the composition of our board of directors shall consist of at least three

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directors designated by Roche, three independent directors nominated by the nomination committee and one Genentech executive officer nominated by the nominations committee. Our bylaws also provide that Roche will have the right to obtain proportional representation on our board until such time that Roche owns less than 5% of our stock. Currently, three of our directors, Mr. William Burns, Dr. Erich Hunziker and Dr. Jonathan K.C. Knowles, also serve as officers and employees of Roche Holding Ltd and its affiliates. As long as Roche owns in excess of 50% of our Common Stock, Roche directors will comprise two of the three members of the nominations committee. Our certificate of incorporation includes provisions relating to competition by Roche affiliates with us, offering of corporate opportunities, transactions with interested parties, intercompany agreements, and provisions limiting the liability of specified employees. We cannot assure you that Roche will not seek to influence our business in a manner that is contrary to our goals or strategies or the interests of other stockholders. Moreover, persons who are directors and/or officers of Genentech and who are also directors and/or officers of Roche may decline to take action in a manner that might be favorable to us but adverse to Roche.

Additionally, our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the provisions in the certificate of incorporation relating to competition with Roche, conflicts of interest with Roche, the offer of corporate opportunities to Roche and intercompany agreements with Roche. This deemed consent might restrict the ability to challenge transactions carried out in compliance with these provisions.

We may incur material product liability costs

The testing and marketing of medical products entail an inherent risk of product liability. Liability exposures for biotherapeutics could be extremely large and pose a material risk. Our business may be materially and adversely affected by a successful product liability claim or claims in excess of any insurance coverage that we may have.

Insurance coverage is increasingly more difficult and costly to obtain or maintain

While we currently have a certain amount of insurance to minimize our direct exposure to certain business risks, premiums are generally increasing and coverage is narrowing in scope. As a result, we may be required to assume more risk in the future or make significant expenditures to maintain our current levels of insurance. If we are subject to third-party claims or suffer a loss or damages in excess of our insurance coverage, we will incur the cost of the portion of the retained risk. Furthermore, any claims made on our insurance policies may affect our ability to obtain or maintain insurance coverage at reasonable costs.

We are subject to environmental and other risks

We use certain hazardous materials in connection with our research and manufacturing activities. In the event such hazardous materials are stored, handled or released into the environment in violation of law or any permit, we could be subject to loss of our permits, government fines or penalties and/or other adverse governmental or private actions. The levy of a substantial fine or penalty, the payment of significant environmental remediation costs or the loss of a permit or other authorization to operate or engage in our ordinary course of business could materially adversely affect our business.

We also have acquired, and may continue to acquire in the future, land and buildings as we expand our operations. Some of these properties are “brownfields” for which redevelopment or use is complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant. Certain events could occur which may require us to pay significant clean-up or other costs in order to maintain our operations on those properties. Such events include, but are not limited to, changes in environmental laws, discovery of new contamination, or unintended exacerbation of existing contamination. The occurrence of any such event could materially affect our ability to continue our business operations on those properties.

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~~Fluctuations~~large-scale inclinical ~~our~~trials ~~operating~~for ~~results~~a ~~could~~product ~~affect~~are ~~the~~not ~~price~~successful, ofwe ~~our~~will ~~Common~~not recover our ~~Stock~~substantial investments in that product.

~~Our~~Factors ~~operating~~affecting ~~results~~our ~~may~~research ~~vary~~and ~~from~~development ~~period~~(R&D) toproductivity ~~period~~and ~~for~~the ~~several~~amount ~~reasons~~of ~~including~~our R&D expenses include, but are not limited to:

·Ÿ The ~~overall~~number ~~competitive~~of ~~environment~~and ~~for~~the outcome of clinical trials currently being conducted by us and/or our ~~products~~collaborators. asFor ~~described~~example, inour ~~“We~~R&D ~~face~~expenses ~~competition”~~may ~~above~~increase based on the number of late-stage clinical trials being conducted by us and/or our collaborators.

·Ÿ The ~~amount~~number ~~and timing~~ of ~~sales~~products toentering ~~customers~~into indevelopment ~~the~~from Ulate-stage research.S. For example, ~~sales~~there ofis ano ~~product~~guarantee ~~may~~that ~~increase~~internal orresearch ~~decrease~~efforts ~~due~~will tosucceed ~~pricing~~in ~~changes,~~generating ~~fluctuations~~a insufficient ~~distributor~~number ~~buying~~of ~~patterns~~product orcandidates ~~sales~~that ~~initiatives~~are ready to move into development or that weproduct ~~may~~candidates ~~undertake~~will ~~from~~be ~~time~~available for in-licensing on terms acceptable to ~~time~~us and permitted under the anti-trust laws.

·Ÿ ~~The~~Decisions ~~amount~~by ~~and~~Roche ~~timing~~Holding ofAG ~~our~~and ~~sales~~affiliates to(Roche) ~~Hoffmann-La~~whether ~~Roche~~to ~~and~~exercise ~~our~~its ~~other~~options ~~collaborators~~to ofdevelop ~~products~~and ~~for~~sell ~~sale~~our ~~outside~~future ofproducts ~~the~~in non-U.S. markets, and the ~~amount~~timing and ~~timing~~amount of ~~sales~~any torelated ~~their~~development ~~respective~~cost ~~customers, which directly impacts both our product sales and royalty revenues~~reimbursements.

·Ÿ ~~The~~Our ability to in-license projects of interest to us, and the timing and ~~volume~~amount of ~~bulk~~related ~~shipments~~development funding or milestone payments for such licenses. For example, we may enter into agreements requiring us to ~~licensees~~pay a significant up-front fee for the purchase of in-process R&D, which we may record as an R&D expense.

·Ÿ ~~The~~Participation ~~availability~~in ~~and~~a ~~extent~~number of ~~government~~collaborative ~~and~~R&D ~~private~~arrangements. ~~third-party~~In ~~reimbursements~~many ~~for~~of these collaborations, our share of expenses recorded in our financial statements is subject to volatility based on our collaborators’ spending activities, as well as the ~~cost~~mix and timing of ~~therapy~~activities between the parties.

·Ÿ ~~The~~Charges ~~extent~~incurred ofin connection with expanding our product ~~discounts~~manufacturing ~~extended~~capabilities, toas ~~customers~~described below in “Difficulties or delays in product manufacturing or in obtaining materials from our suppliers, or difficulties in accurately forecasting manufacturing capacity needs could harm our business and/or negatively affect our financial performance.”

·Ÿ ~~The~~Future ~~effectiveness~~levels ~~and safety~~ of ~~our various products as determined both in clinical testing and by the accumulation of additional information on each product after the FDA approves it for sale~~revenue.

·Ÿ ~~The~~Our ~~rate~~ability ofto ~~adoption~~supply byproduct ~~physicians and use of our products~~ for ~~approved indications and additional indications. Among other things, the rate of adoption by physicians and~~ use ofin ~~our products may be affected by results of~~ clinical ~~studies reporting on the benefits or risks of a product~~trials.

·We face ~~The potential introduction of new products and additional indications for existing products~~competition.

·We face ~~The~~competition ~~ability~~from topharmaceutical ~~successfully~~companies ~~manufacture~~and ~~sufficient quantities of any particular marketed product~~biotechnology companies.

·The introduction ~~Pricing~~of new competitive products or follow-on biologics, new information about existing products or pricing decisions weby us or our competitors, rate of market penetration by competitors’ products, and/or development and use of alternate therapies may ~~adopt~~result in lost market share for us, reduced utilization of our products, lower prices, and/or reduced product sales, even for products protected by patents.

~~Our~~Avastin: Avastin ~~integration~~competes in metastatic colorectal cancer (CRC) with Erbitux® (Imclone/Bristol-Myers Squibb), which is an epidermal growth factor receptor (EGFR) inhibitor approved for the treatment of ~~new~~irinotecan ~~information~~refractory ~~systems~~or intolerant ~~could~~metastatic ~~disrupt~~CRC ~~our~~patients; ~~internal~~and ~~operations~~with Vectibix™ (Amgen), which is indicated for the treatment of patients with EGFR-expressing metastatic CRC who have disease progression on or following fluoropyrimidine–, oxaliplatin–, and irinotecan–containing regimens. Avastin could ~~harm~~also ~~our~~face competition ~~revenues~~from Erbitux® in metastatic non-small cell lung cancer (NSCLC). At the American Society of Clinical Oncology (ASCO) annual meeting in 2008, ImClone Systems Incorporated and ~~increase~~Bristol-Myers ~~our~~Squibb ~~expenses~~Company presented data from a Phase III study of Erbitux® in combination with vinorelbine plus cisplatin showing that this study met its primary endpoint of increasing overall survival compared with chemotherapy alone in patients with advanced NSCLC. Avastin could also face competition in NSCLC from the chemotherapy Alimta (Eli Lilly) which, in a Phase III trial in combination

Portions of our information technology infrastructure may experience interruptions, delays or cessations of service or produce errors. As part of our Enterprise Resource Planning efforts, we are implementing new information systems, but we may not be successful in implementing all of the new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource intensive. Any disruptions that may occur in the implementation of new systems or any future systems could adversely affect our ability to report in an accurate and timely manner the results of our consolidated operations, our financial position and cash flows. Disruptions to these systems also could adversely affect our ability to fulfill orders and interrupt other operational processes. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results.

Our stock price, like that of many biotechnology companies, is volatile

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Inwith ~~addition~~cisplatin versus gemcitabine/cisplatin, ~~the~~demonstrated ~~following~~non-inferiority ~~factors~~relative ~~may~~to overall ~~have~~survival. aIn ~~significant~~addition, ~~impact~~Avastin oncompetes ~~the~~with Nexavar® ~~market~~(sorafenib, Bayer Corporation/Onyx Pharmaceuticals, Inc.), Sutent® ~~price~~(sunitinib malate, Pfizer, Inc.), and Torisel® (Wyeth) for the treatment of ~~our~~patients ~~Common~~with ~~Stock.~~advanced renal cell carcinoma (an unapproved use of Avastin).

·Avastin could ~~Announcements~~face ofcompetition ~~technological~~from ~~innovations~~products orin ~~new~~development ~~commercial~~that ~~products~~currently do not have regulatory approval. Sanofi-Aventis is developing a vascular endothelial growth factor (VEGF) inhibitor, VEGF-Trap, in multiple indications, including metastatic CRC and metastatic NSCLC. Avastin could also face competition from the VEGF receptor-2 inhibitor (IMC-1121b) under development by usImClone orin several ~~our~~indications ~~competitors~~including breast cancer (BC). There are also ongoing head-to-head clinical trials comparing both Sutent® and AZD2171 (AstraZeneca) to Avastin. Likewise, Amgen is conducting head-to-head clinical trials comparing AMG 706 to Avastin in NSCLC and metastatic BC; Pfizer has initiated a head-to-head trial comparing Sutent® to Avastin in BC. Antisoma’s vascular disrupting agent, ASA404, has an ongoing Phase III trial in first-line NSCLC (ATTRACT-1), and Antisoma has announced plans to initiate a second-line NSCLC study (ATTRACT-2). Overall, there are more than 65 molecules in clinical development that target VEGF inhibition, and over 130 companies are developing molecules that, if successful in clinical trials, may compete with Avastin.

·Rituxan: Rituxan’s current ~~Publicity~~competitors ~~regarding~~in ~~actual~~hematology-oncology orinclude ~~potential~~Bexxar® (GlaxoSmithKline ~~medical~~[GSK]) ~~results~~and ~~relating~~Zevalin® to(Cell Therapeutics), ~~products~~both ~~under~~of ~~development~~which orare ~~being~~radioimmunotherapies ~~commercialized~~indicated byfor usthe treatment of patients with relapsed or ~~our~~refractory low-grade, follicular, or transformed B-cell non-Hodgkin’s lymphoma (NHL). Other potential competitors include Campath® (Bayer Corporation/Genzyme) in previously untreated and relapsed chronic lymphocytic leukemia (CLL) (an unapproved use of Rituxan); Velcade® (Millennium Pharmaceuticals, Inc.), which is indicated for multiple myeloma and more recently mantle cell lymphoma (both unapproved uses of Rituxan); Revlimid® (Celgene), which is indicated for multiple myeloma and myelodysplastic syndromes (both unapproved uses of Rituxan); and Treanda® (Cephalon), which was recently approved for the treatment of CLL (an unapproved use of Rituxan).

·Rituxan’s current ~~Concerns~~competitors ~~about~~in ~~the~~rheumatoid ~~pricing~~arthritis of(RA) ~~our~~include ~~products~~Enbrel® (Amgen/Wyeth), Humira® (Abbott Laboratories), Remicade® (Johnson & Johnson), Orencia® (Bristol-Myers Squibb), and Kineret® (Amgen). These products are approved for use in an RA patient population that is broader than the ~~potential~~approved ~~impact~~population for Rituxan. In addition, molecules in development that, if approved by the FDA, may compete with Rituxan in RA include: Actemra™, an anti-interleukin-6 receptor being developed by Chugai Pharmaceutical Co. Ltd. and Roche; Cimzia™ (certolizumab pegol), an anti-tumor necrosis factor (TNF) antibody being developed by UCB; and CNTO 148 (golimumab), an anti-TNF antibody being developed by Centocor, Inc. (a wholly owned subsidiary of ~~such~~Johnson on& ~~their~~Johnson) ~~utilization~~and Schering-Plough.

·Rituxan may ~~Developments~~face orfuture ~~outcome~~competition in both hematology-oncology and RA from HuMax-CD20® (ofatumumab), an anti-CD20 antibody being co-developed by Genmab and GSK. Genmab and GSK announced their plans to file for approval of HuMax-CD20® in 2008 ~~litigation~~for monotherapy use in refractory CLL and to complete a monotherapy trial for refractory indolent NHL. In addition, ~~including~~we ~~litigation~~are ~~regarding~~aware ~~proprietary~~of other anti-CD20 molecules in development that, if successful in clinical trials, may compete with Rituxan. Rituxan could also face competition from Treanda® (Cephalon, Inc.), in NHL by the end of 2008 based on an FDA submission in December 2007 in refractory indolent NHL. Finally BioVaxID (Accentia Biopharmaceuticals) is currently in development and ~~patent~~Accentia ~~rights~~is planning to seek approval for it in indolent NHL.

·Herceptin: Herceptin faces ~~Regulatory~~competition ~~developments~~in orthe ~~delays~~relapsed ~~concerning~~metastatic ~~our~~setting ~~products~~from Tykerb® (lapatinib ditosylate) which is manufactured by GSK. Tykerb® is approved in combination with capecitabine, for the Utreatment of patients with advanced or metastatic BC whose tumors overexpress HER2 and who have received prior therapy, including an anthracycline, a taxane, and Herceptin.S. We will continue to monitor the clinical development of lapatinib in early lines of metastatic and ~~foreign~~adjuvant ~~countries~~BC.

·Lucentis: We ~~Issues~~are ~~concerning~~aware that retinal specialists are currently using Avastin to treat the ~~safety~~wet form of age-related ~~our~~macular ~~products~~degeneration or(AMD), an unapproved use for Avastin, which results in significantly less revenue to us per treatment compared to Lucentis. As of ~~biotechnology~~January ~~products~~1, ~~generally~~2008, we no longer directly supply Avastin to compounding pharmacies. We expect ocular use of Avastin to continue as physicians can purchase Avastin from authorized distributors and have it shipped to the destination of the physicians’ choice. Additionally, an independent head-to-head

· Economic and other external factors or a disaster or crisis.

· Period to period fluctuations in our financial results.

Our effective income tax rate may vary significantly

Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include but are not limited to changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, past and future levels of R&D spending, and changes in overall levels of income before taxes.

To pay our indebtedness will require a significant amount of cash and may adversely affect our operations and financial results

As of March 31, 2006, we had approximately $2.0 billion of long-term debt. Our ability to make payments on and to refinance our indebtedness, including our long-term debt obligations, and to fund planned capital expenditures, R&D, as well as stock repurchases and expansion efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are and will remain beyond our control. Additionally, our indebtedness may increase our vulnerability to general adverse economic and industry conditions, require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, R&D, expansion efforts and other general corporate purposes, and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Accounting pronouncements may affect our future financial position and results of operations

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”). As a result, we have included employee stock-based compensation costs in our results of operations for the quarter ended March 31, 2006, as discussed in Note 2, “Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item I of this Form 10-Q. Our adoption of FAS 123R is expected to result in compensation expense that will reduce diluted net income per share by approximately $0.15 to $0.17 per share for 2006. However, our estimate of future employee stock-based compensation expense is affected by our stock price, the number of stock-based awards our board of directors may grant in 2006, as well as a number of complex and subjective valuation assumptions and the related tax effect. These valuation assumptions include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors.

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~~Item~~trial 2of Avastin and Lucentis in wet AMD is being partially funded by the National Eye Institute, which announced that enrollment had commenced in February 2008. ~~Unregistered~~ ~~Sales~~Lucentis ofalso ~~Equity~~competes ~~Securities~~with Macugen® (Pfizer/OSI Pharmaceuticals), and ~~Use~~with Visudyne® (Novartis) alone, in combination with Lucentis, in combination with Avastin, or in combination with the off-label steroid triamcinolone in wet AMD. In addition, VEGF-Trap-Eye, a vascular endothelial growth factor blocker being developed by Bayer Corporation and Regeneron Pharmaceuticals, Inc., is in Phase III clinical trials for the treatment of ~~Proceeds~~wet AMD.

~~Under a~~Xolair: Xolair ~~stock repurchase program approved by our Board of Directors in December~~faces ~~2003 and~~competition most recently extended in April 2006, we are authorized to repurchase up to 100,000,000 shares of our Common Stock for an aggregate amount of up to $6.0 billion through June 30, 2007. In this stock repurchase program, purchases may be made in the open market or in privately negotiated transactions from ~~time to time at management’s discretion. Genentech also may engage in transactions in~~ other ~~Genentech~~asthma ~~securities in conjunction with the repurchase program~~therapies, including ~~certain~~inhaled ~~derivative~~corticosteroids, ~~securities.~~long-acting ~~Genentech~~beta intends to use the repurchased stock to offset dilution caused by the issuance of shares in connection with Genentech’s employee stock plans. Although there are currently no specific plans for the shares that may be purchased under the programagonists, ~~our~~combination ~~goals~~products ~~for~~such ~~the~~as ~~program~~fixed-dose ~~are (i) to make~~inhaled ~~prudent investments~~corticosteroids/long-acting ofbeta ~~our~~agonists ~~cash resources; (ii) to allow for an effective mechanism to provide stock for our employee stock plans;~~ and ~~(iii)~~leukotriene toinhibitors, ~~address~~as ~~provisions of our~~well ~~affiliation agreement with Roche relating to maintaining Roche’s minimum~~as ~~ownership~~oral ~~percentage.~~corticosteroids See above in “Relationship with Roche” for more information on Roche’s minimum ownership percentage. We have entered into Rule 10b5-1 trading plans to repurchase shares in the open market during those periods each quarter when trading in our stock is restricted under our insider trading policy. The current trading plan covers approximately 2 million shares and ~~will run through June 30, 2006~~immunotherapy.

~~Our~~Tarceva: Tarceva ~~shares~~competes ~~repurchased~~with the chemotherapy agents Taxotere® (Sanofi-Aventis) and Alimta® (Eli Lilly and Company), both of which are indicated for the ~~three~~treatment ~~months~~of ~~ended~~relapsed NSCLC. ~~March~~Tarceva 31may face future competition in relapsed NSCLC from Zactima™ (AstraZeneca), ~~2006~~Erbitux® (ImClone/Bristol-Myers ~~were~~Squibb), asand from a potential re-filing of Iressa® ~~follows~~(AstraZeneca) in the U.S. In first-line NSCLC (an unapproved use of Tarceva), positive results from pivotal studies have been announced for Alimta® (~~shares~~Eli Lilly) and Erbitux® (ImClone/Bristol-Myers Squibb). Alimta® received approval for this indication in ~~millions~~the European Union. In front-line pancreatic cancer, Tarceva primarily competes with Gemzar® (Eli Lilly): monotherapy and Gemzar® in combination with other chemotherapeutic agents. Tarceva could face competition in the future from products in late-phase development, such as Axitinib (Pfizer), in the treatment of pancreatic cancer.

	Total Number of Shares Purchased in 2006		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1-31, 2006		0.9	$	88.37
February 1-28, 2006		0.7		85.31
March 1-31, 2006		1.0		84.24
Total		2.6	$	85.95		52		48

Nutropin: Nutropin faces competition in the growth hormone market from five (5) branded competitors:

~~The par~~Ÿ ~~value~~Humatrope® method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital with the amounts in excess of the estimated original sales price charged to accumulated deficit.(Lilly)

~~Item 6. Exhibits~~Ÿ Genotropin® (Pfizer)

Exhibit No.	Description	Location
10.1	Genentech, Inc. Employee Stock Plan, as amended	Filed on a Current Report on Form 8-K with the U.S. Securities and Exchange Commission on April 25, 2006, and incorporated herein by reference.
15.1	Letter regarding Unaudited Interim Financial Information.	Filed herewith
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended	Filed herewith
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended	Filed herewith
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith

Ÿ	Norditropin® (Novo Nordisk)

Ÿ	Saizen® (Merck Serono)

Ÿ	Tev-Tropin® (Teva)

Nutropin also faces competition from one (1) follow-on biologic:

Ÿ	Omnitrope® (Sandoz)

Two (2) additional follow-on biologics have been approved and are pending launch:

Ÿ	Valtropin® (LG Life Sciences)

Ÿ	Accretropin® (Cangene)

As a result of this competition, we have experienced and may continue to experience a loss of patient share and increased competition for managed care product placement. Obtaining placement on the preferred product lists of managed care companies may require that we further discount the price of Nutropin. In addition to managed care placement, patient and healthcare provider services provided by growth hormone manufacturers are increasingly important to creating brand preference.

Thrombolytics: Our thrombolytic products face competition in the acute myocardial infarction market, with sales of TNKase and Activase affected by the adoption by physicians of mechanical reperfusion strategies. We expect that the use of mechanical reperfusion, in lieu of thrombolytic therapy for the treatment of acute myocardial infarction, will continue to grow. TNKase for acute myocardial infarction also faces competition from Retavase® (EKR Therapeutics).

Pulmozyme: Pulmozyme currently faces competition from the use of hypertonic saline, an inexpensive approach to clearing sputum from the lungs of cystic fibrosis patients. Approximately 25% of cystic fibrosis patients receive hypertonic saline, and it is estimated that in a small percentage of patients (less than 5%), this use will impact how a physician may prescribe or a patient may use Pulmozyme.

Raptiva: Raptiva competes with established therapies for moderate-to-severe psoriasis, including oral systemics such as methotrexate and cyclosporin as well as ultraviolet light therapies. In addition, Raptiva competes with biologic agents Amevive® (Astellas), Enbrel® (Amgen), and Remicade® (Centocor). Raptiva also competes with the biologic agent Humira® (Abbott), which was approved by the FDA for use in moderate-to-severe psoriasis on January 18, 2008, and was used off-label in psoriasis prior to FDA approval. Raptiva may face future competition

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from the biologic Ustekinumab/CNTO-1275 (Centocor), for which a filing was made with the FDA for approval in the treatment of psoriasis on December 4, 2007.

In addition to the commercial and late-stage development products listed above, numerous products are in earlier stages of development at other biotechnology and pharmaceutical companies that, if successful in clinical trials, may compete with our products.

Decreases in third-party reimbursement rates may affect our product sales, results of operations, and financial condition.

Sales of our products will depend significantly on the extent to which reimbursement for the cost of our products and related treatments will be available to physicians and patients from U.S. and international government health administration authorities, private health insurers, and other organizations. Third-party payers and government health administration authorities increasingly attempt to limit and/or regulate the reimbursement of medical products and services, including branded prescription drugs. Changes in government legislation or regulation, such as the Medicare Prescription Drug Improvement and Modernization Act of 2003, the Deficit Reduction Act of 2005, and the Medicare, Medicaid and SCHIP (State Children’s Health Insurance Program) Extension Act of 2007; changes in formulary or compendia listings; or changes in private third-party payers’ policies toward reimbursement for our products may reduce reimbursement of our products’ costs to physicians, pharmacies, and distributors. Decreases in third-party reimbursement for our products could reduce usage of the products, sales to collaborators, and royalties, and may have a material adverse effect on our product sales, results of operations, and financial condition. The pricing and reimbursement environment for our products may change in the future and become more challenging due to, among other reasons, new policies of the next presidential administration or new healthcare legislation passed by congress.

We may be unable to obtain or maintain regulatory approvals for our products.

We are subject to stringent regulations with respect to product safety and efficacy by various international, federal, state, and local authorities. Of particular significance are the FDA’s requirements covering R&D, testing, manufacturing, quality control, labeling, and promotion of drugs for human use. As a result of these requirements, the length of time, the level of expenditures, and the laboratory and clinical information required for approval of a BLA or NDA are substantial and can require a number of years. In addition, even if our products receive regulatory approval, they remain subject to ongoing FDA regulations, including, for example, obligations to conduct additional clinical trials or other testing, changes to the product label, new or revised regulatory requirements for manufacturing practices, written advisements to physicians, and/or a product recall or withdrawal.

We may not obtain necessary regulatory approvals on a timely basis, if at all, for any of the products we are developing or manufacturing, or we may not maintain necessary regulatory approvals for our existing products, and all of the following could have a material adverse effect on our business:

Ÿ	Significant delays in obtaining or failing to obtain approvals, as described above in “The successful development of pharmaceutical products is highly uncertain and requires significant expenditures and time.”

Loss of, or changes to, previously obtained approvals or accelerated approvals, including those resulting from post-approval safety or efficacy issues. For example, with respect to the FDA’s accelerated approval of Avastin in combination with paclitaxel chemotherapy for the treatment of patients who have not received prior chemotherapy for metastatic HER2-negative BC, the FDA may withdraw or modify such approval, or request additional post-marketing studies.

Ÿ	Failure to comply with existing or future regulatory requirements.

Ÿ	A determination by the FDA that any study endpoints used in clinical trials for our products are not sufficient for product approval.

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Ÿ	Changes to manufacturing processes, manufacturing process standards, or current Good Manufacturing Practices (GMP) following approval, or changing interpretations of these factors.

In addition, the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing that may affect our ability to obtain or maintain approval of our products or require us to make significant expenditures to obtain or maintain such approvals.

Difficulties or delays in product manufacturing or in obtaining materials from our suppliers, or difficulties in accurately forecasting manufacturing capacity needs, could harm our business and/or negatively affect our financial performance.

Manufacturing pharmaceutical products is difficult and complex, and requires facilities specifically designed and validated for this purpose. It can take more than five years to design, construct, validate, and license a new biotechnology manufacturing facility. We currently produce our products at our manufacturing facilities located in South San Francisco, Vacaville, and Oceanside, California and through various contract-manufacturing arrangements. Maintaining an adequate supply to meet demand for our products depends on our ability to execute on our production plan. Any significant problem in the operations of our or our contractors’ manufacturing facilities could result in cancellation of shipments; loss of product in the process of being manufactured; a shortfall, stock-out, or recall of available product inventory; or unplanned increases in production costs—any of which could have a material adverse effect on our business. A number of factors could cause significant production problems or interruptions, including:

Ÿ	The inability of a supplier to provide raw materials used to manufacture our products.

Ÿ	Equipment obsolescence, malfunctions, or failures.

Ÿ	Product quality or contamination problems, due to a number of factors including, but not limited to, human error.

Ÿ	Damage to a facility, including our warehouses and distribution facilities, due to events such as fires or earthquakes, as our South San Francisco, Vacaville, and Oceanside facilities are located in areas where earthquakes and/or fires have occurred.

Ÿ	Changes in FDA regulatory requirements or standards that require modifications to our manufacturing processes.

Ÿ	Action by the FDA or by us that results in the halting or slowdown of production of one or more of our products or products that we make for others.

Ÿ	A contract manufacturer going out of business or failing to produce product as contractually required.

Ÿ	Failure to maintain an adequate state of current GMP compliance.

Ÿ	Problems in integrating our new enterprise resource planning system, including the portions related to manufacturing and distribution.

In addition, there are inherent uncertainties associated with forecasting future demand or actual demand for our products or products that we produce for others, and as a consequence we may have inadequate capacity or inventory to meet actual demand. Alternatively, as a result of these inherent uncertainties, we may have excess capacity or inventory, which could lead to an idling of a portion of our manufacturing facilities during which time we would incur unabsorbed or idle plant charges, costs associated with the termination of existing contract manufacturing relationships, costs associated with a reduction in workforce, costs associated with unsalable inventory or other excess capacity charges, resulting in an increase in our cost of sales (COS).

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Furthermore, certain of our raw materials and supplies required for the production of our principal products, or products that we make for others, are available only through sole-source suppliers (the only recognized supplier available to us) or single-source suppliers (the only approved supplier for us among other sources). If such sole-source or single-source suppliers were to limit or terminate production or otherwise fail to supply these materials for any reason, we may not be able to obtain such raw materials and supplies without significant delay or at all, and such failures could have a material adverse effect on our product sales and our business.

Because our manufacturing processes and those of our contractors are highly complex and are subject to a lengthy FDA approval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our or our contractors’ manufacturing and supply of existing or new products could increase our costs, cause us to lose revenue or market share, damage our reputation, and result in a material adverse effect on our product sales, financial condition, and results of operations.

Protecting our proprietary rights is difficult and costly.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, we cannot predict with certainty the breadth of claims that will be allowed in companies’ patents. Patent disputes are frequent and may ultimately preclude the commercialization of products. We have in the past been, are currently, and may in the future be involved in material litigation and other legal proceedings related to our proprietary rights, such as the Cabilly patent litigation and re-examination (discussed in Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), and disputes in connection with licenses granted to or obtained from third parties. Such litigation and other legal proceedings are costly in their own right and could subject us to significant liabilities with third parties, including the payment of significant royalty expenses, the loss of significant royalty income, or other expenses or losses. Furthermore, an adverse decision or ruling could force us to either obtain third-party licenses at a material cost or cease using the technology or commercializing the product in dispute. An adverse decision or ruling with respect to one or more of our patents or other intellectual property rights could cause us to incur a material loss of sales and/or royalties and other revenue from licensing arrangements that we have with third parties, and could significantly interfere with our ability to negotiate future licensing arrangements.

The presence of patents or other proprietary rights belonging to other parties may lead to our termination of the R&D of a particular product, or to a loss of our entire investment in the product, and subject us to infringement claims.

If there is an adverse outcome in our pending litigation or other legal actions, our business may be harmed.

Litigation and other legal actions to which we are currently or have been subjected to relate to, among other things, our patent and other intellectual property rights, licensing arrangements and other contracts with third parties, and product liability. We cannot predict with certainty the eventual outcome of pending proceedings, which may include an injunction against the development, manufacture, or sale of a product or potential product; a judgment with a significant monetary award, including the possibility of punitive damages; or a judgment that certain of our patent or other intellectual property rights are invalid or unenforceable. Furthermore, we may have to incur substantial expense in these proceedings, and such matters could divert management’s attention from ongoing business concerns.

Our activities related to the sale and marketing of our products are subject to regulation under the U.S. Federal Food, Drug, and Cosmetic Act and other federal statutes. Violations of these laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid). In 1999, we agreed to pay $50 million to settle a federal investigation related to our past clinical, sales, and marketing activities associated with human growth hormone. We are currently being investigated by the Department of Justice with respect to our promotional practices and may in the future be investigated for our promotional practices related to any of our products. If the government were to bring charges against us or if we were convicted of violating federal statutes, or if we were subject to third-party litigation related to the same promotional practices, there could be a material adverse effect on our business, including our financial condition and results of operations.

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We are subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due in part to the breadth of the statutory provisions and the absence of guidance in the form of regulations or court decisions addressing some of our practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid), claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal healthcare programs (including Medicare and Medicaid). If a court were to find us liable for violating these laws, or if the government were to allege against us or convict us of violating these laws, there could be a material adverse effect on our business, including our stock price.

Potential distraction and uncertainty resulting from Roche’s recent unsolicited proposal and related matters may adversely affect our business.

On July 21, 2008, we announced that we received an unsolicited proposal from Roche to acquire all of the outstanding shares of Common Stock of the company not owned by Roche. A special committee of our Board of Directors, composed of the independent directors has been formed to review, evaluate, and, in the special committee’s discretion, negotiate and recommend or not recommend the proposal. The review and consideration of the Roche proposal and related matters requires the expenditure of significant time and resources by us and may be a significant distraction for our management and employees. The Roche proposal may create uncertainty for our management, employees, current and potential collaborators and other third parties. This uncertainty could adversely affect our ability to retain key employees and to hire new talent, cause collaborators to terminate, or not to renew or enter into, arrangements with us and negatively impact our business during the special committee review of the proposal or anytime thereafter. Additionally, we, members of our Board of Directors and Roche entities have been named in a number of purported stockholder class action complaints relating to the Roche proposal as more fully described in Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. These lawsuits or any future lawsuits may become burdensome and result in significant costs of defense, indemnification and liability. These consequences, alone or in combination, may harm our business and have a material adverse effect on our results of operations.

RHI, our controlling stockholder, may seek to influence our business in a manner that is adverse to us or adverse to other stockholders who may be unable to prevent actions by RHI.

As our majority stockholder, RHI controls the outcome of most actions requiring the approval of our stockholders. Our bylaws provide, among other things, that the composition of our Board of Directors shall consist of at least three directors designated by RHI, three independent directors nominated by the Nominations Committee, and one Genentech executive officer nominated by the Nominations Committee. Our bylaws also provide that RHI will have the right to obtain proportional representation on our Board of Directors until such time that RHI owns less than five percent of our stock. Currently, three of our directors—Mr. William Burns, Dr. Erich Hunziker, and Dr. Jonathan K. C. Knowles—also serve as officers and employees of Roche. As long as RHI owns more than 50 percent of our Common Stock, RHI directors will be two of the three members of the Nominations Committee. Our certificate of incorporation includes provisions related to competition by RHI affiliates with Genentech, offering of corporate opportunities, transactions with interested parties, intercompany agreements, and provisions limiting the liability of specified employees. We cannot assure that RHI will not seek to influence our business in a manner that is contrary to our goals or strategies, or the interests of other stockholders. Moreover, persons who are directors of Genentech and who are also directors and/or officers of RHI may decline to take action in a manner that might be favorable to us but adverse to RHI.

Additionally, our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the provisions in the certificate of incorporation related to competition with RHI, conflicts of interest with RHI, the offer of corporate opportunities to RHI, and intercompany agreements with RHI. This deemed consent might restrict our ability to challenge transactions carried out in compliance with these provisions.

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Our Affiliation Agreement with Roche Holdings, Inc. (RHI) could adversely affect our cash position.

Under our July 1999 Affiliation Agreement with RHI (Affiliation Agreement), we have established a stock repurchase program designed to maintain RHI’s percentage ownership interest in our Common Stock based on an established Minimum Percentage. A request by RHI to increase RHI’s percentage ownership to the Minimum Percentage may adversely affect our cash position. Based on the trading price of our Common Stock and RHI’s approximate ownership percentage as of July 31, 2008, to raise RHI’S percentage ownership to the Minimum Percentage would require us to spend approximately $3 billion for share repurchases, in addition to $500 million we have already paid in connection with our May 2008 prepaid share repurchase arrangement. For more information on our stock repurchase program, see “Liquidity and Capital Resources—Cash Used in Financing Activities,” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this Quarterly Report on Form 10-Q and Note 8, “Capital Stock,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. For information on the Minimum Percentage, see Note 6, “Relationship with Roche Holdings, Inc. and Related Party Transactions,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

RHI’s ownership percentage is diluted by the exercise of stock options to purchase shares of our Common Stock by our employees and the purchase of shares of our Common Stock through our employee stock purchase plan. See Note 2, “Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding employee stock plans. In order to maintain RHI’s Minimum Percentage, we repurchase shares of our Common Stock under the stock repurchase program. In the first quarter of 2008, we received approximately four million shares under a $300 million prepaid share repurchase arrangement that we entered into and funded in 2007. In the second quarter of 2008, we entered into another prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $500 million to the investment bank. Under this arrangement, the investment bank is obligated to deliver to us, by September 30, 2008, not fewer than five million shares of our Common Stock based on a pre-determined formula, subject to a possible reduction in the number of shares received, an extension of the date on which shares are to be delivered, or other modifications or cancellation of the plan in certain circumstances. As of June 30, 2008, there were 37 million in-the-money exercisable options. While the U.S. dollar amounts associated with future stock repurchase programs cannot currently be determined, future stock repurchases could have a material adverse effect on our liquidity, credit rating, and ability to access additional capital in the financial markets.

Our Affiliation Agreement with RHI could limit our ability to make acquisitions or divestitures.

Our Affiliation Agreement with RHI contains provisions that:

Ÿ	Require the approval of the directors designated by RHI to make any acquisition that represents 10 percent or more of our assets, net income or revenue: or any sale or disposal of all or a portion of our business representing 10 percent or more of our assets, net income, or revenue.

Ÿ	Enable RHI to maintain its percentage ownership interest in our Common Stock.

Require us to establish a stock repurchase program designed to maintain RHI’s percentage ownership interest in our Common Stock based on an established Minimum Percentage. For information regarding the Minimum Percentage, see Note 6, “Relationship with Roche Holdings, Inc. and Related Party Transactions,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Sales of our Common Stock by RHI could cause the price of our Common Stock to decline.

As of June 30, 2008, RHI owned 587,189,380 shares of our Common Stock, or 55.9% of our outstanding shares. All of our shares owned by RHI are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon RHI’s request, we will file one or more registration statements under the Securities Act of 1933 in order to permit RHI to offer and sell shares of our Common Stock. Sales of a substantial number of shares of our Common Stock by RHI in the public market could adversely affect the market price of our Common Stock.

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Other factors could affect our product sales.

Other factors that could affect our product sales include, but are not limited to:

Ÿ	Efficacy data from clinical studies conducted by any party in the U.S. or internationally showing, or perceived to show, a similar or improved treatment benefit at a lower dose or shorter duration of therapy could cause the sales of our products to decrease.

Our pricing decisions, including a decision to increase or decrease the price of a product; the pricing decisions of our competitors; as well as our Avastin Patient Assistance Program, which is a voluntary program that enables eligible patients who have received 10,000 milligrams (mg) of Avastin in a 12-month period to receive free Avastin in excess of the 10,000 mg during the remainder of the 12-month period.

Ÿ	New negative safety or efficacy data from clinical studies conducted either in the U.S. or internationally by any party could cause the sales of our products to decrease or a product to be recalled or withdrawn.

Ÿ	Negative safety or efficacy data from post-approval marketing experience or production-quality problems could cause sales of our products to decrease or a product to be recalled or withdrawn.

Ÿ	The outcome of litigation involving patents of other companies concerning our products or processes related to production and formulation of those products or uses of those products.

Ÿ	Our distribution strategy, including the termination of, or change in, an existing arrangement with any major wholesalers that supply our products.

Ÿ	Our decision to no longer allow compounding pharmacies to purchase Avastin directly from wholesale distributors, which could have a negative impact on Lucentis sales as a result of negative reaction by retinal specialists to our decision.

Ÿ	Product returns and allowances greater than expected or historically experienced.

Ÿ	That we have three major customers and the inability of one or more of them to meet their payment obligations to us.

Any of these additional factors could have a material adverse effect on our sales and results of operations.

Our results of operations are affected by our royalty and contract revenue, and sales to collaborators.

Royalty and contract revenue, and sales to collaborators in future periods, could vary significantly. Major factors affecting this revenue include, but are not limited to:

Ÿ	Roche’s decisions about whether to exercise its options and option extensions to develop and sell our future products in non-U.S. markets, and the timing and amount of any related development cost reimbursements.

Ÿ	The expiration or termination of existing arrangements with other companies and Roche, which may include development and marketing arrangements for our products in the U.S., Europe, and other countries.

Ÿ	The timing of non-U.S. approvals, if any, for products licensed to Roche and other licensees.

Ÿ	Government and third-party payer reimbursement and coverage decisions that affect the utilization of our products and competing products.

Ÿ	The initiation of new contractual arrangements with other companies.

Ÿ	Whether and when contract milestones are achieved.

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Ÿ	The failure or refusal of a licensee to pay royalties or to make other contractual payments, the termination of a contract under which we receive royalties or other revenue, or changes to the terms of such a contract.

Ÿ	The expiration or invalidation of our patents or licensed intellectual property. See “Protecting our proprietary rights is difficult and costly.”

Ÿ	Variations in Roche’s or other licensees’ sales of our products due to competition, manufacturing difficulties, licensees’ internal forecasts, or other factors that affect the sales of products.

Variations in the recognition of royalty revenue based on our estimates of our licensees’ sales, which is difficult to forecast because of the number of products involved, the availability of licensee sales data, potential contractual and intellectual property disputes, and the volatility of foreign exchange rates.

Ÿ	Fluctuations in foreign currency exchange rates and the effect of any hedging contracts that we have entered into under our hedging policy.

We may be unable to manufacture certain of our products if there is bovine spongiform encephalopathy (BSE) contamination of our bovine source raw material.

Most biotechnology companies, including Genentech, have historically used, and continue to use, bovine source raw materials to support cell growth in certain production processes. Bovine source raw materials from within or outside the U.S. are subject to public and regulatory scrutiny because of the perceived risk of contamination with the infectious agent that causes BSE. Should such BSE contamination occur, it would likely negatively affect our ability to manufacture certain products for an indefinite period of time (or at least until an alternative process is approved); negatively affect our reputation; and could result in a material adverse effect on our product sales, financial condition, and results of operations.

We may be unable to attract and retain skilled personnel and maintain key relationships.

The success of our business depends, in large part, on our continued ability to (1) attract and retain highly qualified management, scientific, manufacturing, and sales and marketing personnel, (2) successfully integrate new employees into our corporate culture, and (3) develop and maintain important relationships with leading research and medical institutions and key distributors. Competition for these types of personnel and relationships is intense. We cannot be sure that we will be able to attract or retain skilled personnel or maintain key relationships, or that the costs of retaining such personnel or maintaining such relationships will not materially increase.

We may incur material product liability costs.

The testing and marketing of medical products entails an inherent risk of product liability. Liability exposures for pharmaceutical products can be extremely large and pose a material risk. Our business may be materially and adversely affected by a successful product liability claim or claims in excess of any insurance coverage that we may have.

Insurance coverage may be more difficult and costly to obtain or maintain.

We currently have a limited amount of insurance to minimize our direct exposure to certain business risks. In the future, we may be exposed to an increase in premiums and a narrowing scope of coverage. As a result, we may be required to assume more risk or make significant expenditures to maintain our current levels of insurance. If we are subject to third-party claims or suffer a loss or damages in excess of our insurance coverage, we will incur the cost of the portion of the retained risk. Furthermore, any claims made on our insurance policies may affect our ability to obtain or maintain insurance coverage at reasonable costs.

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We are subject to environmental and other risks.

We use certain hazardous materials in connection with our research and manufacturing activities. In the event that such hazardous materials are stored, handled, or released into the environment in violation of law or any permit, we could be subject to loss of our permits, government fines or penalties, and/or other adverse governmental or private actions. The levy of a substantial fine or penalty, the payment of significant environmental remediation costs, or the loss of a permit or other authorization to operate or engage in our ordinary course of business could materially adversely affect our business.

We also have acquired, and may continue to acquire in the future, land and buildings as we expand our operations. Some of these properties are “brownfields” for which redevelopment or use is complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. Certain events that could occur may require us to pay significant clean-up or other costs in order to maintain our operations on those properties. Such events include, but are not limited to, changes in environmental laws, discovery of new contamination, or unintended exacerbation of existing contamination. The occurrence of any such event could materially affect our ability to continue our business operations on those properties.

Fluctuations in our operating results could affect the price of our Common Stock.

Our operating results may vary from period to period for several reasons, including, but not limited to, the following:

Ÿ	The overall competitive environment for our products, as described in “We face competition” above.

Ÿ	The amount and timing of sales to customers in the U.S. For example, sales of a product may increase or decrease due to pricing changes, fluctuations in distributor buying patterns, or sales initiatives that we may undertake from time to time.

Ÿ	Increased COS; R&D and marketing, general and administrative expenses; stock-based compensation expenses; litigation-related expenses; asset impairments; and equity securities write-downs.

Ÿ	Changes in interest rates, credit ratings, and the liquidity of our interest-bearing investments, and the effects that such changes may have on the value of those investments.

Ÿ	Changes in foreign currency exchange rates, the effect of any hedging contracts that we have entered into under our policy and the effects that they may have on our royalty revenue, contract revenue, R&D expenses and foreign-currency-denominated investments.

Ÿ	The amount and timing of our sales to Roche and our other collaborators of products for sale outside the U.S., and the amount and timing of sales to their respective customers, which directly affect both our product sales and royalty revenue.

Ÿ	The timing and volume of bulk shipments to licensees.

Ÿ	The availability and extent of government and private third-party reimbursements for the cost of our products.

Ÿ	The extent of product discounts extended to customers.

Ÿ	The efficacy and safety of our various products as determined both in clinical testing and by the accumulation of additional information on each product after the FDA approves it for sale.

Ÿ	The rate of adoption by physicians and the use of our products for approved indications and additional indications. Among other things, the rate of adoption by physicians and the use of our products may be affected by the results of clinical studies reporting on the benefits or risks of a product.

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Ÿ	The potential introduction of new products and additional indications for existing products.

Ÿ	The ability to successfully manufacture sufficient quantities of any particular marketed product.

Ÿ	Pricing decisions that we or our competitors have adopted or may adopt, as well as our Avastin Patient Assistance Program.

Ÿ	Our distribution strategy, including the termination of, or any change in, an existing arrangement with any major wholesalers that supply our products.

Fluctuation in our operating results due to factors described above or for any other reason could affect the price of our Common Stock.

Our integration of new information systems could disrupt our internal operations, which could decrease revenue and increase expenses.

Portions of our information technology infrastructure may experience interruptions, delays, or cessations of service, or produce errors. As part of our enterprise resource planning efforts, we have implemented new information systems, but we may not be successful in integrating the new systems into our operations. Any disruptions that may occur as a result of the implementation of new systems, or any future systems, could adversely affect our ability to report in an accurate and timely manner the results of our consolidated operations, financial position, and cash flows. Disruptions to these systems also could adversely affect our ability to fulfill orders and interrupt other operational processes. Delayed sales, lower margins, or lost customers resulting from these disruptions could adversely affect our financial results.

Our stock price, like that of many biotechnology companies, is volatile.

The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. In addition, the market price of our Common Stock has been and may continue to be volatile. Among other factors, the following may have a significant effect on the market price of our Common Stock:

On July 21, 2008 the announcement of the unsolicited proposal by Roche to acquire all of the outstanding shares of our stock not owned by Roche preceded a substantial increase in the closing price of our stock. Future developments related to the Roche proposal may result in further volatility in the price of our stock.

Ÿ	Announcements of technological innovations or new commercial products by us or our competitors.

Ÿ	Publicity regarding actual or potential medical results related to products under development or being commercialized by us or our competitors.

Ÿ	Our financial results.

Ÿ	Concerns about our pricing initiatives and distribution strategy, and the potential effect of such initiatives and strategy on the utilization of our products or our product sales.

Developments or outcomes of litigation, including litigation regarding proprietary and patent rights (including, for example, the Cabilly patent discussed in Note 5, “Contingencies,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q), and governmental investigations.

Ÿ	Regulatory developments or delays affecting our products in the U.S. and other countries.

Ÿ	Issues concerning the efficacy or safety of our products, or of biotechnology products generally.

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Ÿ	Economic and other external factors or a disaster or crisis.

Ÿ	New proposals to change or reform the U.S. healthcare system, including, but not limited to, new regulations concerning reimbursement or follow-on biologics.

Our effective income tax rate may vary significantly.

Various internal and external factors may have favorable or unfavorable effects on our future effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations, and/or rates; the results of any tax examinations; changing interpretations of existing tax laws or regulations; changes in estimates of prior years’ items; past and future levels of R&D spending; acquisitions; changes in our corporate structure; and changes in overall levels of income before taxes, all of which may result in periodic revisions to our effective income tax rate.

To pay our indebtedness will require a significant amount of cash and may adversely affect our operations and financial results.

As of June 30, 2008, we had approximately $2.0 billion of long-term debt and $600 million of commercial paper notes payable. Our ability to make payments on or to refinance our indebtedness, and to fund planned capital expenditures and R&D, as well as stock repurchases and expansion efforts, will depend on our ability to generate cash in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are and will remain beyond our control. Additionally, our indebtedness may increase our vulnerability to general adverse economic and industry conditions, and require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, R&D, expansion efforts, and other general corporate purposes; and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Accounting pronouncements may affect our future financial position and results of operations.

Under Financial Accounting Standards Board Interpretation No. 46R (FIN 46R), a revision to FIN 46, “Consolidation of Variable Interest Entities,” we are required to assess new business development collaborations as well as reassess, upon certain events, some of which are outside our control, the accounting treatment of our existing business development collaborations based on the nature and extent of our variable interests in the entities, as well as the extent of our ability to exercise influence over the entities with which we have such collaborations. Our continuing compliance with FIN 46R may result in our consolidation of companies or related entities with which we have a collaborative arrangement, and this may have a material effect on our financial condition and/or results of operations in future periods.

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

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2008, we are authorized to repurchase up to 150 million shares of our Common Stock for an aggregate amount of up to $10.0 billion through June 30, 2009. In this program, as in previous stock repurchase programs, purchases may be made in the open market or in privately negotiated transactions from time to time at management’s discretion. We also may engage in transactions in other Genentech securities in conjunction with the repurchase program, including certain derivative securities. As of June 30, 2008, we had not engaged in any such transactions. We use the repurchased stock to offset dilution caused by the issuance of shares in connection with our employee stock purchase plan. Although there are currently no specific plans for the shares that may be purchased under the program, our goals for the program are (1) to address provisions of our Affiliation Agreement with RHI related to maintaining RHI’s minimum ownership percentage, (2) to make prudent investments of our cash resources, and (3) to allow for an effective mechanism to provide stock for our employee stock purchase plan. See Note 6, “Relationship with Roche Holdings, Inc. and Related Party Transactions,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on RHI’s minimum ownership percentage.

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We enter into Rule 10b5-1 trading plans to repurchase shares in the open market during those periods when trading in our stock is restricted under our insider trading policy.

Our shares repurchased for the second quarter of 2008 were as follows (shares in millions):

Total Number of

Shares Purchased

Average Price Paid

per Share

Filing Compare · GENENTECH INC