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**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**Washington,        D.C.  20549**

**____________________**

**FORM        10-K**

| **(Mark                  One)** |
|---------------------------------|
| þ                          | **ANNUAL                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT                  OF 1934** |

**For        the fiscal year ended December 31, 2006**

**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.**

| **A                  Delaware Corporation**(State                  or other jurisdiction of incorporation or organization) | **94-2347624**(I.R.S.                  Employer Identification No.) |
|----------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------|

| **1                  DNA Way, South San Francisco, California**(Address                  of principal executive offices) | **94080**(Zip                  Code) |
|--------------------------------------------------------------------------------------------------------------------------|--------------------------------------|

**(650) 225-1000**

**Securities        registered pursuant to Section 12(b) of the Act:**

| **Title                  of Each Class**       | **Name                  of Each Exchange on Which Registered** |
|------------------------------------------------|----------------------------------------------------------------|
| Common                  Stock, $0.02 par value | New                  York Stock Exchange                       |

**Securities        registered pursuant to Section 12(g) of the Act:**

**               None              **

| Large                  accelerated filer þ | Accelerated                  filer o | Non-accelerated                  filer o |
|------------------------------------------------------|-------------------------------------------|-----------------------------------------------|

**Documents        incorporated by reference:**

| Portions                  of the Definitive Proxy Statement with respect to the 2006 Annual                  Meeting of Stockholders to be filed by Genentech, Inc. with the                  Securities                  and Exchange Commission (hereinafter referred to as “Proxy                  Statement”) | Part III |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|

| (A) | Excludes                  587,254,604 shares of Common Stock held by directors and executive                  officers of Genentech and Roche Holdings,                  Inc. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**GENENTECH,        INC.**

**2006        Form 10-K Annual Report**

**Table        of Contents**

| **Page  **                                                     |
|--------------------------------------------------------------------------|
| PART                  I                                                  |
| Item 1                                                              | Business | 1   |
| Item 1A                                                             | Risk                  Factors | 11   |
| Item 1B                                                             | Unresolved                  Staff Comments | 23   |
| Item 2                                                              | Properties | 23   |
| Item 3                                                              | Legal                  Proceedings | 24   |
| Item 4                                                              | Submission                  of Matters                  to a Vote of Security Holders | 26   |
| Executive                  Officers                  of the Company | 27   |
|                                                                     |
| PART                  II                                                 |
| Item 5                                                              | Market for                  the Registrant’s                  Common                  Equity,                  Related Stockholder Matters                  and Issuer Purchases of Equity Securities | 29   |
| Item 6                                                              | Selected                  Financial                  Data | 31   |
| Item 7                                                              | Management’s Discussion                  and Analysis of                  Financial Condition                  and Results of Operations | 32   |
| Item 7A                                                             | Quantitative                  and                  Qualitative Disclosures About Market Risk | 61   |
| Item 8                                                              | Financial                  Statements and                  Supplementary Data | 64   |
| Item 9                                                              | Changes                  in and                  Disagreements                  with Accountants                  on Accounting                  and Financial Disclosure | 103   |
| Item 9A                                                             | Controls                  and Procedures | 103   |
| Item 9B                                                             | Other                  Information | 106   |
|                                                                     |
| PART                  III                                                |
| Item 10                                                             | Directors,                  Executive                  Officers and Corporate Governance | 107   |
| Item 11                                                             | Executive                  Compensation | 107   |
| Item 12                                                             | Security                  Ownership                  of Certain Beneficial Owners and                  Management                  and Related Stockholder Matters | 107   |
| Item 13                                                             | Certain                  Relationships                  and Related                  Transactions, and Director Independence | 107   |
| Item 14                                                             | Principal                  Accountant Fees and Services | 107   |
|                                                                     |
| PART                  IV                                                 |
| Item 15                                                             | Exhibits                  and Financial Statement                  Schedules | 108   |
| SIGNATURES                                                               | 113   |

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**PART        I**

| **Item                  1.** | **BUSINESS** |
|------------------------------|--------------|

**Overview**

**Marketed        Products**

*Avastin*

*Rituxan        *

|   | · | The                  treatment of patients with relapsed or refractory, low-grade or                  follicular, CD20-positive, B-cell non-Hodgkin’s lymphoma, including                  retreatment and bulky disease; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  first-line treatment of patients with diffuse large B-cell, CD20-positive,                  non-Hodgkin’s lymphoma in combination with CHOP (cyclophosphamide,                  doxorubicin, vincristine and prednisone) or other anthracycline-based                  chemotherapy; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  first-line treatment of previously untreated patients with follicular,                  CD20-positive, B-cell non-Hodgkin’s lymphoma in combination with CVP                  (cyclophosphamide, vincristine and prednisone) chemotherapy                  regimens; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  treatment of patients with low-grade, CD20-positive, B-cell non-Hodgkin’s                  lymphoma in patients with stable disease or who achieve a partial                  or                  complete response following first-line treatment with CVP chemotherapy;                  and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Use                  in combination with methotrexate for reducing signs and symptoms                  in adult                  patients with moderately-to-severely active rheumatoid arthritis                  (or “RA”)                  who have had an inadequate response to one or more tumor necrosis                  factor                  antagonist therapies. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Herceptin        *

*Lucentis*

----

*Xolair*

*Tarceva        *

*Nutropin        *
*Nutropin        AQ *

*Activase        *

*TNKase        *

*Cathflo        Activase *

*Pulmozyme        *

*Raptiva*

----

**Licensed        Products **

*Royalty        Revenue*

| **Product**                                               | **Trade                  Name**            | **Licensee**                                                                                                                                               | **Licensed                  Territory**                   |
|-----------------------------------------------------------|--------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|
| Trastuzumab                                          | Herceptin                             | F.                  Hoffmann-La Roche                                                                                                                 | Worldwide                  excluding U.S.            |
| Rituximab                                            | Rituxan/MabThera®                | F.                  Hoffmann-La Roche                                                                                                                 | Worldwide                  excluding U.S. and Japan  |
| Bevacizumab                                          | Avastin                               | F.                  Hoffmann-La Roche                                                                                                                 | Worldwide                  excluding U.S.            |
| Dornase                  alfa, recombinant           | Pulmozyme                             | F.                  Hoffmann-La Roche                                                                                                                 | Worldwide                  excluding U.S.            |
| Alteplase                  and Tenecteplase          | Activase                  and TNKase  | F.                  Hoffmann-La Roche                                                                                                                 | Canada                                               |
| Somatropin                                           | Nutropin                              | F.                  Hoffmann-La Roche                                                                                                                 | Canada                                               |
| Etanercept                                           | ENBREL®                          | Immunex                  Corporation (whose rights were acquired by Amgen Inc.)                                                                       | Worldwide                                            |
| D2E7/adalimumab                                      | Humira®                          | Abbott                  Laboratories                                                                                                                  | Worldwide                                            |
| Infliximab                                           | Remicade®                        | Celltech                  Pharmaceuticals plc (which transferred rights to Centocor, Inc.                  / Johnson                  & Johnson)  | Worldwide                                            |
| Cetuximab                                            | ERBITUX®                         | ImClone                  Systems, Inc.                                                                                                                | Worldwide                                            |
| Antihemophilic                  factor, recombinant  | Kogenate®/Helixate®         | Bayer                  Corporation                                                                                                                    | Worldwide                                            |

*Other        Revenues*

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**Products        in Development **

| **Product**                                                                                                                 | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | **Estimated                  Completion of Current Phase**(1) |
|-----------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------|
| **Awaiting                  U.S. Food and Drug Administration (or**“**FDA**”**)                  Action**  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                          |
| Herceptin                                                                                                              | A                  supplemental Biologics Licensure Application (or “sBLA”) was submitted to                  the FDA on December 21, 2006 for the use of Herceptin for the treatment                  of                  patients with early-stage HER2-positive breast cancer based on                  the HERA                  study to enable a broader label. This product is being developed                  in                  collaboration with F. Hoffmann-La Roche.                                                                      | 2007-2008                                                |
| **Preparing                  for Filing**                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                          |
| Avastin                                                                                                                | We                  are preparing to resubmit an sBLA to the FDA for the use of Avastin                  in                  combination with paclitaxel chemotherapy for the treatment of patients                  who                  have not previously received chemotherapy for their locally recurrent                  or                  metastatic breast cancer. This product is being developed in collaboration                  with F. Hoffmann-La Roche.                                                                                          | 2007                                                     |
| Avastin                                                                                                                | We                  are in discussions with the FDA regarding the submission requirements                  for                  a potential sBLA for the use of Avastin in combination with interferon                  alpha-2a for the treatment of patients with previously untreated                  advanced                  renal cell carcinoma. This product is being developed in collaboration                  with F. Hoffmann-La Roche.                                                                                                               | 2007-2008                                                |
| Herceptin                                                                                                              | We                  are preparing to submit an sBLA to the FDA for the use of Herceptin                  for                  the treatment of patients with early-stage HER2-positive breast                  cancer                  based on the BCIRG 006 study to enable a broader label. This product                  is                  being developed in collaboration with F. Hoffmann-La Roche.                                                                                                                                                         | 2007                                                     |
| Rituxan                  Immunology                                                                                    | We                  and our collaborator Biogen Idec are preparing to submit an sBLA                  to the                  FDA seeking expansion of the rheumatoid arthritis (anti-tumor necrosis                  factor inadequate responders) indication to include radiographic                  data                  demonstrating inhibition of joint damage in Rituxan treated patients.                  This                  product is being developed in collaboration with F. Hoffmann-La                  Roche and                  Biogen Idec.  | 2007                                                     |

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| **Phase                  III**                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |
|----------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 2nd                  Generation anti-CD20     | 2nd                  Generation anti-CD20 is being evaluated in rheumatoid arthritis.                  This                  product is being developed in collaboration with F. Hoffmann-La                  Roche and                  Biogen Idec(2).                                                                                                                                                                                                                               | 2009-2010  |
| Avastin                                       | Avastin                  is being evaluated in adjuvant colon cancer, adjuvant rectal cancer,                  first- and second-line metastatic breast cancer in combination                  with                  several chemotherapy regimens, first-line non-squamous NSCLC, first-line                  ovarian cancer, and hormone refractory prostate cancer. This product                  is                  being developed in collaboration with F. Hoffmann-La Roche.   | 2007-2012  |
| Avastin                  +/- Tarceva          | Avastin                  and Tarceva are being evaluated as combination therapy in first-line                  NSCLC                  in combination with several chemotherapy regimens. This product                  is being                  developed in collaboration with F. Hoffmann-La Roche and OSI.                                                                                                                                                                         | 2009       |
| Rituxan                  Hematology/Oncology  | Rituxan                  is being evaluated in first-line follicular non-Hodgkin’s lymphoma with                  several chemotherapy regimens and in relapsed chronic lymphocytic                  leukemia. This product is being developed in collaboration with                  F.                  Hoffmann-La Roche and Biogen Idec.                                                                                                                                     | 2010       |
| Rituxan                  Immunology           | Rituxan                  is being evaluated in rheumatoid arthritis (DMARD inadequate responders)                  in collaboration with F. Hoffmann-La Roche and Biogen Idec. Rituxan                  is                  also being evaluated in primary progressive multiple sclerosis,                  systemic                  lupus erythematosus, lupus nephritis, and ANCA-associated vasculitis                  in                  collaboration with Biogen Idec.       | 2007-2009  |
| Tarceva                                       | Tarceva                  is being evaluated in adjuvant NSCLC with several chemotherapy                  regimens                  and first-line NSCLC. This product is being developed in collaboration                  with F. Hoffmann-La Roche and OSI.                                                                                                                                                                                                                          | 2013       |
| Tarceva                  +/- Avastin          | Tarceva                  and Avastin are being evaluated as combination therapy in first-line                  metastatic pancreatic cancer and second-line NSCLC. This product                  is being                  developed in collaboration with F. Hoffmann-La Roche and OSI.                                                                                                                                                                                               | 2008       |
| TNKase                                        | TNKase                  is being evaluated in the treatment of dysfunctional hemodialysis                  and                  central venous access catheters.                                                                                                                                                                                                                                                                                                                       | 2008       |
| Xolair                                        | Xolair                  is being evaluated in pediatric asthma. This product is being developed                  in                  collaboration with Novartis and Tanox, Inc. (or “Tanox”).                                                                                                                                                                                                                                                                             | 2008       |

----

| **Preparing                  for Phase III**  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |
|----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 2nd                  Generation anti-CD20     | We                  are preparing Phase III clinical trials in lupus nephritis and                  systemic                  lupus erythematosus. This product is being developed in collaboration                  with                  F. Hoffmann-La Roche and Biogen Idec(2).                                                                                                                                                                                                                    | 2007       |
| ALTU-238                                      | Altus                  is preparing a Phase III clinical trial in adult growth hormone                  deficiency. We have entered into an agreement to develop this product                  in                  collaboration with Altus, and this transaction is subject to closing                  conditions.                                                                                                                                                                                   | (3)        |
| Avastin                                       | We                  are preparing for Phase III clinical trials in adjuvant breast                  cancer,                  first-line metastatic breast cancer in combination with antihormonal                  therapy, adjuvant NSCLC, gastrointestinal stromal tumors, and second-line                  ovarian cancer. This product is being developed in collaboration                  with F.                  Hoffmann-La Roche.                                                            | 2007       |
| Herceptin                  +/- Avastin        | We                  are preparing for a Phase III clinical trial of Herceptin and Avastin                  as                  combination therapy in first-line HER2-positive metastatic breast                  cancer.                  This product is being developed in collaboration with F. Hoffmann-La                  Roche.                                                                                                                                                                | 2007       |
| Lucentis                                      | We                  are preparing for Phase III clinical trials in diabetic macular                  edema and                  retinal vein occlusion. This product is being developed in collaboration                  with Novartis Ophthalmics.                                                                                                                                                                                                                                                   | 2007       |
| **Phase                  II**                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |
| Anti-CD40                                     | Anti-CD40                  is being evaluated in non-Hodgkin’s lymphoma. We are developing this                  product in collaboration with Seattle Genetics Inc.                                                                                                                                                                                                                                                                                                                             | 2008-2009  |
| Avastin                                       | Avastin                  is being evaluated in adjuvant HER2-negative breast cancer, relapsed                  glioblastoma multiforme, and non-squamous NSCLC with previously                  treated                  central nervous system metastases. This product is being developed                  in                  collaboration with F. Hoffmann-La Roche.                                                                                                                              | 2007       |
| HAE1                                          | HAE1                  is being evaluated in moderate-to-severe allergic asthma.                                                                                                                                                                                                                                                                                                                                                                                                                        | 2008-2009  |
| Omnitarg                                      | Our                  Phase II clinical trial evaluating Omnitarg in combination with                  chemotherapy in platinum-resistant ovarian cancer showed encouraging                  results. Roche is conducting a clinical trial evaluating Omnitarg                  in                  combination with chemotherapy in platinum-sensitive ovarian cancer.                  This                  product is being developed in collaboration with F. Hoffmann-La                  Roche.  | 2007       |
| Topical                  VEGF                 | Topical                  VEGF is being evaluated for the treatment of diabetic foot                  ulcers.                                                                                                                                                                                                                                                                                                                                                                                           | 2007       |

----

| **Preparing                  for Phase II**             |                                                                                                                                                                                                                                                                                                                                               |            |
|--------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 2nd                  Generation anti-CD20               | We                  are preparing for a Phase II clinical trial in relapsing remitting                  multiple sclerosis. This product is being developed in collaboration                  with                  F. Hoffmann-La Roche and Biogen Idec(2).                                                                                  | 2007-2008  |
| ALTU-238                                                | Altus                  is preparing for a Phase II clinical trial in pediatric growth                  hormone                  deficiency. We have entered into an agreement to develop this product                  in                  collaboration with Altus, and this transaction is subject to closing                  conditions.  | (3)        |
| Avastin                                                 | We                  are preparing to initiate a Phase II clinical trial in extensive                  small                  cell lung cancer. This product is being developed in collaboration                  with F.                  Hoffmann-La Roche.                                                                                  | 2007       |
| **Phase                  I and Preparing for Phase I**  | We                  have multiple new molecular entities in Phase I or preparing for                  Phase                  I.                                                                                                                                                                                                               |            |

| (1) | For                  those projects preparing for a Phase, the estimated date of completion                  refers to the date the project is expected to enter the Phase for                  which it                  is preparing.                                                                                                                                                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Our                  collaborator Biogen Idec disagrees with certain of our development                  decisions under our 2003 collaboration agreement with them. We                  continue to                  pursue a resolution of our differences with Biogen Idec, and the                  disputed                  issues have been submitted to arbitration. See Part I, Item 3,“Legal                  Proceedings,” of this Form 10-K for further                  information. |
| (3) | Our                  collaborator is conducting the trial(s) and we are unable to provide                  the                  estimated date of completion for the current                  phase.                                                                                                                                                                                                                                                                                                          |

**Related        Party Arrangements**

**Distribution        and Commercialization **

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**Manufacturing        and **
**Raw        Materials**

**Proprietary        Technology — Patents and Trade Secrets **

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**Competition        **

**Government        Regulation**

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**Research        and Development**

**Human        Resources**

----

**Environment**

**Available        Information**

|   | · | our                  annual report on Form 10-K, quarterly reports on Form 10-Q, current                  reports on Form 8-K, and all amendments to those reports as soon                  as                  reasonably practicable after such material is electronically filed                  with                  the Securities and Exchange Commission; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our                  policies related to corporate governance, including Genentech’s                  Principles                  of Corporate Governance, Good                  Operating Principles (Genentech’s code of ethics applying to Genentech’s                  directors, officers and employees) as well as Genentech’s Code of Ethics                  applying to our CEO, CFO and senior financial officials;                  and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                  charters of the Audit Committee and the Compensation Committee                  of our                  Board of Directors. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

| **Item                  1A.** | **RISK                  FACTORS** |
|-------------------------------|-----------------------------------|

**The        successful development of biotherapeutics is highly uncertain and requires        significant expenditures and time**

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

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

|   | · | Failure                  to receive the necessary 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                  Licensing Application (or “BLA”) preparation, discussions with the U.S.                  Food and Drug Administration (or “FDA”), FDA requests for additional                  preclinical or clinical data, analyses or changes to study design,                  or                  unexpected safety, efficacy or manufacturing                  issues. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

|   | · | Manufacturing                  costs, pricing or reimbursement issues, or other factors that make                  the                  product uneconomical. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | The                  contractual rights of our collaborators or others that may prevent                  the                  product from being developed or                  commercialized. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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 a sufficient number of candidate products that are                  ready to                  move into development or that product candidates will be available                  for                  in-licensing on terms acceptable to us and permitted under the                  anti-trust                  laws. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Our                  ability to in-license projects of interest to us and the timing                  and amount                  of related development funding or milestone payments for such licenses.                  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**

----

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

|   | · | Changes                  to manufacturing processes, manufacturing process standards or                  Good                  Manufacturing Practices (or “GMP”) following approval or changing                  interpretations of these factors. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**We        face competition**

*Avastin:*

*Rituxan:*

----

*Herceptin: *

*Lucentis:*

*Xolair: *

*Tarceva: *

*Nutropin:*

*Thrombolytics:*

*Pulmozyme: *

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*Raptiva: *

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

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

|   | · | the                  inability of a supplier to provide raw materials used for manufacture                  of                  our products; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | equipment                  obsolescence, malfunctions or                  failures; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | product                  quality or 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 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; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

|   | · | failure                  to maintain an adequate state of GMP compliance;                  and |
|--------|--------|------------------------------------------------------------------------------------------------|

|   | · | successful                  implementation and integration of our new enterprise resource planning                  system, including the portions relating to manufacturing and                  distribution. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Protecting        our proprietary rights is difficult and costly**

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

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

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

**Other        factors could affect our product sales**

|   | · | 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, the pricing decisions of our competitors, as well                  as our                  Avastin Patient Assistance Program, which is a voluntary program                  that                  enables eligible patients who receive greater than 10,000 milligrams                  of                  Avastin over a 12-month period to receive free Avastin during the                  remainder of the 12-month period. Eligible patients include those                  who are                  being treated for an FDA-approved                  indication. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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 or                  withdrawn. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Our        results of operations are affected by our royalty and contract revenues,        and        sales to collaborators**

|   | · | 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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | 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. |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | · | 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, unenforceable, or                  unpatentable. 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, unenforceable, or unpatentable, 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 could limit our ability to make        acquisitions**

|   | · | 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                  9, “Relationship with Roche and Related Party Transactions,” in the Notes                  to Consolidated Financial Statements in Part II, Item 8 of this                  Form                  10-K. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

**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**

**We        may incur material product liability costs**

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

**We        are subject to environmental and other risks**

----

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

|   | · | The                  overall competitive environment for our products as described in“We face                  competition” above. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  amount and timing of our sales to Hoffmann-La Roche and our other                  collaborators of products for sale outside of the U.S. and the                  amount and                  timing of sales to their respective customers, which directly affects                  both                  our product sales and royalty                  revenues. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  timing and volume of bulk shipments to                  licensees. |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | · | The                  availability and extent of government and private third-party                  reimbursements for the cost of                  therapy. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  extent of product discounts extended to                  customers. |
|--------|--------|------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | The                  potential introduction of new products and additional indications                  for                  existing products. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                  ability to successfully manufacture sufficient quantities of any                  particular marketed product. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

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

**Our        integration of new information systems could disrupt our internal operations,        which could harm our revenues and increase our expenses**

----

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

|   | · | Announcements                  of technological innovations or new commercial products by us or                  our                  competitors. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Publicity                  regarding actual or potential medical results relating to products                  under                  development or being commercialized by us or our competitors. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Concerns                  about the pricing of our products, or our pricing initiatives (including                  our Avastin Patient Assistance Program), and the potential effect                  of such                  on their utilization or our product                  sales. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Developments                  or outcome of litigation, including litigation regarding proprietary                  and                  patent rights. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Regulatory                  developments or delays concerning our products in the U.S. and                  foreign                  countries. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Issues                  concerning the safety of our products or of biotechnology products                  generally. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|

|   | · | 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**

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

----

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

*Consolidation        of Variable Interest Entities,*

*Accounting        for Uncertainty in Income Taxes.*
*Accounting        for Income Taxes,*

| **Item                  1B.** | **UNRESOLVED                  STAFF COMMENTS** |
|-------------------------------|------------------------------------------------|

| **Item                  2.** | **PROPERTIES** |
|------------------------------|----------------|

----

| **Item                  3.** | **LEGAL                  PROCEEDINGS** |
|------------------------------|----------------------------------------|

----

----

| **Item                  4.** | **SUBMISSION                  OF MATTERS TO A VOTE OF SECURITY                  HOLDERS** |
|------------------------------|-------------------------------------------------------------------------------------------|

----

**Executive        Officers of the Company**

| **Name**                                                        | **Age**        |   | **Position**                                                                            |
|-----------------------------------------------------------------|----------------|--------|-----------------------------------------------------------------------------------------|
| Arthur                  D. Levinson, Ph.D.*                | 56   |   | Chairman                  and Chief Executive Officer                              |
| Susan                  D. Desmond-Hellmann, M.D., M.P.H.*  | 49   |   | President,                  Product Development                                    |
| Ian                  T. Clark*                             | 46   |   | Executive                  Vice President, Commercial Operations                   |
| David                  A. Ebersman*                        | 37   |   | Executive                  Vice President and Chief Financial Officer              |
| Stephen                  G. Juelsgaard, D.V.M., J.D.*      | 58   |   | Executive                  Vice President, Secretary and Chief Compliance Officer  |
| Richard                  H. Scheller, Ph.D.*               | 53   |   | Executive                  Vice President, Research                                |
| Patrick                  Y. Yang, Ph.D.*                   | 58   |   | Executive                  Vice President, Product Operations                      |
| Robert                  L. Garnick, Ph.D.                  | 57   |   | Senior                  Vice President, Regulatory, Quality and Compliance         |
| John                  M. Whiting                           | 51   |   | Vice                  President, Finance and Chief Accounting Officer              |

**Business        Experience**

*Arthur        D. Levinson, Ph.D.*

*Susan        D. Desmond-Hellmann, M.D., M.P.H.*

*Ian        T. Clark*

*David        A. Ebersman*

----

*Stephen        G. Juelsgaard, D.V.M., J.D.*

*Richard        H. Scheller, Ph.D.*

*Patrick        Y. Yang, Ph.D. *

*Robert        L. Garnick, Ph.D.*

*John        M. Whiting*

----

**PART        II**

| **Item                  5.** | **MARKET                  FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER                  PURCHASES OF EQUITY                  SECURITIES** |
|------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Stock        Exchange Listing**

**Common        Stockholders**

**Stock        Prices**

|                         |   | **Common                  Stock** |   |
|------------------------------|--------|-----------------------------------|--------|
|                         |   | **2006**                          |   | **2005** |   |
|                         |   | **High**                          |   | **Low** |   | **High** |   | **Low** |   |
| 4th                  Quarter |   | $                                 | 86.93  |   | $ | 79.65 |   | $ | 100.20 |   | $ | 79.87 |   |
| 3rd                  Quarter |   |                              | 86.65  |   |   | 76.80 |   |   | 94.99 |   |   | 79.71 |   |
| 2nd                  Quarter |   |                              | 84.72  |   |   | 75.58 |   |   | 84.10 |   |   | 54.68 |   |
| 1st                  Quarter |   |                              | 95.16  |   |   | 81.15 |   |   | 59.00 |   |   | 43.90 |   |

**Stock        Repurchases**

----

**Performance        Graph **

|                                         |   | **Base                  Period** |   | **Years                  Ending** |   |
|----------------------------------------------|--------|----------------------------------|--------|-----------------------------------|--------|
|                                         |   | **December**                     |   | **December**                      |   | **December** |   | **December** |   | **December** |   | **December** |   |
| **Company                  / Index**         |   | **2001**                         |   | **2002**                          |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   |
| GENENTECH,                  INC              |   |                             | 100    |                              | $      | 61.12 |   | $ | 172.48 |   | $ | 200.70 |   | $ | 341.01 |   | $ | 299.10 |   |
| S&P                  500 INDEX           |   |                             | 100    |                              |   | 77.90 |   |   | 100.25 |   |   | 111.15 |   |   | 116.61 |   |   | 135.03 |   |
| S&P                  500 PHARMACEUTICALS |   |                             | 100    |                              |   | 79.96 |   |   | 86.98 |   |   | 80.51 |   |   | 77.81 |   |   | 90.14 |   |
| S&P                  BIOTECHNOLOGY       |   |                             | 100    |                              |   | 79.59 |   |   | 102.55 |   |   | 110.35 |   |   | 130.52 |   |   | 126.94 |   |

| (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The                  total return on investment (change in year end stock price plus                  reinvested                  dividends) assumes $100 invested on December 31, 2001 in our common                  stock,                  the Standard & Poor’s 500 Index, the Standard & Poor’s 500                  Pharmaceuticals Index and the Standard & Poor’s 500 Biotechnology                  Index. The Standard & Poor’s 500 Pharmaceuticals Index was comprised                  at December 31, 2006 of Abbott Laboratories, Allergan, Inc., Barr                  Pharmaceuticals Inc., Bristol-Myers Squibb Company, Forest Laboratories,                  Inc., Johnson & Johnson, King Pharmaceuticals, Inc., Merck & Co.,                  Inc., Mylan Laboratories Inc., Lilly (Eli) and Company, Pfizer                  Inc.,                  Schering-Plough Corporation, Watson Pharmaceuticals, Inc. and Wyeth.                  The                  Standard & Poor’s 500 Biotechnology Index was comprised at December                  31, 2006 of Amgen Inc., Biogen Idec Inc., Genzyme Corporation,                  Gilead                  Sciences, Inc. and MedImmune, Inc.  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| The                  information under “Performance Graph” is not deemed filed with the                  Securities and Exchange Commission and is not to be incorporated                  by                  reference in any filing of Genentech under the Securities Act of                  1933, as                  amended, or the Securities Exchange Act of 1934, as amended, whether                  made                  before or after the date of this 10-K and irrespective of any general                  incorporation language in those                  filings. |

----

| **Item                  6.** | **SELECTED                  FINANCIAL DATA** |
|------------------------------|----------------------------------------------|

**SELECTED        CONSOLIDATED FINANCIAL DATA**

*(in        millions, except per share amounts)*

|                                                                   |   | **2006** |   | **2005**  |   | **2004** |      | **2003** |   | **2002**  |   |
|------------------------------------------------------------------------|--------|----------|--------|-----------|--------|----------|-----------|----------|--------|-----------|--------|
| Total                  operating revenues                              |   | $        | 9,284  |      | $      | 6,633    |      | $        | 4,621  |      | $      | 3,300 |   | $ | 2,584 |   |
| Product                  sales                                         |   |     | 7,640  |      |   | 5,488    |      |     | 3,749  |      |   | 2,621 |   |   | 2,164 |   |
| Royalties                                                              |   |     | 1,354  |      |   | 935      |      |     | 641    |      |   | 501 |   |   | 366 |   |
| Contract                  revenue                                      |   |     | 290    |      |   | 210      |      |     | 231    |      |   | 178 |   |   | 54 |   |
|                                                                   |   |     |   |      |   |     |      |     |   |      |   |   |   |   |   |   |
| Income                  before cumulative effect of accounting changes |   | $        | 2,113  |      | $      | 1,279    |      | $        | 785    |      | $      | 610 |   | $ | 64 |   |
| Cumulative                  effect of accounting changes, net of tax   |   |     | -      |      |   | -        |      |     | -      |      |   | (47 | )(3) |   | - |   |
| Net                  income                                            |   | $        | 2,113  |  (1) | $      | 1,279    |      | $        | 785    |      | $      | 563 |  (3) | $ | 64 |  (4) |
|                                                                   |   |     |   |      |   |     |      |     |   |      |   |   |   |   |   |   |
| Basic                  earnings per share                              |   | $        | 2.01   |      | $      | 1.21     |      | $        | 0.74   |      | $      | 0.54 |   | $ | 0.06 |   |
| Diluted                  earnings per share                            |   |     | 1.97   |      |   | 1.18     |      |     | 0.73   |      |   | 0.53 |   |   | 0.06 |   |
|                                                                   |   |     |   |      |   |     |      |     |   |      |   |   |   |   |   |   |
| Total                  assets                                          |   | $        | 14,842 |      | $      | 12,147   |      | $        | 9,403  |  (2) | $      | 8,759 |  (2) | $ | 6,776 |   |
| Long-term                  debt                                        |   |     | 2,204  |  (2) |   | 2,083    |  (2) |     | 412    |  (2) |   | 412 |  (2) |   | - |   |
| Stockholders’                  equity                            |   |     | 9,478  |      |   | 7,470    |      |     | 6,782  |      |   | 6,520 |   |   | 5,339 |   |

|   | We                  have paid no dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | All                  per share amounts reflect the two-for-one stock split that was                  effected in                  2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | Certain                  prior year amounts have been reclassified to conform to the current                  year                  presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (1)    | Net                  income in 2006 includes employee stock-based compensation costs                  of $182                  million, net of tax, due to our adoption of FAS 123R on a modified                  prospective basis on January 1, 2006. No employee stock-based compensation                  expense was recognized in reported amounts in any period prior                  to January                  1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | Long-term                  debt in 2006 and 2005 includes $1.99 billion related to our debt                  issuance                  in July 2005, and includes $216 million in 2006 and $94 million                  in 2005 in                  construction financing obligations related to our agreements with                  Slough                  and Lonza. Long-term debt in 2005 also reflects the repayment of                  $425                  million to extinguish the consolidated debt and noncontrolling                  interest of                  a synthetic lease obligation related to our manufacturing facility                  located                  in Vacaville, California. Upon adoption of the Financial Accounting                  Standards Board Interpretation No. 46 (or “FIN 46”), “Consolidation of                  Variable Interest Entities,” in 2003, we consolidated the entity from                  which we lease our manufacturing facility located in Vacaville,                  California. Accordingly, we included in property, plant and equipment                  assets with net book values of $326 million at December 31, 2004                  and $348                  million at December 31, 2003. We also consolidated the entity’s debt of                  $412 million and noncontrolling interest of $13 million, which                  amounts are                  included in long-term debt and litigation-related and other long-term                  liabilities, respectively, at December 31, 2004 and                  2003. |
| (3)    | Net                  income in 2003 includes the receipt of $113 million in pre-tax                  litigation                  settlements with Amgen Inc. and Bayer Inc. Net income in 2003 also                  reflects our adoption of FIN 46 on July 1, 2003, which resulted                  in a $47                  million charge, net of $32 million in taxes, (or $0.05 per share)                  as a                  cumulative effect of an accounting change in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    | Net                  income in 2002 includes $544 million of pre-tax litigation-related                  special                  charges, which are comprised of the COH litigation judgment in                  2002, and                  accrued interest and bond costs, and certain other litigation-related                  matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

----

| **Item                  7.** | **MANAGEMENT’S                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                  OPERATIONS** |
|------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|

**Overview**

***The        Company***

***Major        Developments in 2006***

*Share-Based        Payment*

*We        received the following U.S. Food and Drug Administration (or *
*FDA*
*)        approvals:*

|   | · | Lucentis                  for the treatment of neovascular (wet) age-related macular degeneration                  (or “AMD”); |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Avastin                  in combination with intravenous 5-fluorouracil (or “5-FU”)-based                  chemotherapy for second-line metastatic colorectal                  cancer; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Avastin                  for use in combination with carboplatin and paclitaxel chemotherapy                  for                  the first-line treatment of patients with unresectable, locally                  advanced,                  recurrent or metastatic non-squamous, non-small cell lung cancer                  (or                  “NSCLC”); |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Rituxan                  for the treatment of patients with active rheumatoid arthritis                  (or “RA”)                  who have had an inadequate response to tumor necrosis factor antagonist                  therapy; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Rituxan                  for use in first-line treatment of patients with diffuse large                  B-cell,                  CD20-positive, non-Hodgkin’s                  lymphoma (or “DLBCL”); |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Rituxan                  for the first-line treatment of previously untreated patients with                  follicular,                  CD20-positive, B-cell non-Hodgkin’s                  lymphoma in combination with CVP (cyclophosphamide, vincristine,                  prednisone) chemotherapy; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Rituxan                  for the treatment of low-grade, CD20-positive, B-cell non-Hodgkin’s                  lymphoma in patients with stable disease or who achieve a partial                  or                  complete response following first-line treatment with CVP chemotherapy;                  and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Herceptin                  for the adjuvant treatment of HER2-positive node-positive breast                  cancer                  patients in combination with doxorubicin, cyclophosphamide, and                  paclitaxel. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Our        Strategy and Goals***

----

***Economic        and Industry-wide Factors***

|   | · | We                  face significant competition in the diseases of interest to us                  from                  pharmaceutical companies and biotechnology companies. The introduction                  of                  new competitive products or follow-on biologics, new information                  about                  existing products or pricing decisions by us or our competitors                  may result                  in lost market share for us, reduced utilization of our products,                  reduced                  product sales, and/or lower prices, even for products protected                  by                  patents. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Our                  long-term business growth, commercial performance and clinical                  success                  depend upon our ability to continue to develop and commercialize                  important                  novel therapeutics to treat unmet medical needs, such as cancer.                  We                  recognize that the successful development of biotherapeutics 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/or product recalls                  or                  withdrawals. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We                  believe our business model is only sustainable with appropriate                  pricing                  and reimbursement for our products to offset the costs and risks                  of drug                  development. The pricing of our products has received negative                  press                  coverage and public scrutiny. We will continue to meet with patient                  groups, payers and other stakeholders in the healthcare system                  to                  understand their issues and concerns. However, the future reimbursement                  environment for our products is                  uncertain. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | As                  the Medicare and Medicaid programs are                  the largest payers for our products, rules relating to coverage                  and                  reimbursement continue to represent an important area of focus.                  New                  regulations relating to hospital and physician payment continue                  to be                  implemented annually. To                  date, we have not seen any detectable effects of the new rules                  on our                  product sales, and we anticipate minimal effects on our revenues                  in                  2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | 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.                  In                  keeping with our desire to maintain and protect our culture, we                  continued                  our broad-based stock option program in                  2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Intellectual                  property protection of our products is crucial to our business.                  Loss of                  effective intellectual property protection on one or more products                  could                  result in lost sales to competing products and may negatively affect                  our                  sales, royalty revenues and operating results. We are often involved                  in                  disputes over contracts and intellectual property and we work to                  resolve                  these disputes in confidential negotiations or litigation. We expect                  legal                  challenges in this area to continue. We plan to continue to build                  upon and                  defend our intellectual property                  position. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Critical        Accounting Policies and the Use of Estimates **

***Contingencies***

** **
** **

***Revenue        Recognition***

----

***Product        Sales Allowances***

|   | · | Rebate                  allowances and accruals are comprised of both direct and indirect                  rebates.                  Direct rebates are contractual price adjustments payable to direct                  customers, mainly to wholesalers and specialty pharmacies, that                  purchase                  products directly from us. Indirect rebates are contractual price                  adjustments payable to healthcare providers and organizations such                  as                  clinics, hospitals, pharmacies, Medicaid and group purchasing                  organizations that do not purchase products directly from                  us; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Prompt                  pay sales discounts are credits granted to wholesalers for remitting                  payment on their purchases within established cash repayment incentive                  periods; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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;                  and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Healthcare                  provider contractual chargebacks are the result of contractual                  commitments                  by us to provide products to healthcare providers at specified                  prices or                  discounts. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Royalties***

***Income        Taxes***

----

***Inventories***

***Employee        Stock-Based Compensation—Adoption of FAS 123R***

----

**Results        of Operations **

*(In        millions, except per share amounts)*

|                                                      |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|-----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
|                                                      |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   |  **2005/2004** |   |
| Product                  sales                            |   | $        | 7,640  |     | $      | 5,488    |   | $                                             | 3,749  |   |   | 39 | % |   | 46 | % |
| Royalties                                                 |   |     | 1,354  |     |   | 935      |   |                                          | 641    |   |   | 45 |   |   | 46 |   |
| Contract                  revenue                         |   |     | 290    |     |   | 210      |   |                                          | 231    |   |   | 38 |   |   | (9 | ) |
| Total                  operating revenues                 |   |     | 9,284  |     |   | 6,633    |   |                                          | 4,621  |   |   | 40 |   |   | 44 |   |
| Cost                  of sales                            |   |     | 1,181  |     |   | 1,011    |   |                                          | 673    |   |   | 17 |   |   | 50 |   |
| Research                  and development                 |   |     | 1,773  |     |   | 1,262    |   |                                          | 948    |   |   | 40 |   |   | 33 |   |
| Marketing,                  general and administrative    |   |     | 2,014  |     |   | 1,435    |   |                                          | 1,088  |   |   | 40 |   |   | 32 |   |
| Collaboration                  profit sharing             |   |     | 1,005  |     |   | 823      |   |                                          | 594    |   |   | 22 |   |   | 39 |   |
| Recurring                  charges related to redemption  |   |     | 105    |     |   | 123      |   |                                          | 145    |   |   | (15 | ) |   | (15 | ) |
| Special                  items: litigation-related   |   |     | 54     |     |   | 58       |   |                                          | 37     |   |   | (7 | ) |   | 57 |   |
| Total                  costs and expenses                 |   |     | 6,132  |     |   | 4,712    |   |                                          | 3,485  |   |   | 30 |   |   | 35 |   |
| Operating                  income                         |   |     | 3,152  |     |   | 1,921    |   |                                          | 1,136  |   |   | 64 |   |   | 69 |   |
| Other                  income (expense):                  |   |     |   |     |   |     |   |                                          |   |   |   |   |   |   |   |   |
| Interest                  and other income (expense), net |   |     | 325    |     |   | 142      |   |                                          | 91     |   |   | 129 |   |   | 56 |   |
| Interest                  expense                         |   |     | (74    | )        |   | (50      | )      |                                          | (7     | ) |   | 48 |   |   | 614 |   |
| Total                  other income, net                  |   |     | 251    |     |   | 92       |   |                                          | 84     |   |   | 173 |   |   | 10 |   |
| Income                  before taxes                      |   |     | 3,403  |     |   | 2,013    |   |                                          | 1,220  |   |   | 69 |   |   | 65 |   |
| Income                  tax provision                     |   |     | 1,290  |     |   | 734      |   |                                          | 435    |   |   | 76 |   |   | 69 |   |
| Net                  income                               |   | $        | 2,113  |     | $      | 1,279    |   | $                                             | 785    |   |   | 65 |   |   | 63 |   |
| Earnings                  per share:                      |   |     |   |     |   |     |   |                                          |   |   |   |   |   |   |   |   |
| Basic                                                     |   | $        | 2.01   |     | $      | 1.21     |   | $                                             | 0.74   |   |   | 66 |   |   | 64 |   |
| Diluted                                                   |   | $        | 1.97   |     | $      | 1.18     |   | $                                             | 0.73   |   |   | 67 |   |   | 62 |   |
| Pretax                  operating margin                  |   |     | 34     | %        |   | 29       | %      |                                          | 25     | % |   |   |   |   |   |   |
| COS                  as a % of product sales              |   |     | 15     |     |   | 18       |   |                                          | 18     |   |   |   |   |   |   |   |
| R&D                  as a % of operating revenues     |   |     | 19     |     |   | 19       |   |                                          | 21     |   |   |   |   |   |   |   |
| MG&A                  as a % of operating revenues    |   |     | 22     |     |   | 22       |   |                                          | 24     |   |   |   |   |   |   |   |
| NI                  as a % of operating revenues          |   |     | 23     |     |   | 19       |   |                                          | 17     |   |   |   |   |   |   |   |
| Tax                  rate                                 |   |     | 38     |     |   | 36       |   |                                          | 36     |   |   |   |   |   |   |   |

***Total        Operating Revenues***

----

***Total        Product Sales***

*(In        millions)*

|                                                |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
| **Product                  Sales**                  |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   | **2005/2004** |   |
| Net                  U.S. Product Sales             |   |     |   |     |   |     |   |                                          |   |   |   |
| Avastin                                             |   | $        | 1,746  |     | $      | 1,133    |   | $                                             | 545    |   |   | 54 | % |   | 108 | % |
| Rituxan                                             |   |     | 2,071  |     |   | 1,832    |   |                                          | 1,574  |   |   | 13 |   |   | 16 |   |
| Herceptin                                           |   |     | 1,234  |     |   | 747      |   |                                          | 479    |   |   | 65 |   |   | 56 |   |
| Lucentis                                            |   |     | 380    |     |   | -        |   |                                          | -      |   |   | - |   |   | - |   |
| Xolair                                              |   |     | 425    |     |   | 320      |   |                                          | 188    |   |   | 33 |   |   | 70 |   |
| Tarceva                                             |   |     | 402    |     |   | 275      |   |                                          | 13     |   |   | 46 |   |   | * |   |
| Nutropin                  products                  |   |     | 378    |     |   | 370      |   |                                          | 349    |   |   | 2 |   |   | 6 |   |
| Thrombolytics                                       |   |     | 243    |     |   | 218      |   |                                          | 194    |   |   | 11 |   |   | 12 |   |
| Pulmozyme                                           |   |     | 199    |     |   | 186      |   |                                          | 157    |   |   | 7 |   |   | 18 |   |
| Raptiva                                             |   |     | 90     |     |   | 79       |   |                                          | 52     |   |   | 14 |   |   | 52 |   |
| Total                  U.S. product sales           |   |     | 7,169  |     |   | 5,162    |   |                                          | 3,551  |   |   | 39 |   |   | 45 |   |
| Net                  product sales to collaborators |   |     | 471    |     |   | 326      |   |                                          | 198    |   |   | 44 |   |   | 65 |   |
| Total                  product sales                |   | $        | 7,640  |     | $      | 5,488    |   | $                                             | 3,749  |   |   | 39 |   |   | 46 |   |

| *      | Calculation                  not meaningful.                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   | The                  values shown above are exact; therefore, the totals may not appear                  to sum                  due to rounding. |

*Avastin*

----

*Rituxan*

*Herceptin*

----

*Lucentis*

*Xolair*

*Tarceva*

** **

*Nutropin        Products*

----

*Thrombolytics*

** **

*Pulmozyme*

*Raptiva*

*Sales        to Collaborators*

***Royalties***

----

** **

***Contract        Revenues***

***Cost        of Sales***

** **

***Research        and Development***

----

*(in        millions)*

|                                                            |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
| **Research                  and Development**                   |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   | **2005/2004** |   |
| Product                  development (including post-marketing) |   | $        | 1,269  |     | $      | 935      |   | $                                             | 668    |   |   | 36 | % |   | 40 | % |
| Research                                                        |   |     | 326    |     |   | 235      |   |                                          | 218    |   |   | 39 |   |   | 8 |   |
| In-licensing                                                    |   |     | 178    |     |   | 92       |   |                                          | 62     |   |   | 93 |   |   | 48 |   |
| Total                                                           |   | $        | 1,773  |     | $      | 1,262    |   | $                                             | 948    |   |   | 40 |   |   | 33 |   |

*Product        development:  *

*Research:  *
** **

*In-licensing:  *
** **

----

***Marketing,        General and Administrative***

** **

***Collaboration        Profit Sharing***

*(in        millions)*

|                                                            |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
|                                                            |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   | **2005/2004** |   |
| U.S.                  Rituxan profit sharing expense            |   | $        | 672    |     | $      | 603      |   | $                                             | 518    |   |   | 11 | % |   | 16 | % |
| U.S.                  Tarceva profit sharing expense            |   |     | 146    |     |   | 83       |   |                                          | -      |   |   | 76 |   |   | - |   |
| U.S.                  and ex-U.S. Xolair profit sharing expense |   |     | 187    |     |   | 137      |   |                                          | 76     |   |   | 36 |   |   | 80 |   |
| Total                  collaboration profit sharing expense     |   | $        | 1,005  |     | $      | 823      |   | $                                             | 594    |   |   | 22 |   |   | 39 |   |

----

*(in        millions)*

|                                                                                                                                                                    |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
|                                                                                                                                                                    |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   | **2005/2004** |   |
| Product                  sales, net                                                                                                                                     |   | $        | 2,071  |     | $      | 1,832    |   | $                                             | 1,574  |   |   | 13 | % |   | 16 | % |
| Combined                  commercial costs and expenses                                                                                                                 |   |     | 489    |     |   | 390      |   |                                          | 316    |   |   | 25 |   |   | 23 |   |
| Combined                  co-promotion profits                                                                                                                          |   | $        | 1,582  |     | $      | 1,442    |   | $                                             | 1,258  |   |   | 10 |   |   | 15 |   |
| Amount                  due to Biogen Idec for their share of co-promotion profits - included                  in                  collaboration profit sharing expense |   | $        | 672    |     | $      | 603      |   | $                                             | 518    |   |   | 11 |   |   | 16 |   |

*(in        millions)*

|                                                                                                                                                 |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
|                                                                                                                                                 |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   | **2005/2004** |   |
| Contract                  revenue                                                                                                                    |   | $        | 79     |     | $      | 59       |   | $                                             | 41     |   |   | 34 | % |   | 44 | % |
|                                                                                                                                                 |   |     |   |     |   |     |   |                                          |   |   |   |   |   |   |   |   |
| Co-promotion                  profit sharing expense                                                                                                 |   | $        | 672    |     | $      | 603      |   | $                                             | 518    |   |   | 11 |   |   | 16 |   |
|                                                                                                                                                 |   |     |   |     |   |     |   |                                          |   |   |   |   |   |   |   |   |
| Royalty                  expense on ex-U.S. sales of Rituxan and other patent costs - included                  in                  MG&A expense |   | $        | 175    |     | $      | 139      |   | $                                             | 119    |   |   | 26 |   |   | 17 |   |

***Recurring        Charges Related to Redemption***

***Special        Items: Litigation-Related***

----

***Operating        Income***

** **

***Other        Income (Expense)***

*(in        millions)*

|                                                                    |   |     |   |     |   |     |   | **Annual                  Percentage Change** |   |
|-------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|-----------------------------------------------|--------|
|                                                                    |   | **2006** |   | **2005** |   | **2004** |   | **2006/2005**                                 |   |  **2005/2004** |   |
| Gains                  on sales of biotechnology equity securities, net |   | $        | 93     |     | $      | 9        |   | $                                             | 13     |   |   | 933 | % |   | (31 | )% |
| Write-down                  of biotechnology debt and equity securities |   |     | (4     | )        |   | (10      | )      |                                          | (12    | ) |   | (60 | ) |   | (17 | ) |
| Interest                  income                                        |   |     | 230    |     |   | 143      |   |                                          | 90     |   |   | 61 |   |   | 59 |   |
| Interest                  expense                                       |   |     | (74    | )        |   | (50      | )      |                                          | (7     | ) |   | 48 |   |   | 614 |   |
| Other                  miscellaneous income                             |   |     | 6      |     |   | -        |   |                                          | -      |   |   | - |   |   | - |   |
| Total                  other income, net                                |   | $        | 251    |     | $      | 92       |   | $                                             | 84     |   |   | 173 |   |   | 10 |   |

***Income        Tax Provision***

----

**Relationship        with Roche **

***Affiliation        Arrangements***

|   | · | with                  consideration, if that consideration is composed entirely of either                  cash                  or equity traded on a U.S. national securities exchange, in the                  same form                  and amounts per share as received by Roche and its affiliates;                  and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                  all other cases, with consideration that has a value per share                  not less                  than the weighted-average value per share received by Roche and                  its                  affiliates as determined by a nationally recognized investment                  bank. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                  merger or sale must be authorized by the favorable vote of a majority                  of                  non-Roche stockholders, provided no person will be entitled to                  cast more                  than 5% of the votes at the meeting;                  or |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                  the event such a favorable vote is not obtained, the value of the                  consideration to be received by non-Roche stockholders would be                  equal to                  or greater than the average of the means of the ranges of fair                  values for                  the Common Stock as determined by two nationally recognized investment                  banks. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | any                  acquisition, sale or other disposal of all or a portion of our                  business                  representing 10% or more of our assets, net income or                  revenues; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | any                  issuance of capital stock except under certain circumstances;                  or |
|--------|--------|--------------------------------------------------------------------------------------------------------|

|   | · | any                  repurchase or redemption of our capital stock other than a redemption                  required by the terms of any security and purchases made at fair                  market                  value in connection with any deferred compensation                  plans. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Licensing        Agreements***

|   | · | Hoffmann-La                  Roche’s option expires in 2015; |
|--------|--------|--------------------------------------------------------------------|

|   | · | Hoffmann-La                  Roche may exercise its option to license our products upon the                  occurrence                  of any of the following: (1) our decision to file an Investigational                  New Drug Application (or “IND”) for a product, (2) completion of the first                  Phase II trial for a product or (3) if Hoffmann-La Roche previously                  paid                  us a fee of $10 million to extend its option on a product, completion                  of a                  Phase III trial for that product; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | if                  Hoffmann-La Roche exercises its option to license a product, it                  has agreed                  to reimburse Genentech for development costs as follows: (1) if                  exercise occurs at the time of our decision to file an IND is filed,                  Hoffmann-La Roche will pay 50% of development costs incurred prior                  to the                  filing and 50% of development costs subsequently incurred, (2) if                  exercise occurs at the completion of the first Phase II trial,                  Hoffmann-La                  Roche will pay 50% of development costs incurred through completion                  of the                  trial, 75% of development costs subsequently incurred for the initial                  indications, and 50% of subsequent development costs for new indications,                  formulations or dosing schedules, (3) if the exercise occurs at the                  completion of a Phase III trial, Hoffmann-La Roche will pay 50%                  of                  development costs incurred through completion of Phase II, 75%                  of                  development costs incurred through completion of Phase III, and                  75% of                  development costs subsequently incurred, and $5 million of the                  option                  extension fee paid by Hoffmann-La Roche to preserve its right to                  exercise                  its option at the completion of a Phase III trial will be credited                  against                  the total development costs payable to Genentech upon the exercise                  of the                  option, and (4) each of Genentech and Hoffmann-La Roche have the                  right to                  “opt-out” of developing an additional indication for a product for which                  Hoffmann-La Roche exercised its option, and would not share the                  costs or                  benefits of the additional indication, but could “opt-back-in” within 30                  days of decision to file for approval of the indication by paying                  twice                  what they would have owed for development of the indication if                  they had                  not opted out; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | we                  agreed, in general, to manufacture for and supply to Hoffmann-La                  Roche its                  clinical requirements of our products at cost, and its commercial                  requirements at cost plus a margin of 20%; however, Hoffmann-La                  Roche will                  have the right to manufacture our products under certain                  circumstances; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hoffmann-La                  Roche has agreed to pay, for each product for which Hoffmann-La                  Roche                  exercises its option upon either a decision to file an IND or completion                  of the first Phase II trial, a royalty of 12.5% on the first $100                  million                  on its aggregate sales of that product and thereafter a royalty                  of 15% on                  its aggregate sales of that product in excess of $100 million until                  the                  later in each country of the expiration of our last relevant patent                  or 25                  years from the first commercial introduction of that product;                  and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hoffmann-La                  Roche will pay, for each product for which Hoffmann-La Roche exercises                  its                  option after completion of a Phase III trial, a royalty of 15%                  on its                  sales of that product until the later in each country of the expiration                  of                  our last relevant patent or 25 years from the first commercial                  introduction of that product; however, $5 million of any option                  extension                  fee paid by Hoffmann-La Roche will be credited against royalties                  payable                  to us in the first calendar year of sales by Hoffmann-La Roche                  in which                  aggregate sales of that product exceed $100                  million. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Research        Collaboration Agreement***

***Tax        Sharing Agreement***

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

**Related        Party Transactions**

*Reporting        Revenue Gross as a Principal Versus Net as an Agent*

----

***Hoffmann-La        Roche***

*(in        millions)*

|                                                                         |   | **2006** |   | **2005** |   | **2004** |   |
|------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Ex-U.S.                  product sales to Hoffmann-La Roche                  |   | $        | 359    |     | $      | 177      |   | $ | 111 |   |
|                                                                         |   |     |   |     |   |     |   |   |   |   |
| Royalties                  received from Hoffmann-La Roche                   |   | $        | 846    |     | $      | 500      |   | $ | 334 |   |
|                                                                         |   |     |   |     |   |     |   |   |   |   |
| Cost                  of sales on ex-U.S. product sales to Hoffmann-La Roche |   | $        | 268    |     | $      | 154      |   | $ | 95 |   |
|                                                                         |   |     |   |     |   |     |   |   |   |   |
| Contract                  revenue from Hoffmann-La Roche                     |   | $        | 125    |     | $      | 65       |   | $ | 73 |   |

***Novartis***

----

*(in        millions)*

|                                                                                                                                                |   | **2006** |   | **2005** |   | **2004** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Ex-U.S.                  product sales to Novartis                                                                                                  |   | $        | 5      |     | $      | 7        |   | $ | 1 |   |
|                                                                                                                                                |   |     |   |     |   |     |   |   |   |   |
| Royalties                  received from Novartis                                                                                                   |   | $        | 3      |     | $      | 1        |   | $ | 1 |   |
|                                                                                                                                                |   |     |   |     |   |     |   |   |   |   |
| Cost                  of sales on ex-U.S. product sales to Novartis                                                                                 |   | $        | 4      |     | $      | 17       |   | $ | 1 |   |
|                                                                                                                                                |   |     |   |     |   |     |   |   |   |   |
| Contract                  revenue from Novartis                                                                                                     |   | $        | 40     |     | $      | 50       |   | $ | 48 |   |
|                                                                                                                                                |   |     |   |     |   |     |   |   |   |   |
| Novartis’                  share of co-promotion profits - included in collaboration profit                  sharing                  expense |   | $        | 187    |     | $      | 136      |   | $ | 75 |   |

**Liquidity        and Capital Resources**

| **Liquidity                  and Capital Resources**                                                                                                                                                |   | **2006**                         |   | **2005** |   | **2004** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|----------|--------|----------|--------|
| December                  31:                                                                                                                                                                       |   | *(in                  millions)* |   |
| Unrestricted                  cash, cash equivalents, short-term investments and long-term marketable                  debt and equity securities                                                   |   | $                                | 4,325  |     | $      | 3,814    |   | $ | 2,781 |   |
| Net                  receivable — equity hedge instruments                                                                                                                                    |   |                             | 50     |     |   | 73       |   |   | 21 |   |
| Total                  unrestricted cash, cash equivalents, short-term investments, long-term                  marketable debt and equity securities, and equity hedge                  instruments |   | $                                | 4,375  |     | $      | 3,887    |   | $ | 2,802 |   |
| Working                  capital                                                                                                                                                                    |   | $                                | 3,547  |     | $      | 2,726    |   | $ | 2,187 |   |
| Current                  ratio                                                                                                                                                                      |   |                             | 2.6:1  |     |   | 2.6:1    |   |   | 2.8:1 |   |
| Year                  Ended December 31:                                                                                                                                                            |   |                             |   |     |   |     |   |   |   |   |
| Cash                  provided by (used in):                                                                                                                                                        |   |                             |   |     |   |     |   |   |   |   |
| Operating                  activities                                                                                                                                                               |   | $                                | 2,138  |     | $      | 2,363    |   | $ | 1,195 |   |
| Investing                  activities                                                                                                                                                               |   |                             | (1,681 | )        |   | (1,776   | )      |   | (450 | ) |
| Financing                  activities                                                                                                                                                               |   |                             | (432   | )        |   | 368      |   |   | (847 | ) |
| Capital                  expenditures (included in investing activities above)                                                                                                                      |   |                             | (1,214 | )        |   | (1,400   | )      |   | (650 | ) |

----

***Cash        Provided by Operating Activities***

***Cash        Used in Investing Activities***

----

***Cash        Used in or Provided by Financing Activities***

----

*        (shares in millions)*

|                            |   | **Total                  Number of****Shares                  Purchased** |   | **Average                  Price Paid****per                  Share** |   |
|---------------------------------|--------|---------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| January                  1-31   |   |                                                                      | 0.9    |                                                                  | $      | 88.37 |   |
| February                  1-28  |   |                                                                      | 0.7    |                                                                  |   | 85.31 |   |
| March                  1-31     |   |                                                                      | 1.0    |                                                                  |   | 84.24 |   |
| April                  1-30     |   |                                                                      | 0.7    |                                                                  |   | 80.31 |   |
| May                  1-31       |   |                                                                      | 2.1    |                                                                  |   | 78.83 |   |
| June                  1-30      |   |                                                                      | 1.2    |                                                                  |   | 79.30 |   |
| July                  1-31      |   |                                                                      | 0.9    |                                                                  |   | 79.39 |   |
| August                  1-31    |   |                                                                      | 0.9    |                                                                  |   | 80.89 |   |
| September                  1-30 |   |                                                                      | 0.9    |                                                                  |   | 79.84 |   |
| October                  1-31   |   |                                                                      | 0.3    |                                                                  |   | 83.97 |   |
| November                  1-30  |   |                                                                      | 1.4    |                                                                  |   | 80.81 |   |
| December                  1-31  |   |                                                                      | 1.2    |                                                                  |   | 82.11 |   |
| Total                           |   |                                                                      | 12.2   |                                                                  | $      | 81.45 |   |

** **
** **

**Off-Balance        Sheet Arrangements**

** **

----

*Consolidation        of Variable Interest Entities*

***Commitments***

----

***Contractual        Obligations***

|                                                                   |   | **Payments                  due by period***(in                  millions)* |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
| **Contractual                  Obligations**                           |   | **Total**                                                                   |   | **2007** |   | **2008                  and 2009** |   | **2010                  and 2011** |   | **2012                  and beyond** |   |
| Operating                  lease obligations and other(1)              |   | $                                                                           | 218    |   | $ | 24 |   | $ | 50 |   | $ | 45 |   | $ | 99 |   |
| Slough(2)                  (Financing lease)                           |   |                                                                        | 541    |   |   | 19 |   |   | 67 |   |   | 75 |   |   | 380 |   |
| Lonza(3)                  (Singapore facility agreement)               |   |                                                                        | 510    |   |   | - |   |   | 75 |   |   | 293 |   |   | 142 |   |
| Purchase                  obligations(4)                               |   |                                                                        | 1,567  |   |   | 958 |   |   | 532 |   |   | 64 |   |   | 13 |   |
| Long-term                  debt(5)                                     |   |                                                                        | 2,000  |   |   | - |   |   | - |   |   | 500 |   |   | 1,500 |   |
| Litigation-related                  and other long-term liabilities(6) |   |                                                                        | 768    |   |   | - |   |   | 748 |   |   | - |   |   | 20 |   |
| Interest                  expense on long-term debt(7)                 |   |                                                                        | 1,254  |   |   | 101 |   |   | 198 |   |   | 161 |   |   | 794 |   |
| Total                                                                  |   | $                                                                           | 6,858  |   | $ | 1,102 |   | $ | 1,670 |   | $ | 1,138 |   | $ | 2,948 |   |

| (1)                                                                                                      | Operating                  lease obligations include Owner Association Fees on buildings we                  own. See                  further discussion of our operating leases above in “Off-Balance Sheet                  Arrangements.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)                                                                                                      | See                  further discussion related to the Slough lease above in “Off-Balance Sheet                  Arrangements.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (3)                                                                                                      | Included                  in 2010 is a manufacturing milestone payment. See further discussion                  of                  the agreements with Lonza above in “Off-Balance Sheet Arrangements” and in                  Note 8, “Leases, Commitments and Contingencies,” in the Notes to                  Consolidated Financial Statements of Part II, Item 8 of this Form                  10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (4)                                                                                                      | Purchase                  obligations include commitments related to capital expenditures,                  clinical                  development, collaborations, manufacturing and research operations                  and                  other significant purchase commitments. Purchase obligations exclude                  capitalized labor and capitalized interest on construction projects.                  Included in this line are our purchase obligations under our contract                  manufacturing arrangements with Lonza Biologics, a subsidiary of                  Lonza                  Group Ltd, for commercial quantities of Rituxan and with Wyeth                  Pharmaceuticals, a division of Wyeth, for bulk supply of Herceptin,                  and                  Novartis for the manufacture of Xolair and Lucentis. See also Note                  8, “Leases, Commitments and Contingencies,” in the Notes to Consolidated                  Financial Statements of Part II, Item 8 of this Form                  10-K. |
| (5)                                                                                                      | See                  also Note                  7, “Long-Term Debt,” in the Notes to Consolidated Financial Statements of                  Part II, Item 8 of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (6)                                                                                                      | Litigation-related                  and other long-term liabilities include our litigation liabilities                  and                  other similar items which are reflected on our balance sheet. 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; this item is captured in the “2008 and 2009”                  category in the table above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (7)                                                                                                      | Interest                  expense includes the effects of an interest rate swap agreement.                  See also,                  Note 4 “Investment Securities and Financial Instruments,” in the Notes to                  Consolidated Financial Statements of Part II, Item 8 of this Form                  10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Excludes                  payment obligations associated with deferred tax                  liabilities. |

----

**Stock        Options**

***Option        Program Description***

***General        Option Information***

***Summary        of Option Activity***

*(Shares        in millions)*

|                                        |   |                                                  |   | **Options                  Outstanding** |   |
|---------------------------------------------|--------|-------------------------------------------------------|--------|------------------------------------------|--------|
|                                        |   | **Shares****Available****for                  Grant** |   | **Number                  of****Shares** |   | **Weighted****Average****Exercise                  Price** |   |
| **December 31,                  2004** |   |                                                  | 102    |                                     |   | 94 |   | $ | 32.32 |   |
| Grants                                      |   |                                                  | (20    | )                                        |   | 20 |   |   | 84.01 |   |
| Exercises                                   |   |                                                  | -      |                                     |   | (29 | ) |   | 25.88 |   |
| Cancellations                               |   |                                                  | 2      |                                     |   | (2 | ) |   | 42.16 |   |
| **December 31,                  2005** |   |                                                  | 84     |                                     |   | 83 |   | $ | 46.64 |   |
| Grants                                      |   |                                                  | (17    | )                                        |   | 17 |   |   | 79.85 |   |
| Exercises                                   |   |                                                  | -      |                                     |   | (9 | ) |   | 30.42 |   |
| Cancellations                               |   |                                                  | 3      |                                     |   | (3 | ) |   | 62.09 |   |
| **December 31,                  2006** |   |                                                  | 70     |                                     |   | 88 |   | $ | 54.53 |   |

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

*(Shares        in millions)*

|                                         |   | **Exercisable** |   | **Unexercisable**                                   |   | **Total**  |   |
|----------------------------------------------|--------|-----------------|--------|-----------------------------------------------------|--------|------------|--------|
| **As                  of December 31, 2006** |   | **Shares**      |   | **Wtd.                  Avg.****Exercise****Price** |   | **Shares** |   | **Wtd.                  Avg.****Exercise****Price** |   | **Shares** |   | **Wtd.                  Avg.****Exercise****Price** |   |
| In-the-Money                                 |   |            | 42     |                                                | $      | 32.16      |   |   | 27 |   | $ | 66.70 |   |   | 69 |   | $ | 45.81 |   |
| Out-of-the-Money(1)                          |   |            | 5      |                                                |   | 86.02      |   |   | 14 |   |   | 85.97 |   |   | 19 |   |   | 85.99 |   |
| Total                  Options Outstanding   |   |            | 47     |                                                |   |       |   |   | 41 |   |   |   |   |   | 88 |   |   |   |   |

| (1) | Out-of-the-money                  options are those options with an exercise price equal to or greater                  than                  the fair market value of Genentech Common Stock, which was $81.13                  at the                  close of business on December 29,                  2006. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Distribution        and Dilutive Effect of Options***

***Employee        and Executive Officer Option Grants***

|                                                                                                         |   | **2006*** |   |  **2005*** |   |  **2004*** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------------|--------|-----------------|--------|
| Net                  grants during the year as % of outstanding shares                                       |   |      | 1.43   | %               |   | 1.70            | %      |   | 1.83 | % |
| Grants                  to Executive Officers during the period as % of outstanding                  shares  |   |      | 0.14   | %               |   | 0.18            | %      |   | 0.25 | % |
| Grants                  to Executive Officers during the year as % of total options                  granted |   |      | 8.60   | %               |   | 9.44            | %      |   | 12.29 | % |

| * | Executive                  officers as of December 31 for the years                  presented. |
|---|-------------------------------------------------------------------------------------------------|

***Equity        Compensation Plan Information***

**********

----

| **Item                  7A.** | **QUANTITATIVE                  AND QUALITATIVE DISCLOSURES ABOUT MARKET                  RISK** |
|-------------------------------|--------------------------------------------------------------------------------------------------|

Our        VAR model utilizes historical simulation of daily market data over the past        three years and calculates market data changes using a 21-trading day holding        period to estimate expected loss in fair value at a 95% confidence level.        The        VAR model is not intended to represent actual losses but is used as a risk        estimation and management tool.

***Interest        Rate Risk***

***Foreign        Currency Exchange and Foreign Economic Conditions        Risk***

----

***Equity        Security Risks***

** **

----

***Counterparty        Credit Risks***

----

| **Item                  8.** | **FINANCIAL                  STATEMENTS AND SUPPLEMENTARY                  DATA** |
|------------------------------|-----------------------------------------------------------------------------------|

**Report        of Independent Registered Public Accounting Firm**

*The        Board of Directors and Stockholders of Genentech, Inc.*

**,**

----

**CONSOLIDATED        STATEMENTS OF INCOME **

*(in        millions, except per share amounts)*

|                                                                                                                                                                                                                               |   | **Year                  Ended December 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                                                                                                                               |   | **2006**                                     |   | **2005** |   | **2004** |   |
| **Revenues**                                                                                                                                                                                                                       |   |                                         |   |   |   |   |   |
| Product                  sales (including amounts from related parties: 2006-$364;                  2005-$184;                  2004-$112)                                                                                         |   | $                                            | 7,640  |   | $ | 5,488 |   | $ | 3,749 |   |
| Royalties                  (including amounts from related parties: 2006-$849;                  2005-$501; 2004-$335)                                                                                                              |   |                                         | 1,354  |   |   | 935 |   |   | 641 |   |
| Contract                  revenue (including amounts from related parties: 2006-$165;                  2005-$115; 2004-$121)                                                                                                       |   |                                         | 290    |   |   | 210 |   |   | 231 |   |
| **Total                  operating revenues**                                                                                                                                                                                      |   |                                         | 9,284  |   |   | 6,633 |   |   | 4,621 |   |
|                                                                                                                                                                                                                               |   |                                         |   |   |   |   |   |   |   |   |
| **Costs                  and expenses**                                                                                                                                                                                            |   |                                         |   |   |   |   |   |   |   |   |
| Cost                  of sales (including amounts for related parties: 2006-$272;                  2005-$171; 2004-$96)                                                                                                            |   |                                         | 1,181  |   |   | 1,011 |   |   | 673 |   |
| Research                  and development (including amounts for related parties: 2006-$251;                  2005-$183; 2004-$169)(including                  contract related: 2006-$185;                  2005-$144; 2004-$132) |   |                                         | 1,773  |   |   | 1,262 |   |   | 948 |   |
| Marketing,                  general and administrative                                                                                                                                                                             |   |                                         | 2,014  |   |   | 1,435 |   |   | 1,088 |   |
| Collaboration                  profit sharing (including amounts for a related party: 2006-$187;                  2005-$136; 2004-$75)                                                                                             |   |                                         | 1,005  |   |   | 823 |   |   | 594 |   |
| Recurring                  charges related to redemption                                                                                                                                                                           |   |                                         | 105    |   |   | 123 |   |   | 145 |   |
| Special                  items: litigation-related                                                                                                                                                                            |   |                                         | 54     |   |   | 58 |   |   | 37 |   |
| **Total                  costs and expenses**                                                                                                                                                                                      |   |                                         | 6,132  |   |   | 4,712 |   |   | 3,485 |   |
|                                                                                                                                                                                                                               |   |                                         |   |   |   |   |   |   |   |   |
| Operating                  income                                                                                                                                                                                                  |   |                                         | 3,152  |   |   | 1,921 |   |   | 1,136 |   |
| Other                  income (expense):                                                                                                                                                                                           |   |                                         |   |   |   |   |   |   |   |   |
| Interest                  and other income (expense), net                                                                                                                                                                          |   |                                         | 325    |   |   | 142 |   |   | 91 |   |
| Interest                  expense                                                                                                                                                                                                  |   |                                         | (74    | ) |   | (50 | ) |   | (7 | ) |
| Total                  other income, net                                                                                                                                                                                           |   |                                         | 251    |   |   | 92 |   |   | 84 |   |
| Income                  before taxes                                                                                                                                                                                               |   |                                         | 3,403  |   |   | 2,013 |   |   | 1,220 |   |
| Income                  tax provision                                                                                                                                                                                              |   |                                         | 1,290  |   |   | 734 |   |   | 435 |   |
| **Net                  income**                                                                                                                                                                                                    |   | $                                            | 2,113  |   | $ | 1,279 |   | $ | 785 |   |
|                                                                                                                                                                                                                               |   |                                         |   |   |   |   |   |   |   |   |
| **Earnings                  per share**                                                                                                                                                                                            |   |                                         |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                                                                                                              |   | $                                            | 2.01   |   | $ | 1.21 |   | $ | 0.74 |   |
| Diluted                                                                                                                                                                                                                            |   | $                                            | 1.97   |   | $ | 1.18 |   | $ | 0.73 |   |
|                                                                                                                                                                                                                               |   |                                         |   |   |   |   |   |   |   |   |
| Shares                  used to compute basic earnings per share                                                                                                                                                                   |   |                                         | 1,053  |   |   | 1,055 |   |   | 1,055 |   |
| Shares                  used to compute diluted earnings per share                                                                                                                                                                 |   |                                         | 1,073  |   |   | 1,081 |   |   | 1,079 |   |

*See        Notes to Consolidated Financial Statements.*

----

**CONSOLIDATED        STATEMENTS OF CASH FLOWS **

*(in        millions)*

|                                                                                                                |   | **Year                  Ended December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                |   | **2006**                                     |   | **2005** |   | **2004** |   |
| **Cash                  flows from operating activities**                                                           |   |                                         |   |   |   |   |   |
| Net                  income                                                                                         |   | $                                            | 2,113  |   | $ | 1,279 |   | $ | 785 |   |
| Adjustments                  to reconcile net income to net cash provided by operating                  activities: |   |                                         |   |   |   |   |   |   |   |   |
| Depreciation                  and amortization                                                                      |   |                                         | 407    |   |   | 370 |   |   | 353 |   |
| Employee                  stock-based compensation                                                                  |   |                                         | 309    |   |   | - |   |   | - |   |
| Deferred                  income taxes                                                                              |   |                                         | (112   | ) |   | (110 | ) |   | (74 | ) |
| Deferred                  revenue                                                                                   |   |                                         | (3     | ) |   | (49 | ) |   | (15 | ) |
| Litigation-related                  liabilities                                                                     |   |                                         | 51     |   |   | 51 |   |   | 35 |   |
| Excess                  tax benefit from stock-based compensation arrangements                                      |   |                                         | (179   | ) |   | - |   |   | - |   |
| Tax                  benefit from employee stock options                                                            |   |                                         | -      |   |   | 632 |   |   | 329 |   |
| Gain                  on sales of securities available-for-sale and other                                           |   |                                         | (94    | ) |   | (12 | ) |   | (15 | ) |
| Loss                  on sales and write-downs of securities available-for-sale and                  other          |   |                                         | 5      |   |   | 13 |   |   | 14 |   |
| Loss                  on fixed asset dispositions                                                                   |   |                                         | 23     |   |   | 10 |   |   | 5 |   |
| Changes                  in assets and liabilities:                                                                 |   |                                         |   |   |   |   |   |   |   |   |
| Receivables                  and other assets                                                                       |   |                                         | (628   | ) |   | (128 | ) |   | (363 | ) |
| Inventories                                                                                                         |   |                                         | (408   | ) |   | (112 | ) |   | (121 | ) |
| Investments                  in trading securities                                                                  |   |                                         | (29    | ) |   | (17 | ) |   | (76 | ) |
| Accounts                  payable, other accrued liabilities, and other long-term                  liabilities      |   |                                         | 683    |   |   | 436 |   |   | 338 |   |
| **Net                  cash provided by operating activities**                                                      |   |                                         | 2,138  |   |   | 2,363 |   |   | 1,195 |   |
| **Cash                  flows from investing activities**                                                           |   |                                         |   |   |   |   |   |   |   |   |
| Purchases                  of securities available-for-sale                                                         |   |                                         | (1,036 | ) |   | (1,000 | ) |   | (890 | ) |
| Proceeds                  from sales of securities available-for-sale                                               |   |                                         | 256    |   |   | 148 |   |   | 687 |   |
| Proceeds                  from maturities of securities available-for-sale                                          |   |                                         | 357    |   |   | 574 |   |   | 462 |   |
| Capital                  expenditures                                                                               |   |                                         | (1,214 | ) |   | (1,400 | ) |   | (650 | ) |
| Change                  in other intangible and long-term assets                                                    |   |                                         | 9      |   |   | (45 | ) |   | (64 | ) |
| Transfer                  (to) from restricted cash, net                                                            |   |                                         | (53    | ) |   | (53 | ) |   | 5 |   |
| **Net                  cash used in investing activities**                                                          |   |                                         | (1,681 | ) |   | (1,776 | ) |   | (450 | ) |
| **Cash                  flows from financing activities**                                                           |   |                                         |   |   |   |   |   |   |   |   |
| Stock                  issuances                                                                                    |   |                                         | 385    |   |   | 821 |   |   | 505 |   |
| Stock                  repurchases                                                                                  |   |                                         | (996   | ) |   | (2,016 | ) |   | (1,352 | ) |
| Excess                  tax benefit from stock-based compensation arrangements                                      |   |                                         | 179    |   |   | - |   |   | - |   |
| Repayment                  of long-term debt and noncontrolling interest                                            |   |                                         | -      |   |   | (425 | ) |   | - |   |
| Proceeds                  from issuance of long-term debt                                                           |   |                                         | -      |   |   | 1,988 |   |   | - |   |
| **Net                  cash (used in) provided by financing activities**                                            |   |                                         | (432   | ) |   | 368 |   |   | (847 | ) |
| Net                  increase (decrease) in cash and cash equivalents                                               |   |                                         | 25     |   |   | 955 |   |   | (102 | ) |
| Cash                  and cash equivalents at beginning of year                                                     |   |                                         | 1,225  |   |   | 270 |   |   | 372 |   |
| **Cash                  and cash equivalents at end of year**                                                       |   | $                                            | 1,250  |   | $ | 1,225 |   | $ | 270 |   |
| **Supplemental                  cash flow data**                                                                    |   |                                         |   |   |   |   |   |   |   |   |
| Cash                  paid during the year for:                                                                     |   |                                         |   |   |   |   |   |   |   |   |
| Interest                                                                                                            |   | $                                            | 68     |   | $ | 8 |   | $ | 7 |   |
| Income                  taxes                                                                                       |   |                                         | 1,038  |   |   | 312 |   |   | 132 |   |
| Non-cash                  investing and financing activities                                                        |   |                                         |   |   |   |   |   |   |   |   |
| Capitalization                  of construction in progress related to financing lease                  transaction |   |                                         | 128    |   |   | 94 |   |   | - |   |
| Sale                  of subsidiary in exchange for note receivable                                                 |   |                                         | 135    |   |   | - |   |   | - |   |
| Exchange                  of XOMA note receivable for a prepaid royalty and other long-term                  asset  |   |                                         | -      |   |   | 29 |   |   | - |   |

*See        Notes to Consolidated Financial Statements.*

----

**CONSOLIDATED        BALANCE SHEETS **

*(in        millions, except par value)*

|                                                                                                                                                                                                            |   | **December                  31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                                                                                            |   | **2006**                          |   | **2005** |   |
| **Assets**                                                                                                                                                                                                      |   |                              |   |   |   |
| Current                  assets                                                                                                                                                                                 |   |                              |   |   |   |
| Cash                  and cash equivalents                                                                                                                                                                      |   | $                                 | 1,250  |   | $ | 1,225 |   |
| Short-term                  investments                                                                                                                                                                         |   |                              | 1,243  |   |   | 1,140 |   |
| Accounts                  receivable - product sales (net of allowances: 2006-$92;                  2005-$84; including                  amounts from related parties: 2006-$57;                  2005-$4) |   |                              | 965    |   |   | 554 |   |
| Accounts                  receivable - royalties (including amounts from related parties:                  2006-$316;                  2005-$173)                                                          |   |                              | 453    |   |   | 297 |   |
| Accounts                  receivable - other (including amounts from related parties: 2006-$150;                  2005-$132)                                                                                    |   |                              | 248    |   |   | 199 |   |
| Inventories                                                                                                                                                                                                     |   |                              | 1,178  |   |   | 703 |   |
| Deferred                  tax assets                                                                                                                                                                            |   |                              | 278    |   |   | 167 |   |
| Prepaid                  expenses and other current assets                                                                                                                                                      |   |                              | 89     |   |   | 101 |   |
| Total                  current assets                                                                                                                                                                           |   |                              | 5,704  |   |   | 4,386 |   |
| Long-term                  marketable debt and equity securities                                                                                                                                                |   |                              | 1,832  |   |   | 1,449 |   |
| Property,                  plant and equipment, net                                                                                                                                                             |   |                              | 4,173  |   |   | 3,349 |   |
| Goodwill                                                                                                                                                                                                        |   |                              | 1,315  |   |   | 1,315 |   |
| Other                  intangible assets                                                                                                                                                                        |   |                              | 476    |   |   | 574 |   |
| Restricted                  cash and investments                                                                                                                                                                |   |                              | 788    |   |   | 735 |   |
| Deferred                  tax assets                                                                                                                                                                            |   |                              | 183    |   |   | 146 |   |
| Other                  long-term assets                                                                                                                                                                         |   |                              | 371    |   |   | 193 |   |
| **Total                  assets**                                                                                                                                                                               |   | $                                 | 14,842 |   | $ | 12,147 |   |
| **Liabilities                  and stockholders’ equity**                                                                                                                                                 |   |                              |   |   |   |   |   |
| Current                  liabilities                                                                                                                                                                            |   |                              |   |   |   |   |   |
| Accounts                  payable (including amounts to related parties: 2006-$7;                  2005-$1)                                                                                                     |   | $                                 | 346    |   | $ | 339 |   |
| Deferred                  revenue                                                                                                                                                                               |   |                              | 62     |   |   | 44 |   |
| Other                  accrued liabilities (including amounts to related parties:                  2006-$136;                  2005-$132)                                                                  |   |                              | 1,749  |   |   | 1,277 |   |
| Total                  current liabilities                                                                                                                                                                      |   |                              | 2,157  |   |   | 1,660 |   |
| Long-term                  debt                                                                                                                                                                                 |   |                              | 2,204  |   |   | 2,083 |   |
| Deferred                  revenue                                                                                                                                                                               |   |                              | 199    |   |   | 220 |   |
| Litigation-related                  and other long-term liabilities                                                                                                                                             |   |                              | 804    |   |   | 714 |   |
| Total                  liabilities                                                                                                                                                                              |   |                              | 5,364  |   |   | 4,677 |   |
| Commitments                  and contingencies (Note 8)                                                                                                                                                         |   |                              |   |   |   |   |   |
| Stockholders’                  equity                                                                                                                                                                     |   |                              |   |   |   |   |   |
| Preferred                  stock, $0.02 par value; authorized: 100 shares; none                  issued                                                                                                    |   |                              | -      |   |   | - |   |
| Common                  Stock, $0.02 par value; authorized: 3,000 shares; outstanding: 2006-1,053                  shares; 2005-1,054 shares                                                          |   |                              | 21     |   |   | 21 |   |
| Additional                  paid-in capital                                                                                                                                                                     |   |                              | 10,091 |   |   | 9,263 |   |
| Accumulated                  other comprehensive income                                                                                                                                                         |   |                              | 204    |   |   | 253 |   |
| Accumulated                  deficit, since June 30, 1999                                                                                                                                                       |   |                              | (838   | ) |   | (2,067 | ) |
| Total                  stockholders’ equity                                                                                                                                                               |   |                              | 9,478  |   |   | 7,470 |   |
| **Total                  liabilities and stockholders’ equity**                                                                                                                                           |   | $                                 | 14,842 |   | $ | 12,147 |   |

*See        Notes to Consolidated Financial Statements.*

----

**CONSOLIDATED        STATEMENTS OF STOCKHOLDERS’ EQUITY **

*(in        millions)*

|                                                                                                       |   |                              |   |        |   |            |   |              |   | **Accumulated** |   |      |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|-------------|--------|-----------------|--------|-------------------|--------|-----------------|--------|-----------|--------|
|                                                                                                       |   |                              |   |        |   | **Additional**  |   |              |   | **Other**       |   |      |   |
|                                                                                                       |   | **Common                  Stock** |   | **Paid-in** |   | **Accumulated** |   | **Comprehensive** |   |            |   |
|                                                                                                       |   | **Shares**                        |   | **Amounts** |   | **Capital**     |   | **Deficit**       |   | **Income**      |   | **Total** |   |
| **Balance                  December 31, 2003**                                                             |   |                              | 1,049  |        | $      | 21              |   | $                 | 7,360  |            | $      | (1,157    | )      | $ | 297 |   | $ | 6,521 |   |
| Comprehensive                  income                                                                      |   |                              |   |        |   |            |   |              |   |            |   |      |   |   |   |   |   |   |   |
| Net                  income                                                                                |   |                              | -      |        |   | -               |   |              | -      |            |   | 785       |   |   | - |   |   | 785 |   |
| Increase                  in unrealized gain on securities available-for-sale, net of                  tax |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | 11 |   |   | 11 |   |
| Changes                  in fair value of cash flow hedges, net of tax                                     |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | (17 | ) |   | (17 | ) |
| Comprehensive                  income                                                                      |   |                              |   |        |   |            |   |              |   |            |   |      |   |   |   |   |   | 779 |   |
| Issuance                  of stock upon exercise of options                                                |   |                              | 22     |        |   | 1               |   |              | 446    |            |   | -         |   |   | - |   |   | 447 |   |
| Income                  tax benefits realized from employee stock option exercises                         |   |                              | -      |        |   | -               |   |              | 329    |            |   | -         |   |   | - |   |   | 329 |   |
| Issuance                  of stock under employee stock purchase plan                                      |   |                              | 2      |        |   | -               |   |              | 58     |            |   | -         |   |   | - |   |   | 58 |   |
| Repurchase                  of Common Stock                                                                |   |                              | (26    | )           |   | (1              | )      |              | (191   | )               |   | (1,160    | )      |   | - |   |   | (1,352 | ) |
| **Balance                  December 31, 2004**                                                             |   |                              | 1,047  |        |   | 21              |   |              | 8,002  |            |   | (1,532    | )      |   | 291 |   |   | 6,782 |   |
| Comprehensive                  income                                                                      |   |                              |   |        |   |            |   |              |   |            |   |      |   |   |   |   |   |   |   |
| Net                  income                                                                                |   |                              | -      |        |   | -               |   |              | -      |            |   | 1,279     |   |   | - |   |   | 1,279 |   |
| Decrease                  in unrealized gain on securities available-for-sale, net of                  tax |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | (75 | ) |   | (75 | ) |
| Changes                  in fair value of cash flow hedges, net of tax                                     |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | 37 |   |   | 37 |   |
| Comprehensive                  income                                                                      |   |                              |   |        |   |            |   |              |   |            |   |      |   |   |   |   |   | 1,241 |   |
| Issuance                  of stock upon exercise of options                                                |   |                              | 29     |        |   | 1               |   |              | 745    |            |   | -         |   |   | - |   |   | 746 |   |
| Income                  tax benefits realized from employee stock option exercises                         |   |                              | -      |        |   | -               |   |              | 642    |            |   | -         |   |   | - |   |   | 642 |   |
| Issuance                  of stock under employee stock purchase plan                                      |   |                              | 2      |        |   | -               |   |              | 75     |            |   | -         |   |   | - |   |   | 75 |   |
| Repurchase                  of Common Stock                                                                |   |                              | (24    | )           |   | (1              | )      |              | (201   | )               |   | (1,814    | )      |   | - |   |   | (2,016 | ) |
| **Balance                  December 31, 2005**                                                             |   |                              | 1,054  |        |   | 21              |   |              | 9,263  |            |   | (2,067    | )      |   | 253 |   |   | 7,470 |   |
| Comprehensive                  income                                                                      |   |                              |   |        |   |            |   |              |   |            |   |      |   |   |   |   |   |   |   |
| Net                  income                                                                                |   |                              | -      |        |   | -               |   |              | -      |            |   | 2,113     |   |   | - |   |   | 2,113 |   |
| Decrease                  in unrealized gain on securities available-for-sale, net of                  tax |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | (16 | ) |   | (16 | ) |
| Changes                  in fair value of cash flow hedges, net of tax                                     |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | (27 | ) |   | (27 | ) |
| Change                  in post-retirement benefit obligation, net of tax                                  |   |                              | -      |        |   | -               |   |              | -      |            |   | -         |   |   | (6 | ) |   | (6 | ) |
| Comprehensive                  income                                                                      |   |                              |   |        |   |            |   |              |   |            |   |      |   |   |   |   |   | 2,064 |   |
| Issuance                  of stock upon exercise of options                                                |   |                              | 9      |        |   | -               |   |              | 288    |            |   | -         |   |   | - |   |   | 288 |   |
| Income                  tax benefits realized from employee stock option exercises                         |   |                              | -      |        |   | -               |   |              | 179    |            |   | -         |   |   | - |   |   | 179 |   |
| Issuance                  of stock under employee stock purchase plan                                      |   |                              | 2      |        |   | -               |   |              | 97     |            |   | -         |   |   | - |   |   | 97 |   |
| Stock-based                  compensation expense                                                          |   |                              | -      |        |   | -               |   |              | 376    |            |   | -         |   |   | - |   |   | 376 |   |
| Repurchase                  of Common Stock                                                                |   |                              | (12    | )           |   | -               |   |              | (112   | )               |   | (884      | )      |   | - |   |   | (996 | ) |
| **Balance                  December 31, 2006**                                                             |   |                              | 1,053  |        | $      | 21              |   | $                 | 10,091 |            | $      | (838      | )      | $ | 204 |   | $ | 9,478 |   |

*See        Notes to Consolidated Financial Statements.*

----

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

| **Note                  1.** | **DESCRIPTION                  OF BUSINESS** |
|------------------------------|----------------------------------------------|

***Redemption        of Our Special Common Stock***

| **Note                  2.** | **SUMMARY                  OF SIGNIFICANT ACCOUNTING                  POLICIES** |
|------------------------------|----------------------------------------------------------------------------------|

***Principles        of Consolidation***

***Use        of Estimates and Reclassifications***

***Recent        Accounting Pronouncements***

*Accounting        for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement        No.        43, Accounting for Compensated Absences*
** **
** **

----

*Accounting        for Uncertainty in Income Taxes.*
*Accounting        for Income Taxes,*

***Revenue        Recognition***

|   | · | We                  recognize revenue from product sales when there is persuasive evidence                  that an arrangement exists, title passes, the price is fixed and                  determinable, and collectibility is reasonably assured. Allowances                  are                  established for estimated                  rebates, healthcare provider contractual chargebacks, prompt pay                  sales                  discounts, product returns, and wholesaler and distributor inventory                  management allowances.                  In our domestic commercial collaboration agreements, we have primary                  responsibility for the United States (or “U.S.”) product sales                  commercialization efforts, including selling and marketing, customer                  service, order entry, distribution, shipping and billing. We record                  net                  product sales and related production and selling cost in our income                  statement line items on a gross basis since we have the manufacturing                  risk                  and/or inventory risk, and credit risk, and meet the criteria as                  a                  principal under EITF                  Issue No. 99-19, “*Reporting                  Revenue Gross as a Principal Versus Net as an Agent*”                  (or “EITF 99-19”). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Revenue        Arrangements with Multiple Deliverables,*

|   | · | We                  recognize revenue from royalties based on licensees’ sales of our products                  or products using our technologies. Royalties are recognized as                  earned in                  accordance with the contract terms when royalties from licensees                  can be                  reasonably estimated and collectibility is reasonably assured.                  For the                  majority of our royalty revenues, estimates are made using historical                  and                  forecasted sales trends and used as a basis to record amounts in                  advance                  of amounts collected. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Contract                  revenue generally includes upfront and continuing licensing fees,                  manufacturing fees, milestone payments and net reimbursements from                  collaborators on development, post-marketing and commercial costs.                  Most of                  our contract arrangements with up-front license fees were entered                  into                  prior to the effective date of July 1, 2003 for EITF 00-21. Accordingly,                  our accounting policy on contract revenue, as described below,                  is focused                  on describing transactions entered into prior to the effective                  date of                  EITF 00-21. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Nonrefundable                  upfront fees, including product opt-ins, for which no further performance                  obligations exist, are recognized as revenue on the earlier of                  when                  payments are received or collection is                  assured. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Nonrefundable                  upfront licensing fees, including product opt-ins, and certain                  guaranteed,                  time-based payments that require our continuing involvement in                  the form of                  development, manufacturing or other commercialization efforts by                  us are                  recognized as revenue: |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | ratably                  over the development period if development risk is significant,                  or |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

|   | · | ratably                  over the manufacturing period or estimated product useful life                  if                  development risk has been substantially                  eliminated. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Upfront                  manufacturing fees are recognized as revenue as the related manufacturing                  services are rendered, generally on a straight-line basis over                  the                  performance period of the longer of the manufacturing obligation                  period or                  the expected product life. Manufacturing profit is recognized when                  the                  product is shipped and title                  passes. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Fees                  associated with substantive milestones, which are contingent upon                  future                  events for which there is reasonable uncertainty as to their achievement                  at the time the agreement was entered into, are                  recognized as revenue when these milestones, as defined in the                  contract,                  are achieved. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Multiple                  element agreements, or amendments to such agreements, entered into                  after                  July 1, 2003, are evaluated under the provisions of EITF 00-21.                  We                  evaluate whether there is stand-alone value for the delivered elements                  and                  objective evidence of fair value to allocate revenue to each element                  in                  multiple element agreements. When the delivered element does not                  have                  stand-alone value or there is insufficient evidence of fair value                  for the                  undelivered element(s), we recognize the consideration for the                  combined                  unit of accounting in the same manner as the revenue is recognized                  for the                  final deliverable, which is generally ratably over the longest                  period of                  involvement. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Commercial                  collaborations resulting in a net reimbursement of development,                  post-marketing and commercial costs are recognized as revenue as                  the                  related costs are incurred. The corresponding development and                  post-marketing expenses are included in research and development                  (or                  “R&D”) expenses and the corresponding commercial costs are included                  in                  marketing, general and administrative (or “MG&A”) expenses in the                  Consolidated Statements of Income. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Product        Sales Allowances***

----

|   | · | Rebate                  allowances and accruals are comprised of both direct and indirect                  rebates.                  Direct rebates are contractual price adjustments payable to wholesalers                  and specialty pharmacies that purchase products directly from us.                  Indirect                  rebates are contractual price adjustments payable to healthcare                  providers                  and organizations, such as payers, clinics, hospitals, pharmacies                  and                  group purchasing organizations that do not purchase products directly                  from                  us. Both types of allowances are based upon definitive contractual                  agreements or legal requirements (such as Medicaid) related to                  the                  dispensing of the product by a pharmacy, clinic or hospital to                  a benefit                  plan participant. Rebate accruals are recorded in the same period                  the                  related revenue is recognized resulting in a reduction to product                  sales                  revenue and the recognition of a contra asset (if due to a wholesaler                  or                  specialty pharmacy) or a liability (if due to a third party, such                  as a                  healthcare provider) as appropriate, which are included in accounts                  receivable allowances or other accrued liabilities, respectively.                  Rebates                  are estimated using historical and other data, including patient                  usage,                  customer buying patterns, applicable contractual rebate rates and                  contract                  performance by the benefit providers. Rebate estimates are evaluated                  quarterly and may require adjustments to better align our estimates                  with                  actual results. As part of this evaluation, we review changes to                  federal                  legislation, changes to rebate contracts, changes in the level                  of                  discounts, and 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Healthcare                  provider contractual chargebacks are the result of contractual                  commitments                  by us to provide products to healthcare providers at specified                  prices or                  discounts. These contracted health care providers include (i) hospitals                  that service a disproportionately high share of economically indigent                  and                  Medicaid patients for which they receive little or no reimbursement                  (i.e.                  Disproportionate Share Hospitals or “DSH”), (ii) government-owned                  hospitals that receive discounts, and (iii) hospitals that have                  contract                  pricing for certain products usually through a group purchasing                  agreement.                  Chargebacks occur when a contracted health care provider purchases                  our                  products through an intermediary wholesaler at fixed contract prices                  that                  are lower than the list prices we charge the wholesalers. The wholesaler,                  in turn, charges us back for the difference between the price initially                  paid by the wholesaler and the contract price paid to the wholesaler                  by                  the healthcare providers. Chargebacks are accrued at the time of                  sale and                  are estimated based on historical trends, which closely approximate                  actual                  results as we generally issue credits within a few weeks of the                  time of                  sale. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Prompt                  pay sales discounts are credits granted to wholesalers for remitting                  payment on their purchases within contractually defined cash repayment                  incentive periods. The contractually defined cash repayment periods                  are                  generally 30 days; however, for newly launched products, we have                  offered                  and we may offer in the future, for a limited period of time, extended                  payment terms to wholesalers. In connection with the launch of                  Lucentis we                  have offered an extended payment terms program to certain of our                  wholesalers. This program will be in effect for 12 months ending                  June 30,                  2007. Based upon our experience that it is rare that a wholesaler                  does not                  comply with the contractual terms to earn the prompt pay sales                  discount,                  we accrue 100 percent of the prompt pay sales discounts at the                  time of                  original sale. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Wholesaler                  and distributor inventory management allowances are credits granted                  to                  wholesalers and distributors for compliance with various                  contractually-defined inventory management programs. These programs                  provide monetary incentives in the form of a credit for wholesalers                  and                  distributors to maintain consistent inventory levels at approximately                  two                  to three weeks of sales depending on the product. These wholesaler                  inventory management credits are calculated based on quarterly                  product                  purchases multiplied by a factor to determine the maximum possible credit                  for a product for the preceding quarter. Adjustments to reduce                  the maximum                  credit are made if the wholesaler does not meet and/or comply with                  the                  contractually defined metrics. These metrics include data timeliness,                  completeness and accuracy and deviations outside of the contracted                  inventory days on hand for each product. The maximum credits are                  accrued                  at the time of sale, and are typically granted to wholesaler accounts                  within 90 days after the sale. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Product                  returns allowances are established in accordance with our returns                  policy,                  which allows buyers to return our products within two months prior                  to and                  six months following product expiration. Most of our products are                  sold to                  our wholesalers with at least six months of dating prior to expiration.                  As                  part of our estimation process, we calculate historical return                  data on a                  production lot basis. Historical rates of return are determined                  by product                  and are adjusted for known or expected changes in the marketplace                  specific                  to each product. In addition, we review expiration dates to determine                  the                  remaining shelf life of each product not yet returned. Although                  product                  return allowances are accrued at the time of sale, the majority                  of returns                  take place up to two years after the                  sale. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Commercial        Collaboration Accounting***

***Research        and Development Expenses***

***Royalty        Expenses***

----

***Advertising        Expenses***

***Research        and Development Arrangements***

***Cash        and Cash Equivalents***

***Inventories***

***Investments        in Marketable and Nonmarketable Securities***

----

***Derivative        Instruments***

***Property,        Plant and Equipment***

|                                             | **Useful                  Lives**           |
|--------------------------------------------------|---------------------------------------------|
| Buildings                                        | 25                  years                   |
| Certain                  manufacturing equipment | 15                  years                   |
| Other                  equipment                 | 3                  to 8 years               |
| Leasehold                  improvements          | length                  of applicable lease |

----

***FDA        Validation Costs***

***Goodwill        and Other Intangible Assets***

***Restricted        Cash and Investments***

***Impairment        of Long-Lived Assets***

***Accounting        for Employee Stock-Based Compensation***

*Share-Based        Payment*
*Accounting        for Stock Issued to Employees*

----

*Transition        Election Related to Accounting for the Tax Effects of Share-Based Payment        Awards.*

*Accounting        for Stock-Based Compensation*

***401(k)        Plan and Other Postretirement Benefits***

** **
** **

*Employers’        Accounting for Defined Benefit Pension and Other Postretirement Plans - an        amendment of FASB Statements No. 87, 88, 106, and 132(R)*

***Income        Taxes***

----

***Earnings        Per Share***

*(in        millions)*

|                                                                                                                                     |   | **2006** |   | **2005** |   | **2004** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Numerator:**                                                                                                                           |   |     |   |     |   |     |   |
| Net                  income                                                                                                              |   | $        | 2,113  |     | $      | 1,279    |   | $ | 785 |   |
| **Denominator:**                                                                                                                         |   |     |   |     |   |     |   |   |   |   |
| Weighted-average                  shares outstanding used to compute basic earnings per                  share                           |   |     | 1,053  |     |   | 1,055    |   |   | 1,055 |   |
| Effect                  of dilutive stock options                                                                                        |   |     | 20     |     |   | 26       |   |   | 24 |   |
| Weighted-average                  shares outstanding and dilutive securities used to compute diluted                  earnings per share |   |     | 1,073  |     |   | 1,081    |   |   | 1,079 |   |

** **

***Comprehensive        Income***

*(in        millions)*

|                                                                   |   | **2006** |   | **2005** |   |
|------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net                  unrealized gains on securities available-for-sale |   | $        | 214    |     | $      | 230 |   |
| Net                  unrealized gains (losses) on cash flow hedges     |   |     | (4     | )        |   | 23 |   |
| Change                  in post-retirement benefit obligation          |   |     | (6     | )        |   | - |   |
| Accumulated                  other comprehensive income                |   | $        | 204    |     | $      | 253 |   |

----

*(in        millions)*

|                                                                                                                                                                                                           |   | **2006** |   | **2005** |   | **2004** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| (Decrease)                  increase in unrealized gains on securities available-for-sale (net                  of                  tax: 2006-$(11); 2005-$(49); 2004-$7)                                 |   | $        | (13    | )        | $      | (74      | )      | $ | 10 |   |
| Reclassification                  adjustment for net (gains) losses on securities available-for-sale                  included in net income (net of tax: 2006-$(2); 2005-$(1);                  2004-$1) |   |     | (3     | )        |   | (1       | )      |   | 1 |   |
| (Decrease)                  increase in unrealized gains on cash flow hedges (net of                  tax: 2006-$(12); 2005-$32; 2004-($14))                                                              |   |     | (18    | )        |   | 48       |   |   | (21 | ) |
| Reclassification                  adjustment for net (gains) losses on cash flow hedges included                  in net                  income (net of tax: 2006-$(6); 2005-$(7); 2004-$3)              |   |     | (9     | )        |   | (11      | )      |   | 4 |   |
| Change                  in post-retirement benefit obligation (net of tax:                  2006-$(4))                                                                                                         |   |     | (6     | )        |   | -        |   |   | - |   |
| Other                  comprehensive loss                                                                                                                                                                      |   | $        | (49    | )        | $      | (38      | )      | $ | (6 | ) |

| **Note****3.** | **Employee                  Stock-Based Compensation** |
|----------------|--------------------------------------------------------|

***Employee        Stock Plans***

----

***Adoption        of FAS 123R***

*(in        millions, except for per share data):*

|                                                                                               |   | **2006** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|
| Research                  and development                                                          |   | $        | 140    |   |
| Marketing,                  general and administrative                                             |   |     | 169    |   |
| Total                  employee stock-based compensation expense                                   |   |     | 309    |   |
| Tax                  benefit related to employee stock-based compensation                  expense |   |     | (127   | ) |
| Net                  effect on net income                                                          |   | $        | 182    |   |
| Effect                  on earnings per share:                                                     |   |     |   |   |
| Basic                                                                                              |   | $        | 0.17   |   |
| Diluted                                                                                            |   | $        | 0.17   |   |

** **

*(In        millions, except for per share data)*

|                                                                                                                                                                    |   | **2006** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
| Net                  income as reported                                                                                                                                 |   | $        | 2,113  |   |
| Deduct: Total                  employee stock-based compensation expense includable in cost of                  sales, net                  of related tax effects |   |     | (34    | ) |
| Pro                  forma net income                                                                                                                                   |   | $        | 2,079  |   |
| Earnings                  per share:                                                                                                                                    |   |     |   |   |
| Basic-as                  reported                                                                                                                                      |   | $        | 2.01   |   |
| Basic-pro                  forma                                                                                                                                        |   | $        | 1.97   |   |
|                                                                                                                                                                    |   |     |   |   |
| Diluted-as                  reported                                                                                                                                    |   | $        | 1.97   |   |
| Diluted-pro                  forma                                                                                                                                      |   | $        | 1.94   |   |

----

***Pro        Forma Information for Periods Prior to Adoption of FAS        123R***

*(In        millions, except for per share data)*

|                                                                                                                                                                                                    |   | **2005** |   | **2004** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net                  income as reported                                                                                                                                                                 |   | $        | 1,279  |     | $      | 785 |   |
| Deduct: Total                  employee stock-based compensation expense determined under the                  fair value                  based method for all awards, net of related tax effects |   |     | (175   | )        |   | (191 | ) |
| Pro                  forma net income                                                                                                                                                                   |   | $        | 1,104  |     | $      | 594 |   |
| Earnings                  per share:                                                                                                                                                                    |   |     |   |     |   |   |   |
| Basic-as                  reported                                                                                                                                                                      |   | $        | 1.21   |     | $      | 0.74 |   |
| Basic-pro                  forma                                                                                                                                                                        |   | $        | 1.05   |     | $      | 0.56 |   |
|                                                                                                                                                                                                    |   |     |   |     |   |   |   |
| Diluted-as                  reported                                                                                                                                                                    |   | $        | 1.18   |     | $      | 0.73 |   |
| Diluted-pro                  forma                                                                                                                                                                      |   | $        | 1.02   |     | $      | 0.54 |   |

***Valuation        Assumptions***

|                                     |   | **2006** |   | **2005** |   | **2004** |   |
|------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk-free                  interest rate |   |     | 4.6    | %        |   | 4.2      | %      |   | 3.4 | % |
| Dividend                  yield          |   |     | 0.0    | %        |   | 0.0      | %      |   | 0.0 | % |
| Expected                  volatility     |   |     | 27.2   | %        |   | 29.3     | %      |   | 33.3 | % |
| Expected                  term (years)   |   |     | 4.6    |     |   | 4.2      |   |   | 4.3 |   |

----

***Stock        Option Activity***

*(shares        in millions)*

|                                           |   |                                            |   | **Options                  Outstanding** |   |
|------------------------------------------------|--------|-------------------------------------------------|--------|------------------------------------------|--------|
|                                           |   | **Shares                  Available for Grant** |   | **Number                  of Shares**    |   | **Weighted-Average                  Exercise Price** |   |
| December                  31, 2003             |   |                                            | 41     |                                     |   | 96 |   | $ | 25.18 |   |
| Grants                                         |   |                                            | (21    | )                                        |   | 21 |   |   | 53.04 |   |
| Exercises                                      |   |                                            | -      |                                     |   | (21 | ) |   | 20.81 |   |
| Cancellations                                  |   |                                            | 2      |                                     |   | (2 | ) |   | 29.92 |   |
| Additional                  shares reserved(1) |   |                                            | 80     |                                     |   | - |   |   | - |   |
| December                  31, 2004             |   |                                            | 102    |                                     |   | 94 |   |   | 32.32 |   |
| Grants                                         |   |                                            | (20    | )                                        |   | 20 |   |   | 84.01 |   |
| Exercises                                      |   |                                            | -      |                                     |   | (29 | ) |   | 25.88 |   |
| Cancellations                                  |   |                                            | 2      |                                     |   | (2 | ) |   | 42.16 |   |
| December                  31, 2005             |   |                                            | 84     |                                     |   | 83 |   |   | 46.64 |   |
| Grants                                         |   |                                            | (17    | )                                        |   | 17 |   |   | 79.85 |   |
| Exercises                                      |   |                                            | -      |                                     |   | (9 | ) |   | 30.42 |   |
| Cancellations                                  |   |                                            | 3      |                                     |   | (3 | ) |   | 62.09 |   |
| December                  31, 2006             |   |                                            | 70     |                                     |   | 88 |   | $ | 54.53 |   |

| (1) | Additional                  shares have been reserved for issuance under the 2004 Equity Incentive                  Plan approved by stockholders on April 16,                  2004. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*(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****Exercisable** |   | **Weighted-Average****Remaining****Contractual                  Life**(in                  years) |   | **Weighted-Average****Exercise                  Price** |   |
| $6.27                  - $8.89                                    |   |                                                    | 0.4    |                                                                                              |   | 5.04 |   | $ | 7.62 |   |   | 0.4 |   |   | 5.04 |   | $ | 7.62 |   |
| $10.00                  - $14.35                                  |   |                                                    | 11.2   |                                                                                              |   | 4.86 |   | $ | 13.68 |   |   | 11.2 |   |   | 4.86 |   | $ | 13.68 |   |
| $15.04                  - $22.39                                  |   |                                                    | 7.8    |                                                                                              |   | 4.34 |   | $ | 20.85 |   |   | 7.8 |   |   | 4.33 |   | $ | 20.86 |   |
| $22.88                  - $33.00                                  |   |                                                    | 0.2    |                                                                                              |   | 4.49 |   | $ | 26.52 |   |   | 0.2 |   |   | 4.49 |   | $ | 26.52 |   |
| $35.63                  - $53.23                                  |   |                                                    | 32.5   |                                                                                              |   | 6.77 |   | $ | 46.85 |   |   | 21.5 |   |   | 6.43 |   | $ | 45.45 |   |
| $53.95                  - $75.90                                  |   |                                                    | 1.4    |                                                                                              |   | 7.79 |   | $ | 59.23 |   |   | 0.7 |   |   | 7.73 |   | $ | 58.39 |   |
| $78.99                  - $98.80                                  |   |                                                    | 34.8   |                                                                                              |   | 9.20 |   | $ | 82.94 |   |   | 5.6 |   |   | 8.73 |   | $ | 85.99 |   |
|                                                              |   |                                                    | 88.3   |                                                                                              |   |   |   |   |   |   |   | 47.4 |   |   |   |   |   |   |   |

----

***Stock        Repurchase Program***

** **

| **Note                  4.** | **INVESTMENT                  SECURITIES AND FINANCIAL                  INSTRUMENTS** |
|------------------------------|---------------------------------------------------------------------------------------|

***Investment        Securities***

*(in        millions)*

| **December                  31, 2006**               |   | **Amortized****Cost** |   | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   | **Estimated****Fair****Value** |   |
|------------------------------------------------------|--------|-----------------------|--------|----------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
| TOTAL                  TRADING SECURITIES            |   | $                     | 639    |                             | $      | 12                                |   | $                              | (10    | ) | $ | 641 |   |
| SECURITIES                  AVAILABLE-FOR-SALE       |   |                  |   |                             |   |                              |   |                           |   |   |   |   |   |
| Equity                  securities                   |   | $                     | 9      |                             | $      | 354                               |   | $                              | (3     | ) | $ | 360 |   |
| Preferred                  stock                     |   |                  | 226    |                             |   | 8                                 |   |                           | (3     | ) |   | 231 |   |
| Debt                  securities maturing:           |   |                  |   |                             |   |                              |   |                           |   |   |   |   |   |
| within                  1 year                       |   |                  | 1,350  |                             |   | -                                 |   |                           | (1     | ) |   | 1,349 |   |
| between                  1-5 years                   |   |                  | 1,491  |                             |   | 7                                 |   |                           | (3     | ) |   | 1,495 |   |
| between                  5-10 years                  |   |                  | 545    |                             |   | 4                                 |   |                           | (7     | ) |   | 542 |   |
| TOTAL                  SECURITIES AVAILABLE-FOR-SALE |   | $                     | 3,621  |                             | $      | 373                               |   | $                              | (17    | ) | $ | 3,977 |   |

| **December                  31, 2005**               |   | **Amortized****Cost** |   | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   | **Estimated****Fair****Value** |   |
|------------------------------------------------------|--------|-----------------------|--------|----------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
| TOTAL                  TRADING SECURITIES            |   | $                     | 615    |                             | $      | 11                                |   | $                              | (14    | ) | $ | 612 |   |
| SECURITIES                  AVAILABLE-FOR-SALE       |   |                  |   |                             |   |                              |   |                           |   |   |   |   |   |
| Equity                  securities                   |   | $                     | (3     | )                                | $      | 381                               |   | $                              | (3     | ) | $ | 375 |   |
| Preferred                  stock                     |   |                  | 201    |                             |   | 8                                 |   |                           | (3     | ) |   | 206 |   |
| Debt                  securities maturing:           |   |                  |   |                             |   |                              |   |                           |   |   |   |   |   |
| within                  1 year                       |   |                  | 1,617  |                             |   | -                                 |   |                           | (1     | ) |   | 1,616 |   |
| between                  1-5 years                   |   |                  | 1,195  |                             |   | 4                                 |   |                           | (4     | ) |   | 1,195 |   |
| between                  5-10 years                  |   |                  | 467    |                             |   | 7                                 |   |                           | (5     | ) |   | 469 |   |
| TOTAL                  SECURITIES AVAILABLE-FOR-SALE |   | $                     | 3,477  |                             | $      | 400                               |   | $                              | (16    | ) | $ | 3,861 |   |

----

*(in        millions)*

|                               |   | **Less                  Than 12 Months** |   | **12                  Months or Greater** |   | **Total**         |   |
|------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|-------------------|--------|
| December                  31, 2006 |   | **Fair****Value**                        |   | **Unrealized****Losses**                  |   | **Fair****Value** |   | **Unrealized****Losses** |   | **Fair****Value** |   | **Unrealized****Losses** |   |
| Equity                  securities |   | $                                        | 9      |                                      | $      | (3                | )      | $ | - |   | $ | - |   | $ | 9 |   | $ | (3 | ) |
| Preferred                  stock   |   |                                     | 34     |                                      |   | (1                | )      |   | 53 |   |   | (2 | ) |   | 87 |   |   | (3 | ) |
| Debt                  securities   |   |                                     | 470    |                                      |   | (1                | )      |   | 490 |   |   | (10 | ) |   | 960 |   |   | (11 | ) |
| Total                              |   | $                                        | 513    |                                      | $      | (5                | )      | $ | 543 |   | $ | (12 | ) | $ | 1,056 |   | $ | (17 | ) |

|                               |   | **Less                  Than 12 Months** |   | **12                  Months or Greater** |   | **Total**         |   |
|------------------------------------|--------|------------------------------------------|--------|-------------------------------------------|--------|-------------------|--------|
| December                  31, 2005 |   | **Fair****Value**                        |   | **Unrealized****Losses**                  |   | **Fair****Value** |   | **Unrealized****Losses** |   | **Fair****Value** |   | **Unrealized****Losses** |   |
| Equity                  securities |   | $                                        | 7      |                                      | $      | (3                | )      | $ | - |   | $ | - |   | $ | 7 |   | $ | (3 | ) |
| Preferred                  stock   |   |                                     | 33     |                                      |   | (1                | )      |   | 41 |   |   | (2 | ) |   | 74 |   |   | (3 | ) |
| Debt                  securities   |   |                                     | 846    |                                      |   | (5                | )      |   | 221 |   |   | (5 | ) |   | 1,067 |   |   | (10 | ) |
| Total                              |   | $                                        | 886    |                                      | $      | (9                | )      | $ | 262 |   | $ | (7 | ) | $ | 1,148 |   | $ | (16 | ) |

*(in        millions)*

| **Security**                                                               |   | **2006** |   | **2005** |   |
|----------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash                                                                       |   | $        | 495    |     | $      | 76 |   |
| Cash                  equivalents                                          |   |     | 755    |     |   | 1,149 |   |
| Total                  cash and cash equivalents                           |   | $        | 1,250  |     | $      | 1,225 |   |
|                                                                       |   |     |   |     |   |   |   |
| Trading                  securities                                        |   | $        | 641    |     | $      | 612 |   |
| Securities                  available-for-sale maturing within one year    |   |     | 371    |     |   | 322 |   |
| Preferred                  stock                                           |   |     | 231    |     |   | 206 |   |
| Total                  short-term investments                              |   | $        | 1,243  |     | $      | 1,140 |   |
|                                                                       |   |     |   |     |   |   |   |
| Securities                  available-for-sale maturing after one year     |   | $        | 1,472  |     | $      | 1,074 |   |
| Equity                  securities                                         |   |     | 360    |     |   | 375 |   |
| Total                  long-term marketable debt and equity securities     |   | $        | 1,832  |     | $      | 1,449 |   |
|                                                                       |   |     |   |     |   |   |   |
| Cash                                                                       |   | $        | -      |     | $      | 1 |   |
| Securities                  available-for-sale maturing within one year    |   |     | 223    |     |   | 144 |   |
| Securities                  available-for-sale maturing between 1-10 years |   |     | 565    |     |   | 590 |   |
| Total                  restricted cash and investments                     |   | $        | 788    |     | $      | 735 |   |

----

**Derivative        Financial Instruments**

***Foreign        Currency Instruments***

***Interest        Rate Swaps***

***Equity        Instruments***

----

***Estimated        Fair Value***

*(in        millions)*

|                                                 |   | **2006** |   | **2005** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|
| Assets:                                              |   |     |   |     |   |
| Foreign                  exchange forward contracts  |   | $        | -      |     | $      | 5 |   |
| Foreign                  exchange options            |   |     | 1      |     |   | 38 |   |
| Equity                  forwards                     |   |     | 47     |     |   | 58 |   |
| Equity                  collars                      |   |     | 4      |     |   | 15 |   |
| Liabilities:                                         |   |     |   |     |   |   |   |
| Foreign                  exchange forwards contracts |   |     | 3      |     |   | - |   |
| Interest                  rate swap agreements       |   |     | 12     |     |   | 10 |   |

----

| **Note                  5.** | **CONSOLIDATED                  FINANCIAL STATEMENT DETAIL** |
|------------------------------|--------------------------------------------------------------|

***Inventories***

*(in        millions)*

|                                        |   | **2006** |   | **2005** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|
| Raw                  materials and supplies |   | $        | 116    |     | $      | 79 |   |
| Work                  in process            |   |     | 818    |     |   | 438 |   |
| Finished                  goods             |   |     | 244    |     |   | 186 |   |
| Total                                       |   | $        | 1,178  |     | $      | 703 |   |

***Property,        Plant and Equipment***

*(in        millions)*

|                                                             |   | **2006** |   | **2005** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|
| At                  cost:                                        |   |     |   |     |   |
| Land                                                             |   | $        | 399    |     | $      | 376 |   |
| Land                  improvements                               |   |     | 38     |     |   | 43 |   |
| Buildings                                                        |   |     | 1,712  |     |   | 1,399 |   |
| Equipment                                                        |   |     | 1,953  |     |   | 1,614 |   |
| Leasehold                  improvements                          |   |     | 146    |     |   | 60 |   |
| Construction-in-progress                                         |   |     | 1,291  |     |   | 965 |   |
|                                                             |   |     | 5,539  |     |   | 4,457 |   |
| Less:                  accumulated depreciation and amortization |   |     | 1,366  |     |   | 1,108 |   |
| Net                  property, plant and equipment               |   | $        | 4,173  |     | $      | 3,349 |   |

----

** **

***Other        Accrued Liabilities***

*(in        millions)*

|                                                                                                                                          |   | **2006** |   | **2005** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Accrued                  compensation                                                                                                         |   | $        | 385    |     | $      | 253 |   |
| Accrued                  royalties                                                                                                            |   |     | 224    |     |   | 161 |   |
| Accrued                  clinical and other studies (including to related parties:                  2006-$67;                  2005-$77) |   |     | 218    |     |   | 221 |   |
| Accrued                  marketing and promotion costs                                                                                        |   |     | 155    |     |   | 161 |   |
| Taxes                  payable                                                                                                                |   |     | 258    |     |   | 62 |   |
| Accrued                  collaborations (including to a related party: 2006-$53;                  2005-$42)                              |   |     | 291    |     |   | 228 |   |
| Other                  (including to related parties: 2006-$16;                  2005-$13)                                                    |   |     | 218    |     |   | 191 |   |
| Total                  other accrued liabilities                                                                                              |   | $        | 1,749  |     | $      | 1,277 |   |

***Interest        and Other Income (Expense), Net***

*(in        millions)*

|                                                                            |   | **2006** |   | **2005** |   | **2004** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Gains                  on sales of biotechnology equity securities, net         |   | $        | 93     |     | $      | 9        |   | $ | 13 |   |
| Write-downs                  of biotechnology debt, equity securities and other |   |     | (4     | )        |   | (10      | )      |   | (12 | ) |
| Interest                  income                                                |   |     | 230    |     |   | 143      |   |   | 90 |   |
| Other                  miscellaneous income                                     |   |     | 6      |     |   | -        |   |   | - |   |
| Total                  interest and other income (expense), net                 |   | $        | 325    |     | $      | 142      |   | $ | 91 |   |

----

| **Note                  6.** | **OTHER                  INTANGIBLE ASSETS** |
|------------------------------|----------------------------------------------|

*(in        millions)*

|                                          |   | **2006**                        |   | **2005**                        |   |
|-----------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                          |   | **Gross****Carrying****Amount** |   | **Accumulated****Amortization** |   | **Net****Carrying****Amount** |   | **Gross****Carrying****Amount** |   | **Accumulated****Amortization** |   | **Net****Carrying****Amount** |   |
| Developed                  product technology |   | $                               | 1,194  |                            | $      | 1,003 |   | $ | 191 |   | $ | 1,194 |   | $ | 926 |   | $ | 268 |   |
| Core                  technology              |   |                            | 444    |                            |   | 393 |   |   | 51 |   |   | 444 |   |   | 372 |   |   | 72 |   |
| Tradenames                                    |   |                            | 144    |                            |   | 91 |   |   | 53 |   |   | 144 |   |   | 84 |   |   | 60 |   |
| Patents                                       |   |                            | 197    |                            |   | 78 |   |   | 119 |   |   | 167 |   |   | 64 |   |   | 103 |   |
| Other                  intangible assets      |   |                            | 98     |                            |   | 36 |   |   | 62 |   |   | 122 |   |   | 51 |   |   | 71 |   |
| Total                                         |   | $                               | 2,077  |                            | $      | 1,601 |   | $ | 476 |   | $ | 2,071 |   | $ | 1,497 |   | $ | 574 |   |

*(in        millions)*

|                                                                |   | **2006** |   | **2005** |   | **2004** |   |
|---------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Acquisition-related                  intangible assets amortization |   | $        | 105    |     | $      | 123      |   | $ | 145 |   |
| Patents                  amortization                               |   |     | 13     |     |   | 11       |   |   | 9 |   |
| Other                  intangible assets amortization               |   |     | 10     |     |   | 10       |   |   | 28 |   |
| Total                  amortization expense                         |   | $        | 128    |     | $      | 144      |   | $ | 182 |   |

*(in        millions)*

| **For                  the Year Ending December 31,**      |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
| 2007                                                       |   | $      | 129    |   |
| 2008                                                       |   |   | 127    |   |
| 2009                                                       |   |   | 78     |   |
| 2010                                                       |   |   | 28     |   |
| 2011                                                       |   |   | 26     |   |
| Thereafter                                                 |   |   | 88     |   |
| Total                  expected future annual amortization |   | $      | 476    |   |

----

| **Note                  7.** | **LONG-TERM                  DEBT** |
|------------------------------|-------------------------------------|

*(in        millions)*

| 2010       |   | $      | 500   |   |
|------------|--------|--------|-------|--------|
| 2011       |   |   | -     |   |
| Thereafter |   |   | 1,500 |   |
| Total      |   | $      | 2,000 |   |

| **Note                  8.** | **LEASES,                  COMMITMENTS AND                  CONTINGENCIES** |
|------------------------------|-----------------------------------------------------------------------------|

***Leases***

----

*Consolidation        of Variable Interest Entities*

*(in        millions)*

|                              |   | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **2011** |   | **Thereafter** |   | **Total** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
| Operating                  leases |   | $        | 23     |     | $      | 24       |   | $        | 23     |     | $      | 22             |   | $         | 22     |   | $ | 99 |   | $ | 213 |   |
| Slough                  leases    |   |     | 19     |     |   | 31       |   |     | 36     |     |   | 37             |   |      | 38     |   |   | 380 |   |   | 541 |   |
| Total                             |   | $        | 42     |     | $      | 55       |   | $        | 59     |     | $      | 59             |   | $         | 60     |   | $ | 479 |   | $ | 754 |   |

***Commitments***

----

** **

** **

***Contingencies***

----

----

** **

| **Note                  9.** | **RELATIONSHIP                  WITH ROCHE AND RELATED PARTY                  TRANSACTIONS** |
|------------------------------|----------------------------------------------------------------------------------------------|

***Licensing        Agreements***

|   | · | Hoffmann-La                  Roche’s option expires in 2015; |
|--------|--------|--------------------------------------------------------------------|

----

|   | · | Hoffmann-La                  Roche may exercise its option to license our products upon the                  occurrence                  of any of the following: (1) our decision to file an Investigational                  New Drug Application (or “IND”) for a product, (2) completion of the first                  Phase II trial for a product or (3) if Hoffmann-La Roche previously                  paid                  us a fee of $10 million to extend its option on a product, completion                  of a                  Phase III trial for that product; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | if                  Hoffmann-La Roche exercises its option to license a product, it                  has agreed                  to reimburse Genentech for development costs as follows: (1) if                  exercise occurs at the time of our decision to file an IND is filed,                  Hoffmann-La Roche will pay 50% of development costs incurred prior                  to the                  filing and 50% of development costs subsequently incurred, (2) if                  exercise occurs at the completion of the first Phase II trial,                  Hoffmann-La                  Roche will pay 50% of development costs incurred through completion                  of the                  trial, 75% of development costs subsequently incurred for the initial                  indications, and 50% of subsequent development costs for new indications,                  formulations or dosing schedules, (3) if the exercise occurs at the                  completion of a Phase III trial, Hoffmann-La Roche will pay 50%                  of                  development costs incurred through completion of Phase II, 75%                  of                  development costs incurred through completion of Phase III, and                  75% of                  development costs subsequently incurred, and $5 million of the                  option                  extension fee paid by Hoffmann-La Roche to preserve its right to                  exercise                  its option at the completion of a Phase III trial will be credited                  against                  the total development costs payable to Genentech upon the exercise                  of the                  option, and (4) each of Genentech and Hoffmann-La Roche have the                  right to                  “opt-out” of developing an additional indication for a product for which                  Hoffmann-La Roche exercised its option, and would not share the                  costs or                  benefits of the additional indication, but could “opt-back-in” within 30                  days of decision to file for approval of the indication by paying                  twice                  what they would have owed for development of the indication if                  they had                  not opted out; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | we                  agreed, in general, to manufacture for and supply to Hoffmann-La                  Roche its                  clinical requirements of our products at cost, and its commercial                  requirements at cost plus a margin of 20%; however, Hoffmann-La                  Roche will                  have the right to manufacture our products under certain                  circumstances; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hoffmann-La                  Roche has agreed to pay, for each product for which Hoffmann-La                  Roche                  exercises its option upon either a decision to file an IND or completion                  of the first Phase II trial, a royalty of 12.5% on the first $100                  million                  on its aggregate sales of that product and thereafter a royalty                  of 15% on                  its aggregate sales of that product in excess of $100 million until                  the                  later in each country of the expiration of our last relevant patent                  or 25                  years from the first commercial introduction of that product;                  and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hoffmann-La                  Roche will pay, for each product for which Hoffmann-La Roche exercises                  its                  option after completion of a Phase III trial, a royalty of 15%                  on its                  sales of that product until the later in each country of the expiration                  of                  our last relevant patent or 25 years from the first commercial                  introduction of that product; however, $5 million of any option                  extension                  fee paid by Hoffmann-La Roche will be credited against royalties                  payable                  to us in the first calendar year of sales by Hoffmann-La Roche                  in which                  aggregate sales of that product exceed $100                  million. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Research        Collaboration Agreement***

***Tax        Sharing Agreement***

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

**Related        Party Transactions **

***Hoffmann-La        Roche***

----

*(in        millions)*

|                                                                         |   | **2006** |   | **2005** |   | **2004** |   |
|------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Ex-U.S.                  product sales to Hoffmann-La Roche                  |   | $        | 359    |     | $      | 177      |   | $ | 111 |   |
|                                                                         |   |     |   |     |   |     |   |   |   |   |
| Royalties                  received from Hoffmann-La Roche                   |   | $        | 846    |     | $      | 500      |   | $ | 334 |   |
|                                                                         |   |     |   |     |   |     |   |   |   |   |
| Cost                  of sales on ex-U.S. product sales to Hoffmann-La Roche |   | $        | 268    |     | $      | 154      |   | $ | 95 |   |
|                                                                         |   |     |   |     |   |     |   |   |   |   |
| Contract                  revenue from Hoffmann-La Roche                     |   | $        | 125    |     | $      | 65       |   | $ | 73 |   |

***Novartis***

----

*(in        millions)*

|                                                                |   | **2006** |   | **2005** |   | **2004** |   |
|---------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Ex-U.S.                  product sales to Novartis                  |   | $        | 5      |     | $      | 7        |   | $ | 1 |   |
|                                                                |   |     |   |     |   |     |   |   |   |   |
| Royalties                  received from Novartis                   |   | $        | 3      |     | $      | 1        |   | $ | 1 |   |
|                                                                |   |     |   |     |   |     |   |   |   |   |
| Cost                  of sales on ex-U.S. product sales to Novartis |   | $        | 4      |     | $      | 17       |   | $ | 1 |   |
|                                                                |   |     |   |     |   |     |   |   |   |   |
| Contract                  revenue from Novartis                     |   | $        | 40     |     | $      | 50       |   | $ | 48 |   |
|                                                                |   |     |   |     |   |     |   |   |   |   |
| Collaboration                  profit sharing expense               |   | $        | 187    |     | $      | 136      |   | $ | 75 |   |

| **Note                  10.** | **CAPITAL                  STOCK** |
|-------------------------------|------------------------------------|

***Common        Stock and Special Common Stock***

***Stock        Repurchase Program***

----

| **Note                  11.** | **INCOME                  TAXES** |
|-------------------------------|-----------------------------------|

*(in        millions)*

|                                        |   | **2006** |   | **2005** |   | **2004** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                                    |   |     |   |     |   |     |   |
| Federal                                     |   | $        | 1,306  |     | $      | 723      |   | $ | 444 |   |
| State                                       |   |     | 96     |     |   | 121      |   |   | 64 |   |
| Total                  current              |   |     | 1,402  |     |   | 844      |   |   | 508 |   |
| Deferred:                                   |   |     |   |     |   |     |   |   |   |   |
| Federal                                     |   |     | (155   | )        |   | (85      | )      |   | (50 | ) |
| State                                       |   |     | 43     |     |   | (25      | )      |   | (23 | ) |
| Total                  deferred             |   |     | (112   | )        |   | (110     | )      |   | (73 | ) |
| Total                  income tax provision |   | $        | 1,290  |     | $      | 734      |   | $ | 435 |   |

|                                                           |   | **2006** |   |  **2005** |   |  **2004** |   |
|----------------------------------------------------------------|--------|----------|--------|----------------|--------|----------------|--------|
| Tax                  at U.S. statutory rate                    |   |     | 35.0   | %              |   | 35.0           | %      |   | 35.0 | % |
| Research                  and other credits                    |   |     | (2.3   | )              |   | (1.5           | )      |   | (3.6 | ) |
| Prior                  years’ items                      |   |     | 0.9    |           |   | (0.7           | )      |   | - |   |
| Export                  sales benefit                          |   |     | (0.3   | )              |   | (0.4           | )      |   | (0.5 | ) |
| State                  taxes                                   |   |     | 5.0    |           |   | 5.0            |   |   | 5.0 |   |
| Deduction                  for qualified production activities |   |     | (0.7   | )              |   | (0.8           | )      |   | - |   |
| Tax-exempt                  investment income                  |   |     | (0.2   | )              |   | (0.3           | )      |   | (0.3 | ) |
| Other                                                          |   |     | 0.5    |           |   | 0.2            |   |   | 0.1 |   |
| Effective                  tax rate                            |   |     | 37.9   | %              |   | 36.5           | %      |   | 35.7 | % |

----

*(in        millions)*

|                                                              |   | **2006** |   | **2005** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred                  tax liabilities:                        |   |     |   |     |   |
| Depreciation                                                      |   | $        | (156   | )        | $      | (189 | ) |
| Unrealized                  gain on securities available-for-sale |   |     | (144   | )        |   | (172 | ) |
| Intangibles                  - Roche transaction                  |   |     | (118   | )        |   | (160 | ) |
| Other                  intangible assets                          |   |     | (48    | )        |   | (41 | ) |
| Other                                                             |   |     | (46    | )        |   | (11 | ) |
| Total                  deferred tax liabilities                   |   |     | (512   | )        |   | (573 | ) |
| Deferred                  tax assets:                             |   |     |   |     |   |   |   |
| Capitalized                  R&D costs                        |   |     | 14     |     |   | 19 |   |
| Employee                  stock-based compensation costs          |   |     | 102    |     |   | - |   |
| Expenses                  not currently deductible                |   |     | 492    |     |   | 431 |   |
| Deferred                  revenue                                 |   |     | 101    |     |   | 106 |   |
| Investment                  basis difference                      |   |     | 203    |     |   | 209 |   |
| State                  credit carryforwards                       |   |     | 56     |     |   | 114 |   |
| Other                                                             |   |     | 5      |     |   | 7 |   |
| Total                  deferred tax assets                        |   |     | 973    |     |   | 886 |   |
| Total                  net deferred tax assets                    |   | $        | 461    |     | $      | 313 |   |

----

| **Note                  12.** | **SEGMENT,                  SIGNIFICANT CUSTOMER AND GEOGRAPHIC                  INFORMATION** |
|-------------------------------|------------------------------------------------------------------------------------------------|

*(in        millions)*

| **Product                  Sales**                    |   | **2006** |   | **2005** |   | **2004** |   |
|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net                  U.S. Product Sales               |   |     |   |     |   |     |   |
| Avastin                                               |   | $        | 1,746  |     | $      | 1,133    |   | $ | 545 |   |
| Rituxan                                               |   |     | 2,071  |     |   | 1,832    |   |   | 1,574 |   |
| Herceptin                                             |   |     | 1,234  |     |   | 747      |   |   | 479 |   |
| Lucentis                                              |   |     | 380    |     |   | -        |   |   | - |   |
| Xolair                                                |   |     | 425    |     |   | 320      |   |   | 188 |   |
| Tarceva                                               |   |     | 402    |     |   | 275      |   |   | 13 |   |
| Nutropin                  products                    |   |     | 378    |     |   | 370      |   |   | 349 |   |
| Thrombolytics                                         |   |     | 243    |     |   | 218      |   |   | 194 |   |
| Pulmozyme                                             |   |     | 199    |     |   | 186      |   |   | 157 |   |
| Raptiva                                               |   |     | 90     |     |   | 79       |   |   | 52 |   |
| Total                  U.S. product sales             |   |     | 7,169  |     |   | 5,162    |   |   | 3,551 |   |
|                                                  |   |     |   |     |   |     |   |   |   |   |
| Net                  Product Sales to Collaborators   |   |     |   |     |   |     |   |   |   |   |
| Avastin                                               |   | $        | 107    |     | $      | 50       |   | $ | 10 |   |
| Rituxan                                               |   |     | 181    |     |   | 158      |   |   | 137 |   |
| Herceptin                                             |   |     | 96     |     |   | 17       |   |   | 4 |   |
| Lucentis                                              |   |     | 1      |     |   | -        |   |   | - |   |
| Xolair                                                |   |     | 4      |     |   | 7        |   |   | 1 |   |
| Nutropin                  products                    |   |     | 8      |     |   | 5        |   |   | 5 |   |
| Thrombolytics                                         |   |     | 16     |     |   | 8        |   |   | 6 |   |
| Pulmozyme                                             |   |     | 45     |     |   | 35       |   |   | 21 |   |
| Raptiva                                               |   |     | 14     |     |   | 15       |   |   | 4 |   |
| Enbrel                                                |   |     | -      |     |   | 31       |   |   | 11 |   |
| Total                  product sales to collaborators |   |     | 471    |     |   | 326      |   |   | 198 |   |
| Total                  product sales                  |   | $        | 7,640  |     | $      | 5,488    |   | $ | 3,749 |   |

----

*(in        millions)*

|                                        |   | **2006** |   | **2005** |   | **2004** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Europe:                                     |   |     |   |     |   |     |   |
| Switzerland                                 |   | $        | 561    |     | $      | 320      |   | $ | 235 |   |
| Germany                                     |   |     | 133    |     |   | 79       |   |   | 47 |   |
| France                                      |   |     | 100    |     |   | 56       |   |   | 35 |   |
| Italy                                       |   |     | 57     |     |   | 35       |   |   | 23 |   |
| Great                  Britain              |   |     | 61     |     |   | 34       |   |   | 23 |   |
| Spain                                       |   |     | 49     |     |   | 28       |   |   | 18 |   |
| Others                                      |   |     | 121    |     |   | 73       |   |   | 51 |   |
| Japan                                       |   |     | 119    |     |   | 117      |   |   | 92 |   |
| Canada                                      |   |     | 64     |     |   | 39       |   |   | 28 |   |
| Others                                      |   |     | 181    |     |   | 91       |   |   | 44 |   |
| Total                  net foreign revenues |   | $        | 1,446  |     | $      | 872      |   | $ | 596 |   |

----

**QUARTERLY        FINANCIAL DATA (unaudited)**

*(in        millions, except per share amounts)*

|                                             |   | **2006                  Quarter Ended**(3) |   |
|--------------------------------------------------|--------|--------------------------------------------|--------|
|                                             |   | **December 31**                       |   | **September 30** |   | **June 30** |   | **March 31** |   |
| Total                  operating revenues        |   | $                                          | 2,714  |   | $ | 2,384 |   | $ | 2,199 |   | $ | 1,986 |   |
| Product                  sales                   |   |                                       | 2,244  |   |   | 1,941 |   |   | 1,810 |   |   | 1,644 |   |
| Gross                  margin from product sales |   |                                       | 1,906  |   |   | 1,644 |   |   | 1,526 |   |   | 1,382 |   |
| Net                  income(1)                   |   |                                       | 594    |   |   | 568 |   |   | 531 |   |   | 421 |   |
| Earnings                  per share:             |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |   |                                       | 0.56   |   |   | 0.54 |   |   | 0.50 |   |   | 0.40 |   |
| Diluted                                          |   |                                       | 0.55   |   |   | 0.53 |   |   | 0.49 |   |   | 0.39 |   |

|                                                |   | **2005                  Quarter Ended**(3) |   |
|-----------------------------------------------------|--------|--------------------------------------------|--------|
|                                                |   | **December 31**                       |   | **September 30** |   | **June 30** |   | **March 31** |   |
| Total                  operating revenues           |   | $                                          | 1,893  |   | $ | 1,752 |   | $ | 1,527 |   | $ | 1,462 |   |
| Product                  sales                      |   |                                       | 1,577  |   |   | 1,451 |   |   | 1,274 |   |   | 1,186 |   |
| Gross                  margin from product sales(2) |   |                                       | 1,332  |   |   | 1,215 |   |   | 1,000 |   |   | 930 |   |
| Net                  income                         |   |                                       | 339    |   |   | 359 |   |   | 296 |   |   | 284 |   |
| Earnings                  per share:                |   |                                       |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                               |   |                                       | 0.32   |   |   | 0.34 |   |   | 0.28 |   |   | 0.27 |   |
| Diluted                                             |   |                                       | 0.31   |   |   | 0.33 |   |   | 0.27 |   |   | 0.27 |   |

| (1) | Net                  income in 2006 includes $182 million, net of tax, in employee stock-based                  compensation expense related to our adoption of FAS 123R on January                  1,                  2006.                                                                                                                                                                  |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Certain                  costs and expenses of $5 million, $5 million, and $6 million for                  the                  quarterly periods ended March 31, June 30, and September 30, 2005,                  respectively, have been reclassified from MG&A expenses to cost of                  sales to conform to the fourth quarter and full year                  presentation. |
| (3) | The                  2006 and 2005 amounts were computed independently for each quarter,                  and                  the sum of the quarters may not total the annual                  amounts.                                                                                                                                                                                       |

| **Item                  9****.** | **CHANGES                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL                  DISCLOSURE** |
|----------------------------------|----------------------------------------------------------------------------------------------------------------------------|

| **Item                  9A****.** | **CONTROLS                  AND PROCEDURES** |
|-----------------------------------|----------------------------------------------|

*Evaluation        of Disclosure Controls and Procedures*

*Management’s        Annual Report on Internal Control Over Financial Reporting*
*Internal        Control-Integrated Framework*

----

----

**Report        of Independent Registered Public Accounting Firm**

*The        Board of Directors and Stockholders of Genentech, Inc.*

----

*Changes        in Internal Controls over Financial Reporting*

| **Item                  9B****.** | **OTHER                  INFORMATION** |
|-----------------------------------|----------------------------------------|

----

**PART        III**

| **Item                  10.** | **DIRECTORS,                  EXECUTIVE OFFICERS AND CORPORATE                  GOVERNANCE** |
|-------------------------------|----------------------------------------------------------------------------------------------|

| **Item                  11.** | **EXECUTIVE                  COMPENSATION** |
|-------------------------------|---------------------------------------------|

| **Item                  12.** | **SECURITY                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED                  STOCKHOLDER MATTERS** |
|-------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|

| **Item                  13.** | **CERTAIN                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR                  INDEPENDENCE** |
|-------------------------------|-----------------------------------------------------------------------------------------------------------------|

| **Item                  14.** | **PRINCIPAL                  ACCOUNTANT FEES AND                  SERVICES** |
|-------------------------------|------------------------------------------------------------------------------|

----

**PART        IV**

| **Item                  15.** | **EXHIBITS                  AND FINANCIAL STATEMENT                  SCHEDULES** |
|-------------------------------|----------------------------------------------------------------------------------|

**(a)  The        following documents are included as part of this Annual Report on Form        10-K.**

**1.  Index        to Financial Statements**

**2.  Financial        Statement Schedule**

**3.  Exhibits**

| **Exhibit                  No.** | **Description**                                                                                                             | **Location**                                                                                                                                                                                                                                                                 |
|----------------------------------|-----------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                         | Amended                  and Restated Certificate of Incorporation                                                     | Filed                  as an exhibit to our Current Report on Form 8-K filed with the                  U. S.                  Securities and Exchange Commission (or “Commission”) on July 28, 1999 and                  incorporated herein by reference.  |
| 3.2                         | Certificate                  of Amendment of Amended and Restated Certificate of                  Incorporation        | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 2000 filed                  with the Commission and incorporated herein by reference.                                                      |
| 3.3                         | Certificate                  of Amendment of Amended and Restated Certificate of                  Incorporation        | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2001 filed with the Commission and incorporated herein                  by                  reference.                       |
| 3.4                         | Certificate                  of Third Amendment of Amended and Restated Certificate of                  Incorporation  | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                       |

----

| 3.5   | Bylaws                                                                                                                                                                                                                                                                                        | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 2005 filed                  with the Commission and incorporated herein by reference.                                                      |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1   | Form                  of Common Stock Certificate                                                                                                                                                                                                                                             | Filed                  as an exhibit to Amendment No. 3 to our Registration Statement                  (No.                  333-80601) on Form S-3 filed with the Commission on July 16, 1999                  and                  incorporated herein by reference.  |
| 4.2   | Indenture,                  dated as of July 18, 2005, between the Company and Bank of New York,                  as trustee                                                                                                                                                             | Filed                  on a Current Report on Form 8-K with the Commission on July 19,                  2005 and                  incorporated herein by reference.                                                                                                     |
| 4.3   | Officers’                  Certificate of Genentech, Inc. dated July 18, 2005, including forms                  of the Company’s 4.40% Senior Notes due 2010, 4.75 Senior Notes due 2015                  and 5.25% Senior Notes due 2035                                    | Filed                  on a Current Report on Form 8-K with the Commission on July 19,                  2005 and                  incorporated herein by reference.                                                                                                     |
| 4.4   | Form                  of 4.40% Senior Note due 2010                                                                                                                                                                                                                                           | Filed                  on a Current Report on Form 8-K with the Commission on July 19,                  2005 and                  incorporated herein by reference.                                                                                                     |
| 4.5   | Form                  of 4.75% Senior Note due 2015                                                                                                                                                                                                                                           | Filed                  on a Current Report on Form 8-K with the Commission on July 19,                  2005 and                  incorporated herein by reference.                                                                                                     |
| 4.6   | Form                  of 5.25% Senior Note due 2035                                                                                                                                                                                                                                           | Filed                  on a Current Report on Form 8-K with the Commission on July 19,                  2005 and                  incorporated herein by reference.                                                                                                     |
| 4.7   | Registration                  Rights Agreement, dated as of July 18, 2005, among Genentech, Inc.                  and Citigroup Global Markets, Inc. and Goldman, Sachs & Co. as                  representatives of the initial purchasers                                          | Filed                  on a Current Report on Form 8-K with the Commission on July 19,                  2005 and                  incorporated herein by reference.                                                                                                     |
| 10.1  | Form                  of Affiliation Agreement, dated as of July 22, 1999, between Genentech                  and                  Roche Holdings, Inc.                                                                                                                                       | Filed                  as an exhibit to Amendment No. 3 to our Registration Statement                  (No.                  333-80601) on Form S-3 filed with the Commission on July 16, 1999                  and                  incorporated herein by reference.  |
| 10.2  | Amendment                  No. 1, dated October 22, 1999, to Affiliation Agreement between                  Genentech                  and Roche Holdings, Inc.                                                                                                                               | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 1999 filed with the Commission and incorporated herein                  by                  reference.                                          |
| 10.3  | Form                  of Amended and Restated Agreement, restated as of July 1, 1999,                  between                  Genentech and F. Hoffmann-La Roche Ltd regarding Commercialization                  of                  Genentech’s Products outside the United States  | Filed                  as an exhibit to Amendment No. 3 to our Registration Statement                  (No.                  333-80601) on Form S-3 filed with the Commission on July 16, 1999                  and                  incorporated herein by reference.  |
| 10.4  | Amendment                  dated March 10, 2000, to Amended and Restated Agreement between                  Genentech                  and F. Hoffmann-La Roche Ltd regarding Commercialization of Genentech’s                  Products outside the United States                      | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                       |
| 10.5  | Amendment                  dated June 26, 2000, to Amended and Restated Agreement between                  Genentech                  and F. Hoffmann-La Roche Ltd regarding Commercialization of Genentech’s                  Products outside the United States                       | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                       |

----

| 10.6   | Third                  Amendment dated April 30, 2004, to Amended and Restated Agreement                  between                  Genentech and F. Hoffmann-La Roche Ltd regarding Commercialization                  of                  Genentech’s Products outside the United States  | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                       |
|-------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7   | Form                  of Tax Sharing Agreement, dated as of July 22, 1999, between Genentech,                  Inc. and Roche Holdings, Inc.                                                                                                                                                     | Filed                  as an exhibit to Amendment No. 3 to our Registration Statement                  (No.                  333-80601) on Form S-3 filed with the Commission on July 16, 1999                  and                  incorporated herein by reference.  |
| 10.8   | Collaborative                  Agreement, dated April 13, 2004, among Genentech, F. Hoffmann-La                  Roche Ltd                  and Hoffmann-La Roche Inc.                                                                                                                           | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                       |
| 10.9   | Genentech,                  Inc. Tax Reduction Investment Plan, as amended and restated †                                                                                                                                                                                                  | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  October 31, 2006 filed with the Commission and incorporated herein                  by                  reference.                    |
| 10.10  | Genentech,                  Inc. 1990 Stock Option/Stock Incentive Plan, as amended effective                  October                  16, 1996 †                                                                                                                                         | Filed                  as an exhibit to our Registration Statement (No. 333-83157) on                  Form S-8                  filed with the Commission on July 19, 1999 and incorporated herein                  by                  reference.                     |
| 10.11  | Genentech,                  Inc. 1994 Stock Option Plan, as amended effective October 16, 1996                  †                                                                                                                                                                          | Filed                  as an exhibit to our Registration Statement (No. 333-83157) on                  Form S-8                  filed with the Commission on July 19, 1999 and incorporated herein                  by                  reference.                     |
| 10.12  | Genentech,                  Inc. 1996 Stock Option/Stock Incentive Plan, as amended effective                  October                  16, 1996 †                                                                                                                                         | Filed                  as an exhibit to our Registration Statement (No. 333-83157) on                  Form S-8                  filed with the Commission on July 19, 1999 and incorporated herein                  by                  reference.                     |
| 10.13  | Genentech,                  Inc. 1999 Stock Plan, as amended and restated as of February 13,                  2003                  †                                                                                                                                                      | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  March 31, 2003 filed with the Commission and incorporated herein                  by                  reference.                      |
| 10.14  | Genentech,                  Inc. 1999                  Stock Plan, Form of Stock Option Agreement†                                                                                                                                                                                         | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  September 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                  |
| 10.15  | Genentech,                  Inc. 1999                  Stock Plan, Form of Stock Option Agreement (Director Version)†                                                                                                                                                                      | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  September 30, 2004 filed with the Commission and incorporated herein                  by                  reference.                  |
| 10.16  | Genentech,                  Inc. 2004                  Equity Incentive Plan†                                                                                                                                                                                                              | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  March 31, 2004 filed with the Commission and incorporated herein                  by                  reference.                      |
| 10.17  | Form                  of Genentech, Inc. 2004 Equity                  Incentive Plan Nonqualified Stock Option Grant Agreement (Employee                  Version) †                                                                                                                  | Filed                  on a Current Report on Form 8-K with the Commission on September                  26, 2006,                  and incorporated herein by reference.                                                                                               |
| 10.18  | Form                  of Genentech, Inc. 2004 Equity Incentive Plan Nonqualified Stock                  Option                  Grant Agreement (Director Version) †                                                                                                                       | Filed                  on a Current Report on Form 8-K with the Commission on September                  26, 2006,                  and incorporated herein by reference.                                                                                               |
| 10.19  | Genentech,                  Inc. Supplemental Plan †                                                                                                                                                                                                                                       | Filed                  on a Current Report on Form 8-K with the Commission on February                  24, 2005                  and incorporated herein by reference.                                                                                                 |
| 10.20  | Genentech,                  Inc. 1991 Employee Stock Plan, as amended                                                                                                                                                                                                                            | Filed                  on a Current Report on Form 8-K with the Commission on April 25,                  2006, and                  incorporated herein by reference.                                                                                                   |
| 10.21  | Bonus                  Program†                                                                                                                                                                                                                                                            | Incorporated                  by reference to the description under “Bonus Program” in the Current                  Report on Form 8-K filed with the Commission on December 21,                  2006.                                                     |
| 10.22  | Form                  of Indemnification Agreement for Directors and Officers†                                                                                                                                                                                                             | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  March 31, 2005 filed with the Commission and incorporated herein                  by                  reference.                      |

----

| 10.23  | Promissory                  Note, dated as of April 5, 2001, issued to Genentech, Inc. by Richard                  H.                  Scheller†                                                                                                                          | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  September 30, 2004 filed with the Commission and incorporated herein                  by                  reference.  |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24  | Transition                  Agreement between Genentech, Inc. and Myrtle S. Potter dated August                  3,                  2005†                                                                                                                                | Filed                  on a Current Report on Form 8-K with the Commission on August 16,                  2005 and                  incorporated herein by reference.                                                                                   |
| 10.25  | First                  Amendment to Transition Agreement between Genentech, Inc. and Myrtle                  S.                  Potter dated December 29, 2005†                                                                                                          | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 2005 filed                  with the Commission and incorporated herein by reference.                                      |
| 10.26  | Master                  Lease Agreement dated as of November 1, 2004, between Genentech                  and Slough                  SSF, LLC                                                                                                                                   | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 2004 filed with the Commission and incorporated herein                  by                  reference.                          |
| 10.27  | First                  Amendment to Master Lease Agreement and First Amendment to Building                  Leases                  between Genentech and Slough SSF, LLC, dated October 2, 2006                                                                                | Filed                  herewith                                                                                                                                                                                                                         |
| 10.28  | Purchase                  and Sale Agreement and Joint Escrow Instruction, dated as of June                  16,                  2005, between Genentech and Biogen Idec Inc. *                                                                                                | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2005 filed with the Commission and incorporated herein                  by                  reference.       |
| 10.29  | Purchase                  Agreement, dated as of July 13, 2005, among Genentech, Inc. and                  Citigroup                  Global Markets, Inc. and Goldman, Sachs & Co. as representatives of                  the initial purchasers                           | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  October 31, 2005 filed with the Commission and incorporated herein                  by                  reference.    |
| 10.30  | Manufacturing                  and Supply Agreement between Genentech, Inc. and Lonza Biologics,                  Inc.                  dated December 7, 2003 *                                                                                                                | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  October 31, 2005 filed with the Commission and incorporated herein                  by                  reference.    |
| 10.31  | First                  Amendment to the Manufacturing and Supply Agreement between Genentech,                  Inc. and Lonza Biologics, Inc. dated March 14, 2005 *                                                                                                            | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 2005 filed                  with the Commission and incorporated herein by reference.                                      |
| 10.32  | Second                  Amendment to the Manufacturing and Supply Agreement between Genentech                  and                  Lonza Biologics PLC, effective as of 19 May 2006 *                                                                                          | Filed                  herewith                                                                                                                                                                                                                         |
| 10.33  | Third                  Amendment to the Manufacturing and Supply Agreement between Genentech                  and                  Lonza Biologics PLC, dated as of November 6, 2006 *                                                                                          | Filed                  herewith                                                                                                                                                                                                                         |
| 10.34  | Toll                  Manufacturing Agreement by and between Wyeth, acting through its                  Wyeth                  Pharmaceuticals Division, and Genentech, Inc. dated September 15,                  2004                  *                                       | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  October 31, 2005 filed with the Commission and incorporated herein                  by                  reference.    |
| 10.35  | First                  Amendment to the Toll                  Manufacturing Agreement by and between Wyeth, acting through its                  Wyeth                  Pharmaceuticals Division, and Genentech, Inc. dated December 8,                  2004                    | Filed                  as an exhibit to our Annual Report on Form 10-K for the year ended                  December 31, 2005 filed                  with the Commission and incorporated herein by reference.                                      |
| 10.36  | Amended                  and Restated Collaboration Agreement between Genentech, Inc. and                  Idec                  Pharmaceuticals Corporation dated as of June 19, 2003 *                                                                                        | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2006, filed with the Commission on August 3, 2006, and                  incorporated herein by reference.    |

----

| 10.37  | Letter                  Amendment dated as of August 21, 2003, to the Amended and Restated                  Collaboration Agreement between Genentech, Inc. and Idec Pharmaceuticals                  Corporation                                   | Filed                  as an exhibit to our Quarterly Report on Form 10-Q for the quarter                  ended                  June 30, 2006, filed with the Commission on August 3, 2006, and                  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.38  | Agreement                  and Plan of Merger by and among Genentech, Inc., Green Acquisition                  Corporation and Tanox, Inc., dated as of November 9, 2006                                                                            | Filed                  herewith                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.39  | Form                  of Voting Agreement between Genentech, Inc. and Certain Stockholders                  of                  Tanox, Inc.                                                                                                         | Filed                  herewith                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 23.1   | Consent                  of Independent                  Registered Public Accounting Firm                                                                                                                                                          | Filed                  herewith                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 24.1   | Power                  of Attorney                                                                                                                                                                                                                  | Reference                  is made to the signature page.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 28.1   | Description                  of the Company’s capital stock                                                                                                                                                                                   | Incorporated                  by reference to the description under the heading “Description of Capital                  Stock” relating to our Common Stock in the prospectus included in our                  Amendment No. 2 to the Registration Statement on Form S-3 (No.                  333-88651)                  filed with the Commission on October 20, 1999, and the description                  under                  the heading “Description of Capital Stock” relating to the Common Stock in                  our final prospectus filed with the Commission on October 21, 1999                  pursuant to Rule 424(b)(1) under the Securities Act of 1933, as                  amended,                  including any amendment or report filed for the purpose of updating                  that                  description.  |
| 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

**SIGNATURES**

|   |                                           |   | **GENENTECH,                  INC.**Registrant |
|--------|------------------------------------------------|--------|------------------------------------------------|
|   |                                           |   |
|   |                                           |   |                                           |   |
|   |                                           |   |                                           |   |
| Date:  |   February                  23, 2007 |   | By:                                            | /s/                  JOHN M. WHITING |
|   |                                           |   |                                           | John                  M. Whiting |
|   |                                           |   |                                           | Vice                  President, Finance and Chief                  Accounting Officer |

**POWER        OF ATTORNEY**

| **Signature**                                           |   | **Title**                                                      |   | **Date**                           |
|---------------------------------------------------------|--------|----------------------------------------------------------------|--------|------------------------------------|
|                                                    |   |                                                           |   |                               |
| **Principal                  Executive Officer:**       |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
| /s/                  ARTHUR D. LEVINSON                 |   | Chairman                  and Chief Executive Officer          |   | February                  23, 2007 |
| Arthur                  D. Levinson                     |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
| **Principal                  Financial Officer:**       |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
| /s/                  DAVID                  A. EBERSMAN |   | Executive                  Vice                  President and |   | February                  23, 2007 |
| David                  A. Ebersman                      |   | Chief                  Financial Officer                       |   |                               |
|                                                    |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
| **Principal                  Accounting Officer:**      |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
|                                                    |   |                                                           |   |                               |
| /s/                  JOHN M. WHITING                    |   | Vice                  President, Finance and                   |   | February                  23, 2007 |
| John                  M. Whiting                        |   | Chief                  Accounting Officer                      |   |                               |

----

| **Signature**                              |   | **Title** |   | **Date**                           |
|--------------------------------------------|--------|-----------|--------|------------------------------------|
|                                       |   |      |   |                               |
| **Directors:**                             |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
| /s/                  HERBERT W. BOYER      |   | Director  |   | February                  23, 2007 |
| Herbert                  W. Boyer          |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
| /s/                  WILLIAM M. BURNS      |   | Director  |   | February                  23, 2007 |
| William                  M. Burns          |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
| /s/                  ERICH HUNZIKER        |   | Director  |   | February                  23, 2007 |
| Erich                  Hunziker            |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
| /s/                  JONATHAN K.C. KNOWLES |   | Director  |   | February                  23, 2007 |
| Jonathan                  K.C. Knowles     |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
| /s/                  DEBRA L. REED         |   | Director  |   | February                  23, 2007 |
| Debra                  L. Reed             |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
|                                       |   |      |   |                               |
| /s/                  CHARLES A. SANDERS    |   | Director  |   | February                  23, 2007 |
| Charles                  A. Sanders        |   |      |   |                               |

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**SCHEDULE        II**

**GENENTECH,        INC.**

**VALUATION        AND QUALIFYING ACCOUNTS**

*(in        millions)*

|                                                 |   | **Balance                  at****Beginning****of                  Period** |   | **Addition****Charged                  to****Cost                  and****Expenses** |   | **Deductions*** |   | **Balance                  at****End                  of****Period** |   |
|------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|-----------------|--------|----------------------------------------------------------------------|--------|
| **Accounts                  receivable allowances:** |   |                                                                       |   |                                                                                 |   |            |   |                                                                 |   |
| Year                  Ended December 31, 2006:       |   | $                                                                          | 84     |                                                                                 | $      | 415             |   | $                                                                    | (407   | ) | $ | 92 |   |
| Year                  Ended December 31, 2005:       |   | $                                                                          | 62     |                                                                                 | $      | 307             |   | $                                                                    | (284   | ) | $ | 84 |   |
| Year                  Ended December 31, 2004:       |   | $                                                                          | 47     |                                                                                 | $      | 188             |   | $                                                                    | (173   | ) | $ | 62 |   |
| **Inventory                  reserves:**             |   |                                                                       |   |                                                                                 |   |            |   |                                                                 |   |   |   |   |   |
| Year                  Ended December 31, 2006:       |   | $                                                                          | 55     |                                                                                 | $      | 29              |   | $                                                                    | (16    | ) | $ | 68 |   |
| Year                  Ended December 31, 2005:       |   | $                                                                          | 46     |                                                                                 | $      | 33              |   | $                                                                    | (24    | ) | $ | 55 |   |
| Year                  Ended December 31, 2004:       |   | $                                                                          | 21     |                                                                                 | $      | 57              |   | $                                                                    | (32    | ) | $ | 46 |   |
| **Rebate                  accruals:**                |   |                                                                       |   |                                                                                 |   |            |   |                                                                 |   |   |   |   |   |
| Year                  Ended December 31, 2006:       |   | $                                                                          | 38     |                                                                                 | $      | 113             |   | $                                                                    | (104   | ) | $ | 47 |   |
| Year                  Ended December 31, 2005:       |   | $                                                                          | 35     |                                                                                 | $      | 77              |   | $                                                                    | (74    | ) | $ | 38 |   |
| Year                  Ended December 31, 2004:       |   | $                                                                          | 23     |                                                                                 | $      | 78              |   | $                                                                    | (66    | ) | $ | 35 |   |

|   | Certain                  prior year amounts have been reclassified to conform with the current                  year                  presentation.            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *      | Represents                  amounts written off or returned against the allowance or reserves,                  or                  returned against earnings. |

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