**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, 2005**

**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              **

**Documents      incorporated by reference:**

| 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 587,256,075 shares                of Common Stock held by directors and executive officers of Genentech                and                Roche Holdings, Inc. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**GENENTECH,      INC.**

**2005      Form 10-K Annual Report**

**Table      of Contents**

| **Page**                                                                 |
|--------------------------------------------------------------------------|
| PART                  I                                                  |
| Item 1                                                              | Business | 1   |
| Item 1A                                                             | Risk                  Factors | 10   |
| Item 1B                                                             | Unresolved                  Staff Comments | 22   |
| Item 2                                                              | Properties | 22   |
| Item 3                                                              | Legal                  Proceedings | 23   |
| Item 4                                                              | Submission                  of Matters                  to a Vote of Security Holders | 24   |
| Executive                  Officers                  of the Company | 25   |
|                                                                          |
| PART                  II                                                 |
| Item 5                                                              | Market for                  the Registrant’s                  Common                  Equity,                  Related Stockholder Matters                  and Issuer Purchases of Equity Securities | 27   |
| Item 6                                                              | Selected                  Financial                  Data | 28   |
| Item 7                                                              | Management’s Discussion                  and Analysis of                  Financial Condition                  and Results of Operations | 29   |
| Item 7A                                                             | Quantitative                  and                  Qualitative Disclosures About Market Risk | 53   |
| Item 8                                                              | Financial                  Statements and                  Supplementary Data | 56   |
| Item 9                                                              | Changes                  in and                  Disagreements                  with Accountants                  on Accounting                  and Financial Disclosure | 87   |
| Item 9A                                                             | Controls                  and Procedures | 87   |
| Item 9B                                                             | Other                  Information | 88   |
|                                                                     |
| PART                  III                                                |
| Item 10                                                             | Directors                  and                  Executive                  Officers of the                  Registrant | 90   |
| Item 11                                                             | Executive                  Compensation | 90   |
| Item 12                                                             | Security                  Ownership                  of Certain Beneficial Owners and                  Management                  and Related Stockholder Matters | 90   |
| Item 13                                                             | Certain                  Relationships                  and Related                  Transactions | 90   |
| Item 14                                                             | Principal                  Accountant Fees and Services | 90   |
|                                                                     |
| PART                  IV                                                 |
| Item 15                                                             | Exhibits                  and Financial Statement                  Schedules | 91   |
| SIGNATURES                                                               | 95   |

----

**PART      I**

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

**Overview**

**Marketed      Products**

*Rituxan      *

*Avastin*

*Herceptin      *

*Tarceva      *

*Xolair*

*Raptiva*

*Nutropin      *
*Nutropin      AQ *

*Activase      *

----

*TNKase      *

*Cathflo      Activase *

*Pulmozyme      *

**Licensed      Products **

*Royalty      Revenue*

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

----

*Other      Revenues*

**Products      in Development **

| **Product**                                               | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **Estimate                    of****Completion                    of****Phase*** |
|-----------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
| **Awaiting                    Regulatory Approval**  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                             |
| Avastin                                              | A                    supplemental Biologics License Application (or “sBLA”) was submitted in                    December 2005 to the U.S. Food and Drug Administration (or “FDA”) for                    Avastin in combination with 5-FU-based chemotherapy for patients                    with                    relapsed, metastatic colorectal cancer. This product is being                    developed in                    collaboration with F. Hoffmann-La Roche.  | 2006                                                                        |
| Herceptin                                            | An                    sBLA was submitted on February 15, 2006 to the FDA for the use                    of                    Herceptin to treat early-stage, HER2-positive breast cancer.                    This product                    is being developed in collaboration with F. Hoffmann-La                    Roche.                                                                                                                                                                         | 2006                                                                        |
| Lucentis                                             | A                    Biologics License Application (or “BLA”) was submitted in December 2005 to                    the FDA for the use of Lucentis (ranibizumab) to treat neovascular                    wet                    form age-related macular degeneration. This product is being                    developed in                    collaboration with Novartis Ophthalmics.                                                                                                    | 2006                                                                        |
| Rituxan                    Immunology                | An                    sBLA was submitted in August 2005 to the FDA for Rituxan to treat                    patients                    with active rheumatoid arthritis (or “RA”) who inadequately respond to an                    anti-tumor necrosis factor therapy. This product is being developed                    in                    collaboration with F. Hoffmann-La Roche and Biogen Idec.                                                                                   | 2006                                                                        |
| **Preparing                    for Filing**          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                             |
| Avastin                                              | We                    are preparing for sBLA submissions to the FDA for the use of                    Avastin in                    combination with chemotherapy for the treatment of first-line                    metastatic                    breast cancer and first-line metastatic non-squamous NSCLC. This                    product                    is being developed in collaboration with F. Hoffmann-La                    Roche.                                                     | 2006                                                                        |
| Herceptin                                            | We                    are preparing for an sBLA submission to the FDA for the use of                    Herceptin                    in the first-line metastatic setting in combination with Taxotere® for                    HER2 positive patients. This product is being developed in collaboration                    with F. Hoffmann-La Roche.                                                                                                                                              | 2006                                                                        |
| Rituxan                    Hematology/Oncology       | We                    are preparing an sBLA submission to the FDA for use of Rituxan                    for                    indolent NHL induction therapy in combination with chemotherapy                    or                    following induction chemotherapy. This product is being developed                    in                    collaboration with F. Hoffmann-La Roche and Biogen Idec.                                                                                             | 2006                                                                        |

----

| **Phase                III**                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| Avastin                                     | Avastin                is being evaluated in Phase III clinical trials in adjuvant colorectal                cancer, first-line metastatic renal cell carcinoma, hormone refractory                prostate cancer, first-line metastatic breast cancer in combination                with                several chemotherapy regimens, first-line ovarian cancer, and first-line                metastatic and locally advanced pancreatic cancer. This product is                being                developed in collaboration with F. Hoffmann-La Roche.                                                                                         | 2006-2011  |
| Rituxan                Hematology/Oncology  | Rituxan                is being evaluated in Phase III clinical trials for relapsed chronic                lymphocytic leukemia (or “CLL”). This product is being developed in                collaboration with F. Hoffmann-La Roche and Biogen Idec.                                                                                                                                                                                                                                                                                                                                                                                     | 2010       |
| Rituxan                Immunology           | Rituxan                is being evaluated in the following indications: primary progressive                multiple sclerosis, ANCA-associated vasculitis, lupus nephritis,                and                systemic lupus erythematosus. This product is being developed in                collaboration with Biogen Idec for these potential indications. In                addition, Rituxan is being evaluated in a Phase III clinical trial                for                disease-modifying anti-rheumatic drug refractory moderate-to-severe                RA in                collaboration with F. Hoffmann-La Roche and Biogen Idec.  | 2006-2009  |
| Tarceva                +/- Avastin          | Avastin                and Tarceva are being evaluated as combination therapy in second-line                NSCLC and as maintenance therapy following first-line treatment for                NSCLC.                Tarceva is being developed in collaboration with F. Hoffmann-La Roche                and                OSI.                                                                                                                                                                                                                                                                                                                      | 2008       |
| Xolair                                      | Xolair                is being evaluated in pediatric asthma. Xolair is being developed                in                collaboration with Novartis and Tanox, Inc. (or "Tanox").                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 2008       |
| **Preparing                for Phase III**  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |
| Avastin                                     | We                are preparing for Phase III clinical trials in second-line metastatic                breast cancer, adjuvant breast cancer and adjuvant NSCLC. This product                is                being developed in collaboration with F. Hoffmann-La Roche.                                                                                                                                                                                                                                                                                                                                                                             | 2006-2007  |
| Tarceva                                     | We                are preparing for a Phase III trial in adjuvant NSCLC. This product                is                being developed in collaboration with F. Hoffmann-La Roche and                OSI.                                                                                                                                                                                                                                                                                                                                                                                                                                              | 2006       |
| **Phase                II**                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |
| 2nd                Generation anti-CD20     | A                Phase I/II clinical trial in patients with RA completed enrollment                in                2005. This product is being developed in collaboration with F. Hoffmann-La                Roche and Biogen Idec.                                                                                                                                                                                                                                                                                                                                                                                                                  | 2006       |
| Omnitarg                                    | A                Phase II clinical trial in combination with chemotherapy for the                treatment                of platinum-resistant ovarian cancer was initiated in 2005. This                product                is being developed in collaboration with F. Hoffmann-La                Roche.                                                                                                                                                                                                                                                                                                                                         | 2007       |
| Rituxan                Immunology           | A                Phase II trial in relapsing remitting multiple sclerosis completed                enrollment in early 2006. This product is being developed in collaboration                with Biogen Idec.                                                                                                                                                                                                                                                                                                                                                                                                                                         | 2007       |

----

| Avastin                +/- Tarceva         | A                Phase II clinical trial in second-line NSCLC has completed enrollment.                Tarceva is being developed in collaboration with F. Hoffmann-La Roche                and                OSI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 2006  |
|-------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Xolair                                     | Patient                enrollment has been discontinued in the Phase II peanut allergy study                due                to severe hypersensitivity reactions in the oral food challenge portion                of                the trial prior to patients receiving Xolair. This decision was based                on a                recommendation from an independent Data Monitoring Committee in                conjunction with Novartis and Tanox who are our collaborators in                the                development of Xolair. We are working with the physicians and the                FDA on                determining a path forward for Xolair in this indication.  | 2006  |
| **Preparing                for Phase II**  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| Avastin                                    | We                are preparing to initiate a Phase II clinical trial for relapsed                glioblastoma multiforme. This product is being developed in collaboration                with F. Hoffmann-La Roche.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 2006  |
| Topical                VEGF                | We                are preparing to initiate a Phase II trial for treatment of diabetic                foot                ulcers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 2007  |
| **Phase                I**                 | Apo2L/TRAIL                for cancer therapy, BR3-Fc for RA and Topical Hedgehog Antagonist                for                Basal Cell Carcinoma are projects in Phase I.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 2006  |

**Related      Party Arrangements**

**Distribution      and Commercialization **

----

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

**Proprietary      Technology — Patents and Trade Secrets **

----

**Competition      **

*Rituxan: *

*Avastin:*

*Lucentis: *

*Herceptin: *

*Tarceva: *

----

*Xolair: *

*Raptiva: *

*Nutropin:*

*Thrombolytics:*

*Pulmozyme: *

**Government      Regulation**

----

----

**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                charter of the Audit Committee of our Board of Directors. |
|--------|--------|------------------------------------------------------------------------------|

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

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

|   | · | 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”), an FDA request for additional                preclinical or clinical data, 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                number of and the outcome of clinical trials currently being conducted                by                us and/or our collaborators. For example, our R&D expenses may                increase based on the number of late-stage clinical trials being                conducted                by us and/or our collaborators. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                number of products entering into development from late-stage research.                For                example, there is no guarantee that internal research efforts will                succeed                in generating sufficient data for us to make a positive development                decision or that an external candidate will be available on terms                acceptable to us. In the past, some promising candidates did not                yield                sufficiently positive preclinical results to meet our stringent                development criteria. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

|   | · | Future                levels of revenue. |
|--------|--------|------------------------------------------|

----

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

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

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

|   | · | Failure                to comply with existing or future regulatory                requirements. |
|--------|--------|--------------------------------------------------------------------------------------------------|

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

**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                contamination problems; |
|--------|--------|------------------------------------------------|

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

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

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

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

|   | · | other                similar factors. |
|--------|--------|---------------------------------------|

**We      face competition**

----

*Rituxan: *

*Avastin:*

*Lucentis: *

*Herceptin: *

*Tarceva: *

*Xolair: *

*Raptiva: *

*Nutropin:*

*Thrombolytics:*

----

*Pulmozyme: *

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

** **

**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**

----

**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, and the pricing decisions of our                competitors. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

|   | · | The                increasing use and development of alternate                therapies. |
|--------|--------|------------------------------------------------------------------------------------------|

|   | · | The                rate of market penetration by competing                products. |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | 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**

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

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

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

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

|   | · | Fluctuations                in foreign currency exchange rates. |
|--------|--------|-----------------------------------------------------------------|

|   | · | The                initiation of new contractual arrangements with other                companies. |
|--------|--------|----------------------------------------------------------------------------------------------------|

----

|   | · | Whether                  and when contract milestones are                  achieved. |
|--------|--------|--------------------------------------------------------------------------------------|

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

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

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

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

**Our      affiliation agreement with Roche could limit our ability to make acquisitions      and could have a material negative impact on our liquidity**

|   | · | 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                8, “Relationship with Roche and Related Party Transactions,” in the Notes                to Consolidated Financial Statements in Part II, Item 8 of this Form                10-K                for a discussion of our relationship with Roche and Roche’s ability to                maintain its percentage ownership interest in our stock. For more                information on our stock repurchase program, see discussion below                in                “Liquidity and Capital Resources — Cash Provided by or Used in Financing                Activities.” |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**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 have interests that are adverse      to other stockholders**

**Our      stockholders may be unable to prevent transactions that are favorable to Roche      but adverse to us**

|   | · | Competition                  by Roche affiliates with us. |
|--------|--------|-----------------------------------------------------------|

|   | · | Offering                  of corporate opportunities. |
|--------|--------|-------------------------------------------------------|

|   | · | Transactions                  with interested parties. |
|--------|--------|--------------------------------------------------------|

|   | · | Intercompany                  agreements. |
|--------|--------|-------------------------------------------|

|   | · | Provisions                  limiting the liability of specified                  employees. |
|--------|--------|---------------------------------------------------------------------------------------------|

**Potential      conflicts of interest could limit our ability to act on opportunities that      are      favorable to us but adverse to 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 impacts                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                effectiveness 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 we may adopt. |
|--------|--------|------------------------------------------------|

----

**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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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**

| **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.*                | 55   |   | Chairman                and Chief Executive Officer                                                              |
| Susan                D. Desmond-Hellmann, M.D., M.P.H.*  | 48   |   | President,                Product Development                                                                    |
| Ian                T. Clark*                             | 45   |   | Executive                Vice President, Commercial Operations                                                   |
| David                A. Ebersman*                        | 36   |   | Executive                Vice President and Chief Financial Officer                                              |
| Stephen                G. Juelsgaard, D.V.M., J.D.*      | 57   |   | Executive                Vice President, General Counsel, Secretary and Chief Compliance                Officer  |
| Richard                H. Scheller, Ph.D.*               | 52   |   | Executive                Vice President, Research                                                                |
| Patrick                Y. Yang, Ph.D.*                   | 57   |   | Executive                Vice President, Product Operations                                                      |
| Robert                L. Garnick, Ph.D.                  | 56   |   | Senior                Vice President, Regulatory, Quality and Compliance                                         |
| John                M. Whiting                           | 50   |   | Vice                President, Controller 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      Trading Symbol:**
**DNA**

**Stock      Exchange Listing**

**Common      Stockholders**

**Stock      Prices**

|                       |   | **Common                Stock** |   |
|----------------------------|--------|---------------------------------|--------|
|                       |   | **2005**                        |   | **2004** |   |
|                       |   | **High**                        |   | **Low** |   | **High** |   | **Low** |   |
| 4th                Quarter |   | $                               | 100.20 |   | $ | 79.87 |   | $ | 55.98 |   | $ | 41.00 |   |
| 3rd                Quarter |   |                            | 94.99  |   |   | 79.71 |   |   | 56.61 |   |   | 43.00 |   |
| 2nd                Quarter |   |                            | 84.10  |   |   | 54.68 |   |   | 68.25 |   |   | 50.11 |   |
| 1st                Quarter |   |                            | 59.00  |   |   | 43.90 |   |   | 56.98 |   |   | 44.74 |   |

**Stock      Repurchases**

----

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

**SELECTED      CONSOLIDATED FINANCIAL DATA**

*(in      millions, except per share amounts)*

|                                                                   | **2005** |     |      | **2004** |   |      | **2003** |      |      |    | **2002**  |      |    | **2001** |      |   |   |
|------------------------------------------------------------------------|----------|----------|-----------|----------|--------|-----------|----------|-----------|-----------|---------|-----------|-----------|---------|----------|-----------|--------|--------|
| Total                  operating revenues                              | $        | 6,633.4  |      |     |   | $         | 4,621.2  |      |      |    | $         | 3,300.2   |    |     |      |   | $      | 2,583.7 |   |   |   | $ | 2,044.1 |   |   |   |
| Product                  sales                                         |     | 5,488.1  |      |     |   |      | 3,748.9  |      |      |    |      | 2,621.4   |    |     |      |   |   | 2,163.6 |   |   |   |   | 1,742.9 |   |   |   |
| Royalties                                                              |     | 935.1    |      |     |   |      | 641.1    |      |      |    |      | 500.9     |    |     |      |   |   | 365.6 |   |   |   |   | 264.5 |   |   |   |
| Contract                  revenue                                      |     | 210.2    |      |     |   |      | 231.2    |      |      |    |      | 177.9     |    |     |      |   |   | 54.5 |   |   |   |   | 36.7 |   |   |   |
|                                                                   |     |     |      |     |   |      |     |      |      |    |      |      |    |     |      |   |   |   |   |   |   |   |   |   |   |   |
| Income                  before cumulative effect of accounting changes | $        | 1,279.0  |      |     |   | $         | 784.8    |      |      |    | $         | 610.1     |    |     |      |   | $      | 63.8 |   |   |   | $ | 155.9 |   |   |   |
| Cumulative                  effect of accounting changes, net of tax   |     | -        |      |     |   |      | -        |      |      |    |      | (47.6     | )(6)    |     | -         |   |   |   |   | (5.6 | )(9) |
| Net                  income(1)                                         | $        | 1,279.0  |  (2) | $        | 784.8  |  (5) | $        | 562.5     |  (6) | $       | 63.8      |  (8) | $       | 150.3    |  (9) |
|                                                                   |     |     |      |     |   |      |     |      |      |    |      |      |    |     |      |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  earnings per share                              | $        | 1.21     |      |     |   | $         | 0.74     |      |      |    | $         | 0.54      |    |     |      |   | $      | 0.06 |   |   |   | $ | 0.14 |   |   |   |
| Diluted                  earnings per share                            |     | 1.18     |      |     |   |      | 0.73     |      |      |    |      | 0.53      |    |     |      |   |   | 0.06 |   |   |   |   | 0.14 |   |   |   |
|                                                                   |     |     |      |     |   |      |     |      |      |    |      |      |    |     |      |   |   |   |   |   |   |   |   |   |   |   |
| Total                  assets                                          | $        | 12,146.9 |      |     |   | $         | 9,403.4  |  (4) | $         | 8,759.5 |  (4) | $         | 6,775.5 |     |      |   | $      | 7,161.5 |   |   |   |
| Long-term                  debt                                        |     | 2,083.0  |  (3) |     | 412.3  |  (4) |     | 412.3     |  (4) |    | -         |  (7) |    | -        |  (7) |
| Stockholders’                  equity                            |     | 7,469.6  |      |     |   |      | 6,782.2  |      |      |    |      | 6,520.3   |    |     |      |   |   | 5,338.9 |   |   |   |   | 5,919.8 |   |   |   |

|   | 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 with the current                year                presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (1)    | Net                income includes pre-tax recurring charges of $122.7 million in 2005,                $145.5 million in 2004, $154.3 million in 2003, $155.7 million in                2002,                and $321.8 million in 2001 related to the June 30, 1999 redemption                of our                Special Common Stock (or “the Redemption”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (2)    | Net                income in 2005 includes accrued interest and bond costs related to                the                City of Hope (or “COH”) trial judgment and net amounts paid related to                other litigation settlements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    | Includes                approximately $2 billion related to our debt issuance in July 2005,                and                reflects the repayment of the consolidated debt related to the                manufacturing facility located in Vacaville,                California.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (4)    | Upon                adoption of FIN 46, 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                $325.9 million at December 31, 2004 and $348.4 million at December                31,                2003. We also consolidated the entity's debt of $412.3 million and                noncontrolling interest of $12.7 million, which amounts are included                in                long-term debt and litigation-related and other long-term liabilities,                respectively, at December 31, 2004 and 2003. During the third quarter                of                2005, we paid $425.0 million to extinguish the debt and noncontrolling                interest related to the synthetic lease obligation. |
| (5)    | Net                income in 2004 includes accrued interest and bond costs related to                the COH                trial judgment, net of a released accrual on a separate litigation                matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (6)    | Net                income in 2003 includes litigation settlements with Amgen Inc. and                Bayer                Inc., net of accrued interest and bond costs related to the COH judgment.                Net income in 2003 also reflects our adoption of the Financial Accounting                Standards Board Interpretation No. 46 (or “FIN 46”), “Consolidation of                Variable Interest Entities,” on July 1, 2003, which resulted in a $47.6                million charge, net of $31.8 million in taxes, (or $0.05 per share)                as a                cumulative effect of an accounting change in 2003.                                                                                                                                                                                                                                                                                                 |
| (7)    | The                $149.7 million of convertible subordinated debentures was reclassified                to                current liabilities in 2001 to reflect the March 27, 2002 maturity.                We                redeemed the debentures in cash at maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (8)    | Net                income in 2002 includes $543.9 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. Net income in 2002 also reflects our                adoption                of Statement of Financial Accounting Standards (or “FAS”) 141 and 142 on                January 1, 2002. As a result of our adoption, reported net income                increased by approximately $157.6 million (or $0.15 per share) due                to the                cessation of goodwill amortization and the amortization of our trained                and                assembled workforce intangible asset.                                                                                                                                |
| (9)    | Net                income in 2001 reflects a $5.6 million charge (net of $3.8 million                in                taxes) as a cumulative effect of a change in accounting principle                and                changes in estimated fair value of certain derivatives ($10.0 million                gain) as a result of our adoption of FAS 133 on January 1,                2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

----

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

**Overview**

***The      Company***

***Major      Developments in 2005***

***Our      Strategy***

----

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

|   | · | Successful                development of biotherapeutics is highly difficult and uncertain.                Our                long-term business growth depends upon our ability to commercialize                important new therapeutics to treat unmet medical needs such as cancer.                Since the underlying biology of these diseases is not completely                understood, it is very challenging to discover and develop safe and                effective treatments, and the majority of potential new therapeutics                fail                to generate the safety and efficacy data required to obtain regulatory                approval. In addition, there is tremendous competition in the diseases                of                interest to us. Our business requires significant investments in                research                and development (or “R&D”)                over many years, often for products that fail during the R&D process.                In addition, after our products receive FDA approval, they remain                subject                to ongoing FDA regulation, including changes to the product label,                new or                revised regulatory requirements for manufacturing practices, written                advisement to physicians, or product recalls. We believe that our                continued focus on excellent science, compelling biological mechanisms,                and designing high quality clinical trials to address significant                medical                needs positions us                well to deliver sustainable growth. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | 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 involved manufacturing process                or                FDA action (see above 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” of “Risk Factors” in                Part I, Item 1A of this Form 10-K). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                Medicare                Prescription Drug Improvement and Modernization Act                (or “Medicare Act”) was enacted into law in December 2003. On November 3,                2004, the 2005 Physician Fee Schedule and Hospital Outpatient Prospective                Payment System Final Rules were announced and were in-line with our                expectations. As                Centers                for Medicare and Medicaid Services (or “CMS”)                is our single largest payer, the new rules represented an important                area                of focus in 2005. To                date, we have not seen any detectable effects of the new rules on                our                product sales. We continue to anticipate minimal effects on our revenues                in 2006. On November 2, 2005, CMS released its Final Rule with comment                on                the Medicare Part B Competitive Acquisition Program (or “CAP”). The CAP                option, which the CMS expects to begin in July 2006, required under                the                Medicare Act, will be available to physicians providing services                under                Part B of Medicare. Under the CAP, physicians could choose to either                obtain drugs directly from qualified CAP vendors, or continue to                purchase                drugs directly and be reimbursed by CMS at the Average Selling Price                + 6%                rate. Although CMS is still finalizing details of the program, we                anticipate that the impact of the program on our sales will be minimal. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | With                respect to follow-on biologics, we believe that current technology                cannot                prove a follow-on biotechnology product to be safe and effective                outside                the New Drug Application and Biologics License Application (or “BLA”)                process. We filed a Citizen Petition with the FDA in April 2004 requesting                that the agency re-assess its approach to approvals of follow-on                biologics                and put processes in place to protect trade secrets and confidential                information from use by others. The FDA initiated a public process                to                discuss the complex scientific issues surrounding follow-on biologics                and                we participated in the FDA Stakeholder meeting in September 2004.                Following this meeting, the FDA and Drug Information Association                held a                scientific workshop in February 2005, which we hope will be followed                by a                similar public discussion of                the |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | 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. During 2005, we experienced                a 25% growth in the number of employees to over 9,500 employees                company-wide as of December 31, 2005. This significant growth in                employees                is challenging to manage and 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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

***Legal      Contingencies***

** **

***Product      Sales Allowances***

----

***Royalties***

***Income      Taxes***

***Inventories***

***Valuation      of Stock Options***

----

----

**Results      of Operations **

*(In      millions)*

|                                                                          |   |     |    |     |   |     |   | **Annual                Percent****Change** |    |
|-------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|---------------------------------------------|---------|
|                                                                          |   | **2005** |    | **2004** |   | **2003** |   | **2005/2004**                               |    |  **2004/2003** |   |
| Product                sales                                                  |   | $        | 5,488.1 |     | $      | 3,748.9  |   | $                                           | 2,621.4 |   |   | 46 | % |   | 43 | % |
| Royalties                                                                     |   |     | 935.1   |     |   | 641.1    |   |                                        | 500.9   |   |   | 46 |   |   | 28 |   |
| Contract                revenue                                               |   |     | 210.2   |     |   | 231.2    |   |                                        | 177.9   |   |   | (9 | ) |   | 30 |   |
| Total                operating revenues                                       |   |     | 6,633.4 |     |   | 4,621.2  |   |                                        | 3,300.2 |   |   | 44 |   |   | 40 |   |
| Cost                of sales                                                  |   |     | 1,011.1 |     |   | 672.5    |   |                                        | 480.1   |   |   | 50 |   |   | 40 |   |
| Research                and development                                       |   |     | 1,261.8 |     |   | 947.5    |   |                                        | 722.0   |   |   | 33 |   |   | 31 |   |
| Marketing,                general and administrative                          |   |     | 1,435.0 |     |   | 1,088.2  |   |                                        | 794.8   |   |   | 32 |   |   | 37 |   |
| Collaboration                profit sharing                                   |   |     | 823.1   |     |   | 593.6    |   |                                        | 457.5   |   |   | 39 |   |   | 30 |   |
| Recurring                charges related to redemption                        |   |     | 122.7   |     |   | 145.5    |   |                                        | 154.3   |   |   | (16 | ) |   | (6 | ) |
| Special                items: litigation-related                         |   |     | 57.8    |     |   | 37.1     |   |                                        | (113.1  | ) |   | 56 |   |   | * |   |
| Total                costs and expenses                                       |   |     | 4,711.5 |     |   | 3,484.4  |   |                                        | 2,495.6 |   |   | 35 |   |   | 40 |   |
| Operating                income                                               |   |     | 1,921.9 |     |   | 1,136.8  |   |                                        | 804.6   |   |   | 69 |   |   | 41 |   |
| Other                income (expense):                                        |   |     |    |     |   |     |   |                                        |    |   |   |   |   |   |   |   |
| Interest                and other income (expense), net                       |   |     | 140.9   |     |   | 90.0     |   |                                        | 95.7    |   |   | 57 |   |   | (6 | ) |
| Interest                expense                                               |   |     | (49.9   | )        |   | (7.4     | )      |                                        | (2.9    | ) |   | 574 |   |   | 155 |   |
| Total                other income, net                                        |   |     | 91.0    |     |   | 82.6     |   |                                        | 92.8    |   |   | 10 |   |   | (11 | ) |
| Income                before taxes and cumulative effect of accounting change |   |     | 2,012.9 |     |   | 1,219.4  |   |                                        | 897.4   |   |   | 65 |   |   | 36 |   |
| Income                tax provision                                           |   |     | 733.9   |     |   | 434.6    |   |                                        | 287.3   |   |   | 69 |   |   | 51 |   |
| Income                before cumulative effect of accounting change           |   |     | 1,279.0 |     |   | 784.8    |   |                                        | 610.1   |   |   | 63 |   |   | 29 |   |
| Cumulative                effect of accounting change, net of tax             |   |     | -       |     |   | -        |   |                                        | (47.6   | ) |   | - |   |   | * |   |
| Net                income                                                     |   | $        | 1,279.0 |     | $      | 784.8    |   | $                                           | 562.5   |   |   | 63 |   |   | 40 |   |
| Earnings                per share:                                            |   |     |    |     |   |     |   |                                        |    |   |   |   |   |   |   |   |
| Basic:                                                                        |   |     |    |     |   |     |   |                                        |    |   |   |   |   |   |   |   |
| Earnings                before cumulative effect of accounting change         |   | $        | 1.21    |     | $      | 0.74     |   | $                                           | 0.59    |   |   | 64 |   |   | 25 |   |
| Cumulative                effect of accounting change, net of tax             |   |     | -       |     |   | -        |   |                                        | (0.05   | ) |   | - |   |   | * |   |
| Net                earnings per share                                         |   | $        | 1.21    |     | $      | 0.74     |   | $                                           | 0.54    |   |   | 64 |   |   | 37 |   |
| Diluted:                                                                      |   |     |    |     |   |     |   |                                        |    |   |   |   |   |   |   |   |
| Earnings                before cumulative effect of accounting change         |   | $        | 1.18    |     | $      | 0.73     |   | $                                           | 0.58    |   |   | 62 |   |   | 26 |   |
| Cumulative                effect of accounting change, net of tax             |   |     | -       |     |   | -        |   |                                        | (0.05   | ) |   | - |   |   | * |   |
| Net                earnings per share                                         |   | $        | 1.18    |     | $      | 0.73     |   | $                                           | 0.53    |   |   | 62 | % |   | 38 | % |
| Pretax                operating margin                                        |   |     | 29      | %        |   | 25       | %      |                                        | 24      | % |   |   |   |   |   |   |
| COS                as a % of product sales                                    |   |     | 18      |     |   | 18       |   |                                        | 18      |   |   |   |   |   |   |   |
| R&D                as a % of operating revenues                           |   |     | 19      |     |   | 21       |   |                                        | 22      |   |   |   |   |   |   |   |
| MG&A                as a % of operating revenues                          |   |     | 22      |     |   | 24       |   |                                        | 24      |   |   |   |   |   |   |   |
| NI                as a % of operating revenues                                |   |     | 19      |     |   | 17       |   |                                        | 17      |   |   |   |   |   |   |   |

|   | Percentages                in this table and throughout our discussion and analysis of financial                condition and results of operations may reflect rounding                adjustments. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *      | Calculation                not meaningful.                                                                                                                                                           |

***Total      Operating Revenues***

----

***Total      Product Sales***

*(In      millions)*

|                                              |   |     |    |     |   |     |   | **Annual                Percent****Change** |    |
|---------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|---------------------------------------------|---------|
| **Product                Sales**                  |   | **2005** |    | **2004** |   | **2003** |   | **2005/2004**                               |    | **2004/2003** |   |
| Net                U.S. Product Sales             |   |     |    |     |   |     |   |                                        |    |   |   |
| Rituxan                                           |   | $        | 1,831.4 |     | $      | 1,574.0  |   | $                                           | 1,360.2 |   |   | 16 | % |   | 16 | % |
| Avastin                                           |   |     | 1,132.9 |     |   | 544.6    |   |                                        | -       |   |   | 108 |   |   | - |   |
| Herceptin                                         |   |     | 747.2   |     |   | 479.0    |   |                                        | 406.0   |   |   | 56 |   |   | 18 |   |
| Tarceva                                           |   |     | 274.9   |     |   | 13.3     |   |                                        | -       |   |   | * |   |   | - |   |
| Xolair                                            |   |     | 320.6   |     |   | 187.6    |   |                                        | 25.1    |   |   | 71 |   |   | 647 |   |
| Raptiva                                           |   |     | 79.2    |     |   | 52.4     |   |                                        | 1.4     |   |   | 51 |   |   | * |   |
| Nutropin                products                  |   |     | 370.5   |     |   | 348.8    |   |                                        | 319.5   |   |   | 6 |   |   | 9 |   |
| Thrombolytics                                     |   |     | 218.5   |     |   | 194.4    |   |                                        | 181.7   |   |   | 12 |   |   | 7 |   |
| Pulmozyme                                         |   |     | 186.5   |     |   | 157.1    |   |                                        | 143.7   |   |   | 19 |   |   | 9 |   |
| Total                U.S. product sales           |   |     | 5,161.7 |     |   | 3,551.2  |   |                                        | 2,437.6 |   |   | 45 |   |   | 46 |   |
| Net                product sales to collaborators |   |     | 326.4   |     |   | 197.7    |   |                                        | 183.8   |   |   | 65 |   |   | 8 |   |
| Total                product sales                |   | $        | 5,488.1 |     | $      | 3,748.9  |   | $                                           | 2,621.4 |   |   | 46 |   |   | 43 |   |

| * | Calculation                not meaningful. |
|---|--------------------------------------------|

*Rituxan*

----

*Avastin*

*Herceptin*

----

*Tarceva*

** **
** **

*Xolair*

*Raptiva*

*Nutropin      Products*

*Thrombolytics*

** **

----

*Pulmozyme*

*Sales      to Collaborators*

***Royalties***

***Contract      Revenues***

----

** **

***Cost      of Sales***

** **

***Research      and Development***

*(in      millions)*

|                                        |   |     |    |     |   |     |   | **Annual                Percent****Change** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|----------|--------|---------------------------------------------|--------|
| **Research                and Development** |   | **2005** |    | **2004** |   | **2003** |   | **2005/2004**                               |   | **2004/2003** |   |
| Product                development          |   | $        | 763.0   |     | $      | 540.7    |   | $                                           | 445.6  |   |   | 41 | % |   | 21 | % |
| Post-marketing                              |   |     | 172.2   |     |   | 127.5    |   |                                        | 81.0   |   |   | 35 |   |   | 57 |   |
| Total                development            |   |     | 935.2   |     |   | 668.2    |   |                                        | 526.6  |   |   | 40 |   |   | 27 |   |
| Research                                    |   |     | 234.9   |     |   | 217.7    |   |                                        | 152.4  |   |   | 8 |   |   | 43 |   |
| In-licensing                                |   |     | 91.7    |     |   | 61.6     |   |                                        | 43.0   |   |   | 49 |   |   | 43 |   |
| Total                                       |   | $        | 1,261.8 |     | $      | 947.5    |   | $                                           | 722.0  |   |   | 33 |   |   | 31 |   |

*Development: *

----

*Research: *
** **

*In-licensing: *
** **

***Marketing,      General and Administrative***

----

***Collaboration      Profit Sharing***

***Recurring      Charges Related to Redemption***

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

** **

***Operating      Income***

** **

----

***Other      Income (Expense)***

|                                                                       |   |                           |   |     |   |         |   | **Annual                Percent Change** |   |
|----------------------------------------------------------------------------|--------|--------------------------------|--------|----------|--------|--------------|--------|------------------------------------------|--------|
|                                                                       |   | **2005**                       |   | **2004** |   | **2003**     |   | **2005/2004**                            |   |  **2004/2003** |   |
|                                                                       |   | *(in                millions)* |   |     |   |    |   |
| Gains                on sales of biotechnology equity securities and other |   | $                              | 9.1    |     | $      | 11.9         |   | $                                        | 21.1   |   |   | (24 | )% |   | (44 | )% |
| Losses                on biotechnology debt, equity securities and other   |   |                           | (10.1  | )        |   | (12.4        | )      |                                     | (3.8   | ) |   | (19 | ) |   | 226 |   |
| Interest                income                                             |   |                           | 141.9  |     |   | 90.5         |   |                                     | 78.4   |   |   | 57 |   |   | 15 |   |
| Interest                expense                                            |   |                           | (49.9  | )        |   | (7.4         | )      |                                     | (2.9   | ) |   | 574 |   |   | 155 |   |
| Total                other income, net                                     |   | $                              | 91.0   |     | $      | 82.6         |   | $                                        | 92.8   |   |   | 10 |   |   | (11 | ) |

***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 a Phase                II trial for a product or (3) if Hoffmann-La Roche previously paid                us a                fee of $10.0 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 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 a 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 indication,                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 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   |   | $5.0                  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 Rocheexercised its option,                  and would                  not share the costs or benefits of the additional indication, but                  could                  “opt-back-in” before 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 with the                FDA or                completion of the Phase II trials, a royalty of 12.5% on the first                $100.0                million on its aggregate sales of that product and thereafter a royalty                of                15% on its aggregate sales of that product in excess of $100.0 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 the Phase III trials, 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, $5.0 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 $100.0                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***

** **

----

** **

***Novartis***

** **

** **

----

**Liquidity      and Capital Resources**

| **Liquidity                and Capital Resources**                                                                                                                                            |   | **2005**                       |     | **2004** |   | **2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|----------|----------|--------|----------|--------|
| December                31:                                                                                                                                                                   |   | *(in                millions)* |     |
| Unrestricted                cash, cash equivalents, short-term investments and long-term marketable                debt and equity securities                                                 |   | $                              | 3,813.9  |     | $      | 2,780.4  |   | $ | 2,934.7 |   |
| Net                receivable — equity hedge instruments                                                                                                                                |   |                           | 73.3     |     |   | 21.3     |   |   | 121.9 |   |
| Total                unrestricted cash, cash equivalents, short-term investments, long-term                marketable debt and equity securities, and equity hedge                instruments |   | $                              | 3,887.2  |     | $      | 2,801.7  |   | $ | 3,056.6 |   |
| Working                capital                                                                                                                                                                |   | $                              | 2,758.9  |     | $      | 2,187.3  |   | $ | 1,888.8 |   |
| Current                ratio                                                                                                                                                                  |   |                           | 2.7:1    |     |   | 2.8:1    |   |   | 3.2:1 |   |
| **Year                Ended December 31:**                                                                                                                                                    |   |                           |     |     |   |     |   |   |   |   |
| Cash                provided by (used in):                                                                                                                                                    |   |                           |     |     |   |     |   |   |   |   |
| Operating                activities                                                                                                                                                           |   | $                              | 2,363.9  |     | $      | 1,194.8  |   | $ | 1,242.1 |   |
| Investing                activities                                                                                                                                                           |   |                           | (1,776.1 | )        |   | (450.5   | )      |   | (1,403.6 | ) |
| Financing                activities                                                                                                                                                           |   |                           | 367.5    |     |   | (846.3   | )      |   | 325.5 |   |
| Capital                expenditures (included in investing activities above)                                                                                                                  |   |                           | (1,399.8 | )        |   | (649.9   | )      |   | (322.0 | ) |

***Cash      Provided by Operating Activities***

----

***Cash      Used in Investing Activities***

** **

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

----

*(in      millions)*

|                                                     |   | **TOTAL**  |   | **2005**    |   | **2004**   |   | **2003**    |   | **2002                and prior** |   |
|----------------------------------------------------------|--------|------------|--------|-------------|--------|------------|--------|-------------|--------|-----------------------------------|--------|
|                                                     |   | **Shares** |   | **Amounts** |   | **Shares** |   | **Amounts** |   | **Shares**                        |   | **Amounts** |   | **Shares** |   | **Amounts** |   | **Shares** |   | **Amounts** |   |
| Repurchase                program expired June 30, 2003  |   |       | 47.6   |        | $      | 893.7      |   |        | -      |                              | $      | - |   |   | - |   | $ | - |   |   | 10.9 |   | $ | 195.3 |   |   | 36.7 |   | $ | 698.4 |   |
| Repurchase                program expiring June 30, 2006 |   |       | 49.8   |        |   | 3,373.6    |   |        | 24.1   |                              |   | 2,015.9 |   |   | 25.6 |   |   | 1,351.7 |   |   | 0.1 |   |   | 6.0 |   |   | - |   |   | - |   |
| Total                repurchases                         |   |       | 97.4   |        | $      | 4,267.3    |   |        | 24.1   |                              | $      | 2,015.9 |   |   | 25.6 |   | $ | 1,351.7 |   |   | 11.0 |   | $ | 201.3 |   |   | 36.7 |   | $ | 698.4 |   |

----

*      (shares in millions)*

|                                 |   | **Total                Number of****Shares                Purchased****in                2005** |   | **Average                Price Paid****per                Share** |   | **Total                Number of****Shares                Purchased as****Part                of Publicly****Announced                Plans or****Programs** |   | **Maximum                Number****of                Shares that May****Yet                Be Purchased****Under                the Plans or****Programs** |   |
|--------------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| January                1-31, 2005    |   |                                                                                            | 1.4    |                                                              | $      | 49.01                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| February                1-28, 2005   |   |                                                                                            | 1.3    |                                                              |   | 47.16                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| March                1-31, 2005      |   |                                                                                            | 0.5    |                                                              |   | 48.94                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| April                1-30, 2005      |   |                                                                                            | 0.1    |                                                              |   | 56.86                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| July                1-31, 2005       |   |                                                                                            | 1.3    |                                                              |   | 88.61                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| August                1-31, 2005     |   |                                                                                            | 9.2    |                                                              |   | 88.63                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| October                1 - 31, 2005  |   |                                                                                            | 5.1    |                                                              |   | 85.00                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| November                1 - 30, 2005 |   |                                                                                            | 4.6    |                                                              |   | 94.37                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| December                1 - 31, 2005 |   |                                                                                            | 0.6    |                                                              |   | 95.71                                                                                                                                                        |   |                                                                                                                                                       |   |   |   |   |   |
| Total                                |   |                                                                                            | 24.1   |                                                              | $      | 83.62                                                                                                                                                        |   |                                                                                                                                                       | 49.8   |   |   | 30.2 |   |

***Leases***

----

**Off-Balance      Sheet Arrangements**

***Commitments***

***Contractual      Obligations***

|                                                                 |   | **Payments                due by period***(in                millions)* |    |
|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------|---------|
| **Contractual                Obligations**                           |   | **Total**                                                               |    | **Less                than****1                year** |   | **1                to 3****years** |   | **3                to 5****years** |   | **More                than****5                years** |   |
| Operating                lease obligations and other(1)              |   | $                                                                       | 181.2   |   | $ | 19.6 |   | $ | 41.3 |   | $ | 38.3 |   | $ | 82.0 |   |
| Slough(2)                                                            |   |                                                                    | 543.7   |   |   | 8.9 |   |   | 50.0 |   |   | 71.9 |   |   | 412.9 |   |
| Purchase                obligations(3)                               |   |                                                                    | 1,590.4 |   |   | 937.9 |   |   | 491.9 |   |   | 132.5 |   |   | 28.1 |   |
| Long-term                debt(4)                                     |   |                                                                    | 2,000.0 |   |   | - |   |   | - |   |   | 500.0 |   |   | 1,500.0 |   |
| Litigation-related                and other long-term liabilities(5) |   |                                                                    | 714.3   |   |   | 0.2 |   |   | 695.1 |   |   | 11.2 |   |   | 7.8 |   |
| Total                                                                |   | $                                                                       | 5,029.6 |   | $ | 966.6 |   | $ | 1,278.3 |   | $ | 753.9 |   | $ | 2,030.8 |   |

| (1)                                                                                                              | Operating                lease obligations include Owner Association Fees on buildings we                own. See                further discussion of our operating leases above in                “Leases.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)                                                                                                              | See                further commitments related to the Slough lease above in                “Leases.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)                                                                                                              | 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 Herceptin bulk drug substance.                  See also Note                  7, “Leases, Commitments and Contingencies,” in the Notes to Consolidated                  Financial Statements of Part II, Item 8 of this Form                  10-K. |
| (4)                                                                                                              | See                further discussion of our debt issuance above in                “Liquidity.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (5)                                                                                                              | Litigation-related                and other long-term liabilities include our litigation liabilities                and                other similar items which are reflected on our balance sheet under                GAAP.                The amount of cash paid, if any, or the timing of such payment in                connection with the COH matter will depend on the outcome of the                California Supreme Court's review of the matter; however, it may                take                longer than one year to further resolve the matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Excludes                interest related payments on long-term debt and deferred tax                liabilities. |

----

**Stock      Options**

***Option      Program Description***

***General      Option Information***

***Summary      of Option Activity***

*(Shares      in thousands)*

|                                           |   |                                                  |    | **Options                  Outstanding** |   |
|------------------------------------------------|--------|-------------------------------------------------------|---------|------------------------------------------|--------|
|                                           |   | **Shares****Available****for                  Grant** |    | **Number                  of****Shares** |   | **Weighted****Average****Exercise                  Price** |   |
| **December 31,                  2003**    |   |                                                  | 40,732  |                                     |   | 96,126 |   | $ | 25.18 |   |
| Grants                                         |   |                                                  | (20,967 | )                                        |   | 20,967 |   |   | 53.04 |   |
| Exercises                                      |   |                                                  | -       |                                     |   | (21,484 | ) |   | 20.81 |   |
| Cancellations                                  |   |                                                  | 1,843   |                                     |   | (1,843 | ) |   | 29.92 |   |
| Additional                  shares reserved(1) |   |                                                  | 80,000  |                                     |   | - |   |   | - |   |
| **December 31,                  2004**    |   |                                                  | 101,608 |                                     |   | 93,766 |   | $ | 32.32 |   |
| Grants                                         |   |                                                  | (19,675 | )                                        |   | 19,675 |   |   | 84.01 |   |
| Exercises                                      |   |                                                  | -       |                                     |   | (28,823 | ) |   | 25.88 |   |
| Cancellations                                  |   |                                                  | 1,814   |                                     |   | (1,814 | ) |   | 42.16 |   |
| **December 31,                  2005**    |   |                                                  | 83,747  |                                     |   | 82,804 |   | $ | 46.64 |   |

| (1) | Additional                shares have been reserved for issuance under the 2004 Equity Incentive                Plan approved by stockholders on April 16, 2004. No awards have been                made                under this Plan. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

*(Shares      in thousands)*

|                                       |   | **Exercisable** |   | **Unexercisable**                                 |   | **Total**  |   |
|--------------------------------------------|--------|-----------------|--------|---------------------------------------------------|--------|------------|--------|
| **As                of December 31, 2005** |   | **Shares**      |   | **Wtd.                Avg.****Exercise****Price** |   | **Shares** |   | **Wtd.                Avg.****Exercise****Price** |   | **Shares** |   | **Wtd.                Avg.****Exercise****Price** |   |
| In-the-Money                               |   |            | 37,451 |                                              | $      | 29.39      |   |   | 44,878 |   | $ | 60.51 |   |   | 82,329 |   | $ | 46.36 |   |
| Out-of-the-Money(1)                        |   |            | -      |                                              |   | -          |   |   | 475 |   |   | 95.02 |   |   | 475 |   |   | 95.02 |   |
| Total                Options Outstanding   |   |            | 37,451 |                                              |   |       |   |   | 45,353 |   |   |   |   |   | 82,804 |   |   |   |   |

| (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 $92.50                at the                close of business on December 30,                2005. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

|                                                                                                     | **2005***  |   | **2004*** |        | **2003*** |
|----------------------------------------------------------------------------------------------------------|------------|--------|-----------|-------------|-----------|
| Net                grants during the year as % of outstanding shares                                     | 1.70  | %      |      | 1.83   | %         |   | 1.69  | % |
| Grants                to Executive Officers during the period as % of outstanding                shares  | 0.18  | %      |      | 0.25   | %         |   | 0.24  | % |
| Grants                to Executive Officers during the year as % of total options                granted | 9.44  | %      |      | 12.29  | %         |   | 11.16  | % |

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

***Equity      Compensation Plan Information***

**********

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

----

***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      thousands, except per share amounts)*

|                                                                                                                                                                                                                                                                                                |   | **Year                Ended December 31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|
|                                                                                                                                                                                                                                                                                                |   | **2005**                                   |      | **2004** |   | **2003** |   |
| **Revenues**                                                                                                                                                                                                                                                                                        |   |                                       |      |   |   |   |   |
| Product                sales (including amounts from related parties:  2005-$183,664;                2004-$112,065; 2003-$108,078)                                                                                                                                                        |   | $                                          | 5,488,058 |   | $ | 3,748,879 |   | $ | 2,621,490 |   |
| Royalties                (including amounts from a related party:  2005-$485,357;                2004-$338,733; 2003-$245,623)                                                                                                                                                            |   |                                       | 935,112   |   |   | 641,119 |   |   | 500,903 |   |
| Contract                revenue (including amounts from related parties:  2005-$115,067;                2004-$121,261; 2003-$90,692)                                                                                                                                                      |   |                                       | 210,202   |   |   | 231,159 |   |   | 177,934 |   |
| **Total                operating revenues**                                                                                                                                                                                                                                                         |   |                                       | 6,633,372 |   |   | 4,621,157 |   |   | 3,300,327 |   |
| **Costs                and expenses**                                                                                                                                                                                                                                                               |   |                                       |      |   |   |   |   |   |   |   |
| Cost                of sales (including amounts for related parties:  2005-$171,200;                2004-$96,091; 2003-$90,657)                                                                                                                                                           |   |                                       | 1,011,069 |   |   | 672,526 |   |   | 480,123 |   |
| Research                and development (including amounts for related parties:  2005-$203,942;                2004-$171,979; 2003-$102,234)  (including                contract                related:   2005-$110,918;                2004-$131,636; 2003-$95,473) |   |                                       | 1,261,824 |   |   | 947,513 |   |   | 721,970 |   |
| Marketing,                general and administrative                                                                                                                                                                                                                                                |   |                                       | 1,435,025 |   |   | 1,088,111 |   |   | 794,845 |   |
| Collaboration                profit sharing (including amounts for a related party:  2005-$136,353;                2004-$75,090; 2003-$9,898)                                                                                                                                             |   |                                       | 823,083   |   |   | 593,616 |   |   | 457,457 |   |
| Recurring                charges related to redemption                                                                                                                                                                                                                                              |   |                                       | 122,746   |   |   | 145,485 |   |   | 154,344 |   |
| Special                items: litigation-related                                                                                                                                                                                                                                               |   |                                       | 57,774    |   |   | 37,087 |   |   | (113,127 | ) |
| **Total                costs and expenses**                                                                                                                                                                                                                                                         |   |                                       | 4,711,521 |   |   | 3,484,338 |   |   | 2,495,612 |   |
| Operating                income                                                                                                                                                                                                                                                                     |   |                                       | 1,921,851 |   |   | 1,136,819 |   |   | 804,715 |   |
| Other                income (expense):                                                                                                                                                                                                                                                              |   |                                       |      |   |   |   |   |   |   |   |
| Interest                and other income (expense), net                                                                                                                                                                                                                                             |   |                                       | 140,927   |   |   | 89,997 |   |   | 95,728 |   |
| Interest                expense                                                                                                                                                                                                                                                                     |   |                                       | (49,929   | ) |   | (7,400 | ) |   | (2,937 | ) |
| Total                other income, net                                                                                                                                                                                                                                                              |   |                                       | 90,998    |   |   | 82,597 |   |   | 92,791 |   |
| Income                before taxes and cumulative effect of accounting change                                                                                                                                                                                                                       |   |                                       | 2,012,849 |   |   | 1,219,416 |   |   | 897,506 |   |
| Income                tax provision                                                                                                                                                                                                                                                                 |   |                                       | 733,858   |   |   | 434,600 |   |   | 287,324 |   |
| Income                before cumulative effect of accounting change                                                                                                                                                                                                                                 |   |                                       | 1,278,991 |   |   | 784,816 |   |   | 610,182 |   |
| Cumulative                effect of accounting change (net of                tax: 2003-$31,770)                                                                                                                                                                                                |   |                                       | -         |   |   | - |   |   | (47,655 | ) |
| **Net                income**                                                                                                                                                                                                                                                                       |   | $                                          | 1,278,991 |   | $ | 784,816 |   | $ | 562,527 |   |
| **Earnings                per share**                                                                                                                                                                                                                                                               |   |                                       |      |   |   |   |   |   |   |   |
| **Basic**                                                                                                                                                                                                                                                                                           |   |                                       |      |   |   |   |   |   |   |   |
| Earnings                before cumulative effect of accounting change                                                                                                                                                                                                                               |   | $                                          | 1.21      |   | $ | 0.74 |   | $ | 0.59 |   |
| Cumulative                effect of accounting change (net of tax: 2003-$0.03)                                                                                                                                                                                                                 |   |                                       | -         |   |   | - |   |   | (0.05 | ) |
| Net                earnings per share                                                                                                                                                                                                                                                               |   | $                                          | 1.21      |   | $ | 0.74 |   | $ | 0.54 |   |
| **Diluted**                                                                                                                                                                                                                                                                                         |   |                                       |      |   |   |   |   |   |   |   |
| Earnings                before cumulative effect of accounting change                                                                                                                                                                                                                               |   | $                                          | 1.18      |   | $ | 0.73 |   | $ | 0.58 |   |
| Cumulative                effect of accounting change (net of tax: 2003-$0.03)                                                                                                                                                                                                                 |   |                                       | -         |   |   | - |   |   | (0.05 | ) |
| Net                earnings per share                                                                                                                                                                                                                                                               |   | $                                          | 1.18      |   | $ | 0.73 |   | $ | 0.53 |   |
|                                                                                                                                                                                                                                                                                                |   |                                       |      |   |   |   |   |   |   |   |
| Shares                used to compute basic earnings per share                                                                                                                                                                                                                                      |   |                                       | 1,054,952 |   |   | 1,055,165 |   |   | 1,034,480 |   |
| Shares                used to compute diluted earnings per share                                                                                                                                                                                                                                    |   |                                       | 1,080,949 |   |   | 1,079,209 |   |   | 1,057,619 |   |

*See      Notes to Consolidated Financial Statements.*

----

**CONSOLIDATED      STATEMENTS OF CASH FLOWS **

*(in      thousands)*

|                                                                                                            |   | **Year                Ended December 31,** |       |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                                            |   | **2005**                                   |       | **2004** |   | **2003** |   |
| **Cash                flows from operating activities**                                                         |   |                                       |       |   |   |   |   |
| Net                income                                                                                       |   | $                                          | 1,278,991  |   | $ | 784,816 |   | $ | 562,527 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities: |   |                                       |       |   |   |   |   |   |   |   |
| Cumulative                effect of accounting change, net of tax                                               |   |                                       | -          |   |   | - |   |   | 47,655 |   |
| Depreciation                and amortization                                                                    |   |                                       | 370,166    |   |   | 353,221 |   |   | 295,449 |   |
| Deferred                income taxes                                                                            |   |                                       | (109,695   | ) |   | (73,585 | ) |   | (149,001 | ) |
| Deferred                revenue                                                                                 |   |                                       | (49,375    | ) |   | (14,927 | ) |   | 239,145 |   |
| Litigation-related                liabilities                                                                   |   |                                       | 51,424     |   |   | 34,722 |   |   | 56,113 |   |
| Tax                benefit from employee stock options                                                          |   |                                       | 632,300    |   |   | 329,470 |   |   | 264,981 |   |
| Gain                on sales of securities available-for-sale and other                                         |   |                                       | (11,606    | ) |   | (13,577 | ) |   | (23,069 | ) |
| Loss                on sales of securities available-for-sale                                                   |   |                                       | 3,164      |   |   | 1,839 |   |   | 3,137 |   |
| Write-down                of securities available-for-sale and other                                            |   |                                       | 10,044     |   |   | 12,340 |   |   | 3,795 |   |
| Loss                on fixed asset dispositions                                                                 |   |                                       | 9,650      |   |   | 5,115 |   |   | 10,760 |   |
| Changes                in assets and liabilities:                                                               |   |                                       |       |   |   |   |   |   |   |   |
| Receivables                and other current assets                                                             |   |                                       | (129,118   | ) |   | (363,805 | ) |   | (146,892 | ) |
| Inventories                                                                                                     |   |                                       | (112,172   | ) |   | (120,703 | ) |   | (93,264 | ) |
| Investments                in trading securities                                                                |   |                                       | (17,409    | ) |   | (75,695 | ) |   | (33,825 | ) |
| Accounts                payable, other accrued liabilities, and other long-term                liabilities      |   |                                       | 437,549    |   |   | 335,542 |   |   | 204,610 |   |
| **Net                cash provided by operating activities**                                                    |   |                                       | 2,363,913  |   |   | 1,194,773 |   |   | 1,242,121 |   |
| **Cash                flows from investing activities**                                                         |   |                                       |       |   |   |   |   |   |   |   |
| Purchases                of securities available-for-sale                                                       |   |                                       | (999,596   | ) |   | (889,732 | ) |   | (1,755,934 | ) |
| Proceeds                from sales and maturities of securities available-for-sale                              |   |                                       | 721,678    |   |   | 1,149,113 |   |   | 739,867 |   |
| Purchases                of nonmarketable equity securities                                                     |   |                                       | (2,601     | ) |   | (6,661 | ) |   | (4,286 | ) |
| Capital                expenditures                                                                             |   |                                       | (1,399,824 | ) |   | (649,858 | ) |   | (321,955 | ) |
| Change                in other assets                                                                           |   |                                       | (42,716    | ) |   | (57,955 | ) |   | (61,307 | ) |
| Transfer                (to) from restricted cash, net                                                          |   |                                       | (53,000    | ) |   | 4,600 |   |   | - |   |
| **Net                cash used in investing activities**                                                        |   |                                       | (1,776,059 | ) |   | (450,493 | ) |   | (1,403,615 | ) |
| **Cash                flows from financing activities**                                                         |   |                                       |       |   |   |   |   |   |   |   |
| Stock                issuances                                                                                  |   |                                       | 820,493    |   |   | 505,374 |   |   | 526,861 |   |
| Stock                repurchases                                                                                |   |                                       | (2,015,912 | ) |   | (1,351,683 | ) |   | (201,345 | ) |
| Repayment                of long-term debt and noncontrolling interest                                          |   |                                       | (425,000   | ) |   | - |   |   | - |   |
| Proceeds                from issuance of long-term debt                                                         |   |                                       | 1,987,953  |   |   | - |   |   | - |   |
| **Net                cash provided by (used in) financing activities**                                          |   |                                       | 367,534    |   |   | (846,309 | ) |   | 325,516 |   |
| Net                increase (decrease) in cash and cash equivalents                                             |   |                                       | 955,388    |   |   | (102,029 | ) |   | 164,022 |   |
| Cash                and cash equivalents at beginning of year                                                   |   |                                       | 270,123    |   |   | 372,152 |   |   | 208,130 |   |
| **Cash                and cash equivalents at end of year**                                                     |   | $                                          | 1,225,511  |   | $ | 270,123 |   | $ | 372,152 |   |
| **Supplemental                cash flow data**                                                                  |   |                                       |       |   |   |   |   |   |   |   |
| Cash                paid during the year for:                                                                   |   |                                       |       |   |   |   |   |   |   |   |
| Interest                                                                                                        |   | $                                          | 9,727      |   | $ | 6,626 |   | $ | 2,223 |   |
| Income                taxes                                                                                     |   |                                       | 311,571    |   |   | 131,611 |   |   | 167,761 |   |
| Non-cash                investing and financing activities                                                      |   |                                       |       |   |   |   |   |   |   |   |
| Capitalization                of construction in progress related to financing lease                transaction |   |                                       | 93,559     |   |   | - |   |   | - |   |
| Exchange                of XOMA note receivable for a prepaid royalty and other long-term                asset  |   |                                       | 29,205     |   |   | - |   |   | - |   |
| Stock                received as consideration for outstanding loans                                            |   |                                       | -          |   |   | - |   |   | 29,600 |   |

*See      Notes to Consolidated Financial Statements.*

----

**CONSOLIDATED      BALANCE SHEETS **

*(in      thousands, except par value and shares)*

|                                                                                                                                                                                                                           |   | **December                31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                                                                                                                                                           |   | **2005**                        |       | **2004** |   |
| **Assets**                                                                                                                                                                                                                     |   |                            |       |   |   |
| Current                assets                                                                                                                                                                                                  |   |                            |       |   |   |
| Cash                and cash equivalents                                                                                                                                                                                       |   | $                               | 1,225,511  |   | $ | 270,123 |   |
| Short-term                investments                                                                                                                                                                                          |   |                            | 1,139,650  |   |   | 1,394,982 |   |
| Accounts                receivable - product sales (net of allowances:  2005-$83,262;                2004-$59,366; including amounts from related parties:  2005-$3,603;                2004-$11,237) |   |                            | 554,455    |   |   | 599,052 |   |
| Accounts                receivable - royalties (including amounts from related                party:  2005-$173,193;                2004-$119,080)                                                              |   |                            | 296,664    |   |   | 217,482 |   |
| Accounts                receivable - other (net of allowances:  2005-$582;                2004-$2,191; including amounts from related parties:  2005-$131,874;                2004-$68,594)                |   |                            | 232,297    |   |   | 143,421 |   |
| Inventories                                                                                                                                                                                                                    |   |                            | 702,515    |   |   | 590,343 |   |
| Deferred                tax assets                                                                                                                                                                                             |   |                            | 166,561    |   |   | 148,370 |   |
| Prepaid                expenses and other current assets                                                                                                                                                                       |   |                            | 101,126    |   |   | 61,567 |   |
| Total                current assets                                                                                                                                                                                            |   |                            | 4,418,779  |   |   | 3,425,340 |   |
| Long-term                marketable debt and equity securities                                                                                                                                                                 |   |                            | 1,448,731  |   |   | 1,115,327 |   |
| Property,                plant and equipment, net                                                                                                                                                                              |   |                            | 3,349,352  |   |   | 2,091,404 |   |
| Goodwill                                                                                                                                                                                                                       |   |                            | 1,315,019  |   |   | 1,315,019 |   |
| Other                intangible assets                                                                                                                                                                                         |   |                            | 573,779    |   |   | 668,391 |   |
| Restricted                cash and investments                                                                                                                                                                                 |   |                            | 735,000    |   |   | 682,000 |   |
| Deferred                tax assets                                                                                                                                                                                             |   |                            | 145,910    |   |   | 20,341 |   |
| Other                long-term assets                                                                                                                                                                                          |   |                            | 160,309    |   |   | 85,573 |   |
| **Total                assets**                                                                                                                                                                                                |   | $                               | 12,146,879 |   | $ | 9,403,395 |   |
| **Liabilities                and stockholders’ equity**                                                                                                                                                                  |   |                            |       |   |   |   |   |
| Current                liabilities                                                                                                                                                                                             |   |                            |       |   |   |   |   |
| Accounts                payable (including amounts to related parties:  2005-$1,379;                2004-$0)                                                                                                         |   | $                               | 338,978    |   | $ | 104,832 |   |
| Deferred                revenue                                                                                                                                                                                                |   |                            | 44,327     |   |   | 45,989 |   |
| Other                accrued liabilities (including amounts to related                parties:  2005-$131,774;                2004-$108,416)                                                                    |   |                            | 1,276,527  |   |   | 1,087,209 |   |
| Total                current liabilities                                                                                                                                                                                       |   |                            | 1,659,832  |   |   | 1,238,030 |   |
| Long-term                debt                                                                                                                                                                                                  |   |                            | 2,083,024  |   |   | 412,250 |   |
| Deferred                revenue                                                                                                                                                                                                |   |                            | 220,093    |   |   | 267,805 |   |
| Litigation-related                and other long-term liabilities                                                                                                                                                              |   |                            | 714,346    |   |   | 703,120 |   |
| Total                liabilities                                                                                                                                                                                               |   |                            | 4,677,295  |   |   | 2,621,205 |   |
| Commitments                and contingencies (Note 7)                                                                                                                                                                          |   |                            |       |   |   |   |   |
| Stockholders’                equity                                                                                                                                                                                      |   |                            |       |   |   |   |   |
| Preferred                stock, $0.02 par value; authorized: 100,000,000 shares; none                issued                                                                                                               |   |                            | -          |   |   | - |   |
| Common                Stock, $0.02 par value; authorized: 3,000,000,000 shares;                  outstanding: 2005-1,053,712,934                shares; 2004-1,047,126,660 shares                          |   |                            | 21,074     |   |   | 20,943 |   |
| Additional                paid-in capital                                                                                                                                                                                      |   |                            | 9,262,679  |   |   | 8,002,754 |   |
| Accumulated                other comprehensive income                                                                                                                                                                          |   |                            | 253,422    |   |   | 290,948 |   |
| Accumulated                deficit, since June 30, 1999                                                                                                                                                                        |   |                            | (2,067,591 | ) |   | (1,532,455 | ) |
| Total                stockholders’ equity                                                                                                                                                                                |   |                            | 7,469,584  |   |   | 6,782,190 |   |
| **Total                liabilities and stockholders’ equity**                                                                                                                                                            |   | $                               | 12,146,879 |   | $ | 9,403,395 |   |

*See      Notes to Consolidated Financial Statements.*

----

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS’ EQUITY **

*(in      thousands)*

|                                                                                                      |   | **Common                  Stock** |      |        |   |                                 |   |                       |      |                                                |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|-------------|--------|--------------------------------------|--------|----------------------------|-----------|-----------------------------------------------------|--------|
|                                                                                                      |   | **Shares**                        |      | **Amounts** |   | **Additional****Paid-in****Capital** |   | **Accumulated****Deficit** |      | **Accumulated****Other****Comprehensive****Income** |   | **Total** |   |
| **Balance                  December 31, 2002**                                                            |   |                              | 1,025,620 |        | $      | 20,512                               |   | $                          | 6,639,824 |                                                | $      | (1,590,094 | ) | $ | 268,642 |   | $ | 5,338,884 |   |
| Comprehensive                  income                                                                     |   |                              |      |        |   |                                 |   |                       |      |                                                |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                               |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | 562,527 |   |   | - |   |   | 562,527 |   |
| Changes                  in unrealized gain on securities available-for-sale, net of                  tax |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | - |   |   | 29,249 |   |   | 29,249 |   |
| Changes                  in fair value of cash flow hedges, net of tax                                    |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | - |   |   | (858 | ) |   | (858 | ) |
| Comprehensive                  income                                                                     |   |                              |      |        |   |                                 |   |                       |      |                                                |   |   |   |   |   |   |   | 590,918 |   |
| Issuance                  of stock upon exercise of options                                               |   |                              | 32,078    |        |   | 640                                  |   |                       | 487,588   |                                                |   | - |   |   | - |   |   | 488,228 |   |
| Income                  tax benefits realized from employee stock option exercises                        |   |                              | -         |        |   | -                                    |   |                       | 264,980   |                                                |   | - |   |   | - |   |   | 264,980 |   |
| Issuance                  of stock under employee stock plan                                              |   |                              | 2,796     |        |   | 56                                   |   |                       | 38,577    |                                                |   | - |   |   | - |   |   | 38,633 |   |
| Repurchase                  of Common Stock                                                               |   |                              | (11,010   | )           |   | (218                                 | )      |                       | (71,553   | )                                                   |   | (129,574 | ) |   | - |   |   | (201,345 | ) |
| **Balance                  December 31, 2003**                                                            |   |                              | 1,049,484 |        |   | 20,990                               |   |                       | 7,359,416 |                                                |   | (1,157,141 | ) |   | 297,033 |   |   | 6,520,298 |   |
| Comprehensive                  income                                                                     |   |                              |      |        |   |                                 |   |                       |      |                                                |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                               |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | 784,816 |   |   | - |   |   | 784,816 |   |
| Changes                  in unrealized gain on securities available-for-sale, net of                  tax |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | - |   |   | 10,789 |   |   | 10,789 |   |
| Changes                  in fair value of cash flow hedges, net of tax                                    |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | - |   |   | (16,874 | ) |   | (16,874 | ) |
| Comprehensive                  income                                                                     |   |                              |      |        |   |                                 |   |                       |      |                                                |   |   |   |   |   |   |   | 778,731 |   |
| Issuance                  of stock upon exercise of options                                               |   |                              | 21,484    |        |   | 430                                  |   |                       | 446,084   |                                                |   | - |   |   | - |   |   | 446,514 |   |
| Income                  tax benefits realized from employee stock option exercises                        |   |                              | -         |        |   | -                                    |   |                       | 329,470   |                                                |   | - |   |   | - |   |   | 329,470 |   |
| Issuance                  of stock under employee stock plan                                              |   |                              | 1,717     |        |   | 34                                   |   |                       | 58,826    |                                                |   | - |   |   | - |   |   | 58,860 |   |
| Repurchase                  of Common Stock                                                               |   |                              | (25,558   | )           |   | (511                                 | )      |                       | (191,042  | )                                                   |   | (1,160,130 | ) |   | - |   |   | (1,351,683 | ) |
| **Balance                  December 31, 2004**                                                            |   |                              | 1,047,127 |        |   | 20,943                               |   |                       | 8,002,754 |                                                |   | (1,532,455 | ) |   | 290,948 |   |   | 6,782,190 |   |
| Comprehensive                  income                                                                     |   |                              |      |        |   |                                 |   |                       |      |                                                |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                               |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | 1,278,991 |   |   | - |   |   | 1,278,991 |   |
| Changes                  in unrealized loss on securities available-for-sale, net of                  tax |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | - |   |   | (75,359 | ) |   | (75,359 | ) |
| Changes                  in fair value of cash flow hedges, net of tax                                    |   |                              | -         |        |   | -                                    |   |                       | -         |                                                |   | - |   |   | 37,833 |   |   | 37,833 |   |
| Comprehensive                  income                                                                     |   |                              |      |        |   |                                 |   |                       |      |                                                |   |   |   |   |   |   |   | 1,241,465 |   |
| Issuance                  of stock upon exercise of options                                               |   |                              | 28,823    |        |   | 576                                  |   |                       | 745,223   |                                                |   | - |   |   | - |   |   | 745,799 |   |
| Income                  tax benefits realized from employee stock option exercises                        |   |                              | -         |        |   | -                                    |   |                       | 641,348   |                                                |   | - |   |   | - |   |   | 641,348 |   |
| Issuance                  of stock under employee stock plan                                              |   |                              | 1,872     |        |   | 37                                   |   |                       | 74,657    |                                                |   | - |   |   | - |   |   | 74,694 |   |
| Repurchase                  of Common Stock                                                               |   |                              | (24,109   | )           |   | (482                                 | )      |                       | (201,303  | )                                                   |   | (1,814,127 | ) |   | - |   |   | (2,015,912 | ) |
| **Balance                  December 31, 2005**                                                            |   |                              | 1,053,713 |        | $      | 21,074                               |   | $                          | 9,262,679 |                                                | $      | (2,067,591 | ) | $ | 253,422 |   | $ | 7,469,584 |   |

*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***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Changes      in Accounting Principles***

***Recent      Accounting Pronouncement***

***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, wholesaler chargebacks, prompt                pay                sales discounts, product returns, and bad                debts. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We                recognize revenue from royalties based on licensees’ sales of our products                or technologies. Royalties are recognized as earned in accordance                with the                contract terms when royalties from licensees can                be |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

|   | · | Contract                revenue generally includes upfront and continuing licensing fees,                manufacturing fees, milestone payments and reimbursements of development                and post-marketing costs and certain commercial                costs. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 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                longer                of the manufacturing obligation period or the expected product life.                Manufacturing profit is recognized when the product is shipped and                title                passes. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Milestone                payments are recognized as revenue when milestones, as defined in                the                contract, are achieved. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Commercial                collaborations resulting in a net reimbursement of development and                post-marketing costs and certain 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                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***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Collaboration      Profit Sharing***

***Research      and Development Expenses***

***Royalty      Expenses***

***Advertising      Expenses***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Research      and Development Arrangements***

***Cash      and Cash Equivalents***

***Inventories***

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

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***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 |

** **

***U.S.      Food and Drug Administration (or “FDA”) Validation      Costs***

***Goodwill      and Other Intangible Assets***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Restricted      Cash and Investments***

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

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

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

|                                                                                                                                                                                              |   | **2005** |      | **2004** |   | **2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|----------|--------|
| Net                income as reported                                                                                                                                                             |   | $        | 1,278,991 |     | $      | 784,816  |   | $ | 562,527 |   |
| Deduct: Total                stock-based employee compensation expense determined under the fair                value                based method for all awards, net of related tax effects |   |     | 174,597   |     |   | 190,375  |   |   | 172,045 |   |
| Pro                forma net income                                                                                                                                                               |   | $        | 1,104,394 |     | $      | 594,441  |   | $ | 390,482 |   |
| Earnings                per share:                                                                                                                                                                |   |     |      |     |   |     |   |   |   |   |
| Basic-as                reported                                                                                                                                                                  |   | $        | 1.21      |     | $      | 0.74     |   | $ | 0.54 |   |
| Basic-pro                forma                                                                                                                                                                    |   | $        | 1.05      |     | $      | 0.56     |   | $ | 0.38 |   |
|                                                                                                                                                                                              |   |     |      |     |   |     |   |   |   |   |
| Diluted-as                reported                                                                                                                                                                |   | $        | 1.18      |     | $      | 0.73     |   | $ | 0.53 |   |
| Diluted-pro                forma                                                                                                                                                                  |   | $        | 1.02      |     | $      | 0.54     |   | $ | 0.38 |   |

|                                   |   | **2005** |   | **2004** |   | **2003** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk-free                interest rate |   |     | 4.2    | %        |   | 3.4      | %      |   | 2.8 | % |
| Dividend                yield          |   |     | 0      | %        |   | 0        | %      |   | 0 | % |
| Expected                volatility     |   |     | 29.3   | %        |   | 33.3     | %      |   | 44.7 | % |
| Expected                term (years)   |   |     | 4.2    |     |   | 4.3      |   |   | 5.0 |   |

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

** **
** **

***Income      Taxes***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Earnings      Per Share***

*(in      thousands)*

|                                                                                                                                 |   | **2005** |      | **2004** |   | **2003**  |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
| **Numerator:**                                                                                                                       |   |     |      |     |   |      |   |
| Net                income                                                                                                            |   | $        | 1,278,991 |     | $      | 784,816   |   | $ | 562,527 |   |
| **Denominator:**                                                                                                                     |   |     |      |     |   |      |   |   |   |   |
| Weighted-average                shares outstanding used to compute basic earnings per                share                           |   |     | 1,054,952 |     |   | 1,055,165 |   |   | 1,034,480 |   |
| Effect                of dilutive stock options                                                                                      |   |     | 25,997    |     |   | 24,044    |   |   | 23,139 |   |
| Weighted-average                shares outstanding and dilutive securities used to compute diluted                earnings per share |   |     | 1,080,949 |     |   | 1,079,209 |   |   | 1,057,619 |   |

*(in      millions, except for exercise prices)*

|                                   | **2005**                  |   | **2004**                  |
|----------------------------------------|---------------------------|--------|---------------------------|
| Number                of shares        | 18.3                      |   | 19.3                      |
| Range                of exercise price | $81.15 - $98.80 |   | $52.00 - $59.61 |

***Comprehensive      Income***

*(in      millions)*

|                                                                 |   | **2005** |   | **2004** |   |
|----------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net                unrealized gains on securities available-for-sale |   | $        | 229.8  |     | $      | 305.1 |   |
| Net                unrealized gains (losses) on cash flow hedges     |   |     | 23.6   |     |   | (14.2 | ) |
| Accumulated                other comprehensive income                |   | $        | 253.4  |     | $      | 290.9 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

*(in      millions)*

|                                                                                                                                                                                                           |   | **2005** |   | **2004** |   | **2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| (Decrease)                increase in unrealized gains on securities available-for-sale (net                of                tax: 2005-$(49.1); 2004-$6.7; 2003-$25.9)                                   |   | $        | (73.6  | )        | $      | 10.0     |   | $ | 38.9 |   |
| Reclassification                adjustment for net (gains) losses on securities available-for-sale                included in net income (net of tax: 2005-$(1.1); 2004-$0.5;                2003-($6.5)) |   |     | (1.7   | )        |   | 0.8      |   |   | (9.7 | ) |
| Increase                (decrease) in unrealized gains on cash flow hedges (net of                tax: 2005-$32.3; 2004-($13.8), 2003-($2.4))                                                             |   |     | 48.4   |     |   | (20.7    | )      |   | (3.6 | ) |
| Reclassification                adjustment for net (gains) losses on cash flow hedges included in                net                income (net of tax: 2005-$(7.0); 2004-$2.6,                2003-$1.8) |   |     | (10.6  | )        |   | 3.8      |   |   | 2.7 |   |
| Other                comprehensive (loss) income                                                                                                                                                               |   | $        | (37.5  | )        | $      | (6.1     | )      | $ | 28.3 |   |

| **Note                3.** | **INVESTMENT                SECURITIES AND FINANCIAL                INSTRUMENTS** |
|----------------------------|-----------------------------------------------------------------------------------|

***Investment      Securities***

*(in      thousands)*

| **December                31, 2005**               |   | **Amortized****Cost** |      | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   | **Estimated****Fair****Value** |    |
|----------------------------------------------------|--------|-----------------------|-----------|----------------------------------|--------|-----------------------------------|--------|--------------------------------|---------|
| TOTAL                TRADING SECURITIES            |   | $                     | 614,620   |                             | $      | 11,439                            |   | $                              | (13,605 | ) | $ | 612,454 |   |
| SECURITIES                AVAILABLE-FOR-SALE       |   |                  |      |                             |   |                              |   |                           |    |   |   |   |   |
| Equity                securities                   |   | $                     | (2,670    | )                                | $      | 380,761                           |   | $                              | (3,280  | ) | $ | 374,811 |   |
| Preferred                stock                     |   |                  | 200,800   |                             |   | 8,098                             |   |                           | (2,534  | ) |   | 206,364 |   |
| Debt                securities maturing:           |   |                  |      |                             |   |                              |   |                           |    |   |   |   |   |
| within                1 year                       |   |                  | 1,616,114 |                             |   | 238                               |   |                           | (1,152  | ) |   | 1,615,200 |   |
| between                1-5 years                   |   |                  | 1,194,628 |                             |   | 4,283                             |   |                           | (3,857  | ) |   | 1,195,054 |   |
| between                5-10 years                  |   |                  | 466,874   |                             |   | 7,083                             |   |                           | (5,224  | ) |   | 468,733 |   |
| TOTAL                SECURITIES AVAILABLE-FOR-SALE |   | $                     | 3,475,746 |                             | $      | 400,463                           |   | $                              | (16,047 | ) | $ | 3,860,162 |   |

| **December                31, 2004**               |   | **Amortized****Cost** |      | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   | **Estimated****Fair****Value** |    |
|----------------------------------------------------|--------|-----------------------|-----------|----------------------------------|--------|-----------------------------------|--------|--------------------------------|---------|
| TOTAL                TRADING SECURITIES            |   | $                     | 574,907   |                             | $      | 31,261                            |   | $                              | (11,123 | ) | $ | 595,045 |   |
| SECURITIES                AVAILABLE-FOR-SALE       |   |                  |      |                             |   |                              |   |                           |    |   |   |   |   |
| Equity                securities                   |   | $                     | 57,993    |                             | $      | 478,226                           |   | $                              | (64     | ) | $ | 536,155 |   |
| Preferred                stock                     |   |                  | 185,223   |                             |   | 13,223                            |   |                           | (1,906  | ) |   | 196,540 |   |
| Debt                securities                     |   |                  | 1,889,878 |                             |   | 26,142                            |   |                           | (5,617  | ) |   | 1,910,403 |   |
| TOTAL                SECURITIES AVAILABLE-FOR-SALE |   | $                     | 2,133,094 |                             | $      | 517,591                           |   | $                              | (7,587  | ) | $ | 2,643,098 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

*(in      thousands)*

|                             |   | **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 |   | $                                      | 6,525   |                                    | $      | (3,280            | )      | $ | - |   | $ | - |   | $ | 6,525 |   | $ | (3,280 | ) |
| Preferred                stock   |   |                                   | 33,773  |                                    |   | (619              | )      |   | 40,577 |   |   | (1,915 | ) |   | 74,350 |   |   | (2,534 | ) |
| Debt                securities   |   |                                   | 846,469 |                                    |   | (4,703            | )      |   | 221,118 |   |   | (5,530 | ) |   | 1,067,587 |   |   | (10,233 | ) |
| Total                            |   | $                                      | 886,767 |                                    | $      | (8,602            | )      | $ | 261,695 |   | $ | (7,445 | ) | $ | 1,148,462 |   | $ | (16,047 | ) |

|                             |   | **Less                Than 12 Months** |    | **12                Months or Greater** |   | **Total**         |   |
|----------------------------------|--------|----------------------------------------|---------|-----------------------------------------|--------|-------------------|--------|
| December                31, 2004 |   | **Fair****Value**                      |    | **Unrealized****Losses**                |   | **Fair****Value** |   | **Unrealized****Losses** |   | **Fair****Value** |   | **Unrealized****Losses** |   |
| Equity                securities |   | $                                      | 286     |                                    | $      | (64               | )      | $ | - |   | $ | - |   | $ | 286 |   | $ | (64 | ) |
| Preferred                stock   |   |                                   | 27,582  |                                    |   | (1,478            | )      |   | 11,427 |   |   | (428 | ) |   | 39,009 |   |   | (1,906 | ) |
| Debt                securities   |   |                                   | 603,736 |                                    |   | (3,816            | )      |   | 78,983 |   |   | (1,801 | ) |   | 682,719 |   |   | (5,617 | ) |
| Total                            |   | $                                      | 631,604 |                                    | $      | (5,358            | )      | $ | 90,410 |   | $ | (2,229 | ) | $ | 722,014 |   | $ | (7,587 | ) |

*(in      thousands)*

| **Security**                                                             |   | **2005** |      | **2004** |   |
|--------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| Cash                                                                     |   | $        | 75,762    |     | $      | 207,776 |   |
| Cash                equivalents                                          |   |     | 1,149,749 |     |   | 62,347 |   |
| Total                cash and cash equivalents                           |   | $        | 1,225,511 |     | $      | 270,123 |   |
|                                                                     |   |     |      |     |   |   |   |
| Trading                securities                                        |   | $        | 612,454   |     | $      | 595,045 |   |
| Securities                available-for-sale maturing within one year    |   |     | 320,832   |     |   | 603,397 |   |
| Preferred                stock                                           |   |     | 206,364   |     |   | 196,540 |   |
| Total                short-term investments                              |   | $        | 1,139,650 |     | $      | 1,394,982 |   |
|                                                                     |   |     |      |     |   |   |   |
| Securities                available-for-sale maturing after one year     |   | $        | 1,073,920 |     | $      | 579,172 |   |
| Equity                securities                                         |   |     | 374,811   |     |   | 536,155 |   |
| Total                long-term marketable debt and equity securities     |   | $        | 1,448,731 |     | $      | 1,115,327 |   |
|                                                                     |   |     |      |     |   |   |   |
| Cash                                                                     |   | $        | 514       |     | $      | 2,268 |   |
| Securities                available-for-sale maturing within one year    |   |     | 144,619   |     |   | 212,368 |   |
| Securities                available-for-sale maturing between 1-10 years |   |     | 589,867   |     |   | 467,364 |   |
| Total                restricted cash and investments                     |   | $        | 735,000   |     | $      | 682,000 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

**Derivative      Financial Instruments**

***Foreign      Currency Instruments***

***Interest      Rate Swaps***

***Equity      Instruments***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Estimated      Fair Value***

*(in      thousands)*

|                                               |   | **2005** |   | **2004** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
| Assets:                                            |   |     |   |     |   |
| Foreign                exchange forward contracts  |   | $        | 4,823  |     | $      | - |   |
| Foreign                exchange put options        |   |     | 38,159 |     |   | 616 |   |
| Equity                forwards                     |   |     | 57,975 |     |   | 12,501 |   |
| Equity                collars                      |   |     | 15,332 |     |   | 21,796 |   |
| Interest                rate swap agreements       |   |     | 9,604  |     |   | - |   |
| Liabilities:                                       |   |     |   |     |   |   |   |
| Foreign                exchange forwards contracts |   |     | -      |     |   | 39,105 |   |
| Equity                forwards                     |   |     | -      |     |   | 12,961 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

| **Note                4.** | **CONSOLIDATED                FINANCIAL STATEMENT DETAIL** |
|----------------------------|------------------------------------------------------------|

***Inventories***

*(in      thousands)*

|                                      |   | **2005** |    | **2004** |   |
|-------------------------------------------|--------|----------|---------|----------|--------|
| Raw                materials and supplies |   | $        | 78,618  |     | $      | 57,072 |   |
| Work                in process            |   |     | 438,270 |     |   | 436,329 |   |
| Finished                goods             |   |     | 185,627 |     |   | 96,942 |   |
| Total                                     |   | $        | 702,515 |     |   | 590,343 |   |

***Property,      Plant and Equipment***

*(in      thousands)*

|                                                           |   | **2005** |      | **2004** |   |
|----------------------------------------------------------------|--------|----------|-----------|----------|--------|
| At                cost:                                        |   |     |      |     |   |
| Land                                                           |   | $        | 376,316   |     | $      | 314,351 |   |
| Land                improvements                               |   |     | 43,364    |     |   | 13,960 |   |
| Buildings                                                      |   |     | 1,398,601 |     |   | 1,055,327 |   |
| Equipment                                                      |   |     | 1,613,832 |     |   | 1,353,694 |   |
| Leasehold                improvements                          |   |     | 60,345    |     |   | 22,601 |   |
| Construction-in-progress                                       |   |     | 964,478   |     |   | 319,670 |   |
|                                                           |   |     | 4,456,936 |     |   | 3,079,603 |   |
| Less:                accumulated depreciation and amortization |   |     | 1,107,584 |     |   | 988,199 |   |
| Net                property, plant and equipment               |   | $        | 3,349,352 |     | $      | 2,091,404 |   |

** **

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Other      Accrued Liabilities***

*(in      thousands)*

|                                                                                                                                                       |   | **2005** |      | **2004** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| Accrued                compensation                                                                                                                        |   | $        | 253,292   |     | $      | 181,047 |   |
| Accrued                royalties                                                                                                                           |   |     | 161,152   |     |   | 141,942 |   |
| Accrued                clinical and other studies (including to related                parties:  2005-$76,838;                2004-$59,067) |   |     | 221,423   |     |   | 154,492 |   |
| Accrued                marketing and promotion costs                                                                                                       |   |     | 160,655   |     |   | 126,303 |   |
| Taxes                payable                                                                                                                               |   |     | 61,579    |     |   | 151,406 |   |
| Accrued                collaborations (including to a related party:  2005-$42,242;                2004-$23,481)                            |   |     | 227,561   |     |   | 198,567 |   |
| Other                (including to related parties:  2005-$12,694;                2004-$25,868)                                                  |   |     | 190,865   |     |   | 133,452 |   |
| Total                other accrued liabilities                                                                                                             |   | $        | 1,276,527 |     | $      | 1,087,209 |   |

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

|                                                                          |   | **2005**                       |   | **2004** |   | **2003** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------|--------|----------|--------|----------|--------|
|                                                                          |   | *(in                millions)* |   |
| Gains                on sales of biotechnology equity securities and other    |   | $                              | 9.1    |     | $      | 11.9     |   | $ | 21.1 |   |
| Write-downs                of biotechnology debt, equity securities and other |   |                           | (10.1  | )        |   | (12.4    | )      |   | (3.8 | ) |
| Interest                income                                                |   |                           | 141.9  |     |   | 90.5     |   |   | 78.4 |   |
| Total                interest and other income (expense), net                 |   | $                              | 140.9  |     | $      | 90.0     |   | $ | 95.7 |   |

| **Note                5.** | **OTHER                INTANGIBLE ASSETS** |
|----------------------------|--------------------------------------------|

*(in      millions)*

|                                        |   | **2005**                        |    | **2004**                        |   |
|---------------------------------------------|--------|---------------------------------|---------|---------------------------------|--------|
|                                        |   | **Gross****Carrying****Amount** |    | **Accumulated****Amortization** |   | **Net****Carrying****Amount** |   | **Gross****Carrying****Amount** |   | **Accumulated****Amortization** |   | **Net****Carrying****Amount** |   |
| Developed                product technology |   | $                               | 1,194.1 |                            | $      | 925.7 |   | $ | 268.4 |   | $ | 1,194.1 |   | $ | 847.7 |   | $ | 346.4 |   |
| Core                technology              |   |                            | 443.5   |                            |   | 372.1 |   |   | 71.4 |   |   | 443.5 |   |   | 351.0 |   |   | 92.5 |   |
| Developed                science technology |   |                            | 467.5   |                            |   | 467.5 |   |   | - |   |   | 467.5 |   |   | 452.9 |   |   | 14.6 |   |
| Tradenames                                  |   |                            | 144.0   |                            |   | 83.7 |   |   | 60.3 |   |   | 144.0 |   |   | 74.7 |   |   | 69.3 |   |
| Patents                                     |   |                            | 166.9   |                            |   | 64.6 |   |   | 102.3 |   |   | 138.0 |   |   | 53.2 |   |   | 84.8 |   |
| Other                intangible assets      |   |                            | 122.2   |                            |   | 50.8 |   |   | 71.4 |   |   | 101.3 |   |   | 40.5 |   |   | 60.8 |   |
| Total                                       |   | $                               | 2,538.2 |                            | $      | 1,964.4 |   | $ | 573.8 |   | $ | 2,488.4 |   | $ | 1,820.0 |   | $ | 668.4 |   |

*(in      millions)*

|                                                              |   | **2005** |   | **2004** |   | **2003** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Acquisition-related                intangible assets amortization |   | $        | 122.7  |     | $      | 145.5    |   | $ | 154.3 |   |
| Patents                amortization                               |   |     | 11.4   |     |   | 8.7      |   |   | 8.3 |   |
| Other                intangible assets amortization               |   |     | 10.3   |     |   | 27.8     |   |   | 8.1 |   |
| Total                amortization expense                         |   | $        | 144.4  |     | $      | 182.0    |   | $ | 170.7 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

*(in      millions)*

| **For                the Year Ending December 31,**      |   |   |   |
|----------------------------------------------------------|--------|--------|--------|
| 2006                                                     |   | $      | 127.4  |   |
| 2007                                                     |   |   | 126.1  |   |
| 2008                                                     |   |   | 124.2  |   |
| 2009                                                     |   |   | 75.2   |   |
| 2010                                                     |   |   | 25.8   |   |
| Thereafter                                               |   |   | 95.1   |   |
| Total                expected future annual amortization |   | $      | 573.8  |   |

| **Note                6.** | **LONG-TERM                DEBT** |
|----------------------------|-----------------------------------|

*(in        millions)*

| 2010       |   | $      | 500.0   |   |
|------------|--------|--------|---------|--------|
| Thereafter |   |   | 1,500.0 |   |
| Total      |   | $      | 2,000.0 |   |

| **Note                7.** | **LEASES,                COMMITMENTS AND                CONTINGENCIES** |
|----------------------------|-------------------------------------------------------------------------|

***Leases***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

*(in      millions)*

|                            |   | **2006** |   | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **Thereafter** |   | **Total** |   |
|---------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
| Operating                leases |   | $        | 19.5   |     | $      | 20.3     |   | $        | 20.8   |     | $      | 20.0           |   | $         | 18.0   |   | $ | 82.0 |   | $ | 180.6 |   |
| Slough                leases    |   |     | 8.8    |     |   | 18.9     |   |     | 31.1   |     |   | 35.4           |   |      | 36.6   |   |   | 412.9 |   |   | 543.7 |   |
| Total                           |   | $        | 28.3   |     | $      | 39.2     |   | $        | 51.9   |     | $      | 55.4           |   | $         | 54.6   |   | $ | 494.9 |   | $ | 724.3 |   |

| Some                of our leases have options to                renew. |
|-------------------------------------------------------------------------|

***Commitments***

***Contingencies***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

** **

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

| **Note                8.** | **RELATIONSHIP                WITH ROCHE AND RELATED PARTY                TRANSACTIONS** |
|----------------------------|------------------------------------------------------------------------------------------|

***Licensing      Agreements***

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Research      Collaboration Agreement***

***Tax      Sharing Agreement***

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

**Related      Party Transactions **

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

***Hoffmann-La      Roche***

** **

** **
** **

***Novartis***

** **

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

** **

| **Note                9.** | **CAPITAL                STOCK** |
|----------------------------|----------------------------------|

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

***Stock      Repurchase Program***

***Employee      Stock Plans***
** **

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

|                                                    |   | **Shares*****(in                thousands)*** |    | **Weighted-Average****Exercise                Price** |   |
|---------------------------------------------------------|--------|-----------------------------------------------|---------|-------------------------------------------------------|--------|
| Options                outstanding at December 31, 2002 |   |                                          | 110,838 |                                                  | $      | 19.19 |   |
| Grants                                                  |   |                                          | 21,780  |                                                  |   | 40.55 |   |
| Exercises                                               |   |                                          | (32,078 | )                                                     |   | 34.14 |   |
| Cancellations                                           |   |                                          | (4,414  | )                                                     |   | 23.80 |   |
| Options                outstanding at December 31, 2003 |   |                                          | 96,126  |                                                  |   | 25.18 |   |
| Grants                                                  |   |                                          | 20,967  |                                                  |   | 53.04 |   |
| Exercises                                               |   |                                          | (21,484 | )                                                     |   | 20.81 |   |
| Cancellations                                           |   |                                          | (1,843  | )                                                     |   | 29.92 |   |
| Options                outstanding at December 31, 2004 |   |                                          | 93,766  |                                                  |   | 32.32 |   |
| Grants                                                  |   |                                          | 19,675  |                                                  |   | 84.01 |   |
| Exercises                                               |   |                                          | (28,823 | )                                                     |   | 25.88 |   |
| Cancellations                                           |   |                                          | (1,814  | )                                                     |   | 42.16 |   |
| Options                outstanding at December 31, 2005 |   |                                          | 82,804  |                                                  | $      | 46.64 |   |

|                                                          |   | **As                of December 31, 2005**               |   |
|---------------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                          |   | **Options                Outstanding**                   |   | **Options                Exercisable** |   |
| **Range                of****Exercise                Prices** |   | **Number****Outstanding***(in                thousands)* |   | **Weighted-Average                Years Remaining****Contractual                Life** |   | **Weighted-Average****Exercise                Price** |   | **Number****Exercisable***(in                thousands)* |   | **Weighted-Average****Exercise                Price** |   |
| $6.27 - $8.89                                       |   |                                                     | 567    |   |   | 5.29 |   | $ | 7.64 |   |   | 567 |   | $ | 7.64 |   |
| $10.00 - $14.35                                     |   |                                                     | 14,358 |   |   | 5.96 |   | $ | 13.75 |   |   | 10,581 |   | $ | 13.56 |   |
| $15.04 - $22.39                                     |   |                                                     | 9,444  |   |   | 5.35 |   | $ | 20.82 |   |   | 9,067 |   | $ | 20.94 |   |
| $22.88 - $33.00                                     |   |                                                     | 343    |   |   | 5.34 |   | $ | 27.51 |   |   | 336 |   | $ | 27.56 |   |
| $35.63 - $53.23                                     |   |                                                     | 38,266 |   |   | 7.79 |   | $ | 46.78 |   |   | 16,561 |   | $ | 44.36 |   |
| $53.95 - $75.90                                     |   |                                                     | 1,575  |   |   | 8.78 |   | $ | 59.39 |   |   | 336 |   | $ | 56.13 |   |
| $81.15 - $98.80                                     |   |                                                     | 18,251 |   |   | 9.73 |   | $ | 86.03 |   |   | 3 |   | $ | 85.83 |   |
|                                                          |   |                                                     | 82,804 |   |   |   |   |   |   |   |   | 37,451 |   |   |   |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

| **Note                10.** | **INCOME                TAXES** |
|-----------------------------|---------------------------------|

*(in      thousands)*

|                                      |   | **2005** |     | **2004** |   | **2003** |   |
|-------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Current:                                  |   |     |     |     |   |     |   |
| Federal                                   |   | $        | 723,191  |     | $      | 444,317  |   | $ | 389,354 |   |
| State                                     |   |     | 120,362  |     |   | 63,868   |   |   | 46,971 |   |
| Total                current              |   |     | 843,553  |     |   | 508,185  |   |   | 436,325 |   |
| Deferred:                                 |   |     |     |     |   |     |   |   |   |   |
| Federal                                   |   |     | (84,672  | )        |   | (50,179  | )      |   | (133,085 | ) |
| State                                     |   |     | (25,023  | )        |   | (23,406  | )      |   | (15,916 | ) |
| Total                deferred             |   |     | (109,695 | )        |   | (73,585  | )      |   | (149,001 | ) |
| Total                income tax provision |   | $        | 733,858  |     |   | 434,600  |   |   | 287,324 |   |

*(in      thousands)*

|                                                         |   | **2005** |    | **2004** |   | **2003** |   |
|--------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Tax                at U.S. statutory rate of 35%             |   | $        | 704,497 |     | $      | 426,795  |   | $ | 314,127 |   |
| Research                and other credits                    |   |     | (29,885 | )        |   | (43,736  | )      |   | (23,531 | ) |
| Prior                years’ items                      |   |     | (14,364 | )        |   | -        |   |   | (34,819 | ) |
| Export                sales benefit                          |   |     | (7,875  | )        |   | (6,181   | )      |   | (10,325 | ) |
| State                taxes                                   |   |     | 100,000 |     |   | 60,484   |   |   | 44,842 |   |
| Deduction                for qualified production activities |   |     | (15,610 | )        |   | -        |   |   | - |   |
| Tax-exempt                investment income                  |   |     | (5,618  | )        |   | (3,718   | )      |   | (3,680 | ) |
| Other                                                        |   |     | 2,713   |     |   | 956      |   |   | 710 |   |
| Income                tax provision                          |   | $        | 733,858 |     | $      | 434,600  |   | $ | 287,324 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

*(in      thousands)*

|                                                            |   | **2005** |     | **2004** |   |
|-----------------------------------------------------------------|--------|----------|----------|----------|--------|
| Deferred                tax liabilities:                        |   |     |     |     |   |
| Depreciation                                                    |   | $        | (188,713 | )        | $      | (223,034 | ) |
| Unrealized                gain on securities available-for-sale |   |     | (172,212 | )        |   | (197,229 | ) |
| Intangibles                - Roche transaction                  |   |     | (160,068 | )        |   | (209,167 | ) |
| Other                intangible assets                          |   |     | (40,948  | )        |   | (33,923 | ) |
| Other                                                           |   |     | (10,876  | )        |   | (14,621 | ) |
| Total                deferred tax liabilities                   |   |     | (572,817 | )        |   | (677,974 | ) |
| Deferred                tax assets:                             |   |     |     |     |   |   |   |
| Capitalized                R&D costs                        |   |     | 18,682   |     |   | 24,447 |   |
| Federal                credit carryforwards                     |   |     | -        |     |   | 22,953 |   |
| Expenses                not currently deductible                |   |     | 430,977  |     |   | 370,704 |   |
| Deferred                revenue                                 |   |     | 105,768  |     |   | 125,506 |   |
| Investment                basis difference                      |   |     | 208,810  |     |   | 205,636 |   |
| State                credit carryforwards                       |   |     | 114,279  |     |   | 93,710 |   |
| Other                                                           |   |     | 6,772    |     |   | 3,729 |   |
| Total                deferred tax assets                        |   |     | 885,288  |     |   | 846,685 |   |
| Total                net deferred tax assets                    |   | $        | 312,471  |     | $      | 168,711 |   |

| **Note                11.** | **SEGMENT,                SIGNIFICANT CUSTOMER AND GEOGRAPHIC                INFORMATION** |
|-----------------------------|--------------------------------------------------------------------------------------------|

*(in      millions)*

|                                              |   |     |    |     |   |     |   |
|---------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **Product                Sales**                  |   | **2005** |    | **2004** |   | **2003** |   |
| Net                U.S. Product Sales             |   |     |    |     |   |     |   |
| Rituxan                                           |   | $        | 1,831.4 |     | $      | 1,574.0  |   | $ | 1,360.2 |   |
| Avastin                                           |   |     | 1,132.9 |     |   | 544.6    |   |   | - |   |
| Herceptin                                         |   |     | 747.2   |     |   | 479.0    |   |   | 406.0 |   |
| Tarceva                                           |   |     | 274.9   |     |   | 13.3     |   |   | - |   |
| Xolair                                            |   |     | 320.6   |     |   | 187.6    |   |   | 25.1 |   |
| Raptiva                                           |   |     | 79.2    |     |   | 52.4     |   |   | 1.4 |   |
| Nutropin                products                  |   |     | 370.5   |     |   | 348.8    |   |   | 319.5 |   |
| Thrombolytics                                     |   |     | 218.5   |     |   | 194.4    |   |   | 181.7 |   |
| Pulmozyme                                         |   |     | 186.5   |     |   | 157.1    |   |   | 143.7 |   |
| Total                U.S. product sales           |   |     | 5,161.7 |     |   | 3,551.2  |   |   | 2,437.6 |   |
| Net                product sales to collaborators |   |     | 326.4   |     |   | 197.7    |   |   | 183.8 |   |
| Total                product sales                |   | $        | 5,488.1 |     | $      | 3,748.9  |   | $ | 2,621.4 |   |

----

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS––(Continued)**

*(in      millions)*

|                                      |   | **2005** |   | **2004** |   | **2003** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Europe:                                   |   |     |   |     |   |     |   |
| Switzerland                               |   | $        | 319.7  |     | $      | 234.9    |   | $ | 210.3 |   |
| Germany                                   |   |     | 79.2   |     |   | 47.5     |   |   | 33.0 |   |
| France                                    |   |     | 55.9   |     |   | 35.1     |   |   | 21.0 |   |
| Italy                                     |   |     | 34.9   |     |   | 22.6     |   |   | 15.4 |   |
| Great                Britain              |   |     | 33.6   |     |   | 23.4     |   |   | 13.7 |   |
| Spain                                     |   |     | 28.0   |     |   | 17.6     |   |   | 11.3 |   |
| Others                                    |   |     | 73.3   |     |   | 51.1     |   |   | 24.6 |   |
| Japan                                     |   |     | 117.2  |     |   | 91.7     |   |   | 95.0 |   |
| Canada                                    |   |     | 39.5   |     |   | 27.9     |   |   | 22.5 |   |
| Others                                    |   |     | 90.6   |     |   | 44.4     |   |   | 30.6 |   |
| Total                net foreign revenues |   | $        | 871.9  |     | $      | 596.2    |   | $ | 477.4 |   |

----

**QUARTERLY      FINANCIAL DATA (UNAUDITED)**

*(in      thousands, except per share amounts)*

|                                              |   | **2005                Quarter Ended** |      |
|---------------------------------------------------|--------|---------------------------------------|-----------|
|                                              |   | **December 31**                  |      | **September 30** |   | **June 30** |   | **March 31** |   |
| Total                operating revenues           |   | $                                     | 1,893,095 |   | $ | 1,751,822 |   | $ | 1,526,879 |   | $ | 1,461,578 |   |
| Product                sales                      |   |                                  | 1,576,964 |   |   | 1,450,979 |   |   | 1,274,115 |   |   | 1,186,002 |   |
| Gross                margin from product sales(3) |   |                                  | 1,332,050 |   |   | 1,214,829 |   |   | 999,883 |   |   | 930,228 |   |
| Net                income(1)                      |   |                                  | 339,239   |   |   | 359,413 |   |   | 296,166 |   |   | 284,174 |   |
| Earnings                per share:                |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| Basic                                             |   |                                  | 0.32      |   |   | 0.34 |   |   | 0.28 |   |   | 0.27 |   |
| Diluted                                           |   |                                  | 0.31      |   |   | 0.33 |   |   | 0.27 |   |   | 0.27 |   |

|                                           |   | **2004                Quarter Ended** |      |
|------------------------------------------------|--------|---------------------------------------|-----------|
|                                           |   | **December 31**                  |      | **September 30** |   | **June 30** |   | **March 31** |   |
| Total                operating revenues        |   | $                                     | 1,315,300 |   | $ | 1,202,644 |   | $ | 1,128,078 |   | $ | 975,135 |   |
| Product                sales                   |   |                                  | 1,066,302 |   |   | 1,005,511 |   |   | 913,366 |   |   | 763,700 |   |
| Gross                margin from product sales |   |                                  | 860,929   |   |   | 839,521 |   |   | 726,683 |   |   | 649,220 |   |
| Net                income(2)                   |   |                                  | 206,584   |   |   | 230,874 |   |   | 170,771 |   |   | 176,587 |   |
| Earnings                per share:             |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |   |                                  | 0.20      |   |   | 0.22 |   |   | 0.16 |   |   | 0.17 |   |
| Diluted                                        |   |                                  | 0.19      |   |   | 0.21 |   |   | 0.16 |   |   | 0.16 |   |

| (1) | Net                income in 2005 includes recurring charges of $122.7 million related                to the Redemption and $57.8 million in special-litigation items for                accrued interest and bond costs related to the COH trial judgment                and net                amounts paid in 2005 related to other litigation                settlements.        |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Net                income in 2004 includes recurring charges of $145.5 million related                to the                Redemption and $37.1 million in special-litigation items for accrued                interest and bond costs related to the COH trial judgment, net of                a                released accrual on a separate litigation matter.                       |
| (3) | Certain                costs and expenses of $4.7 million, $4.8 million, and $6.0 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. |

| **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*

----

*Changes      in Internal Controls over Financial Reporting*

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

----

**Report      of Independent Registered Public Accounting Firm**

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

----

**PART      III**

| **Item                10.** | **DIRECTORS                AND EXECUTIVE OFFICERS OF THE                COMPANY** |
|-----------------------------|-----------------------------------------------------------------------------------|

| **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** |
|-----------------------------|----------------------------------------------------------------------------------|

| **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 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                herewith                                                                                                                                                                                                                  |
| 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 Hoffman-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 as of                January                1, 2002 †                                                                                                                                      | Filed                as an exhibit to our Annual Report on Form 10-K for the year ended                December 31, 2002 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  | Genentech,                Inc. 1991 Employee Stock Plan, as amended on April 23, 2003 †                                                                                                                                   | Filed                as an exhibit to our Annual Report on Form 10-K for the year ended                December 31, 2003 filed with the Commission and incorporated herein                by                reference.                        |
| 10.18  | 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.                                                                             |
| 10.19  | 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,                2005.                                 |
| 10.20  | 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.      |
| 10.21  | 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.  |
| 10.22  | 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.                                                                               |
| 10.23  | First                Amendment to Transition Agreement between Genentech, Inc. and Myrtle                S.                Potter dated December 29, 2005†                                                                | Filed                herewith                                                                                                                                                                                                                 |
| 10.24  | 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.                        |
| 10.25  | 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.                      |
| 10.26  | 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.    |
| 10.27  | 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.    |
| 10.28  | First                Amendment to the Manufacturing and Supply Agreement between Genentech,                Inc. and Lonza Biologics, Inc. dated March 14, 2005 *                                                                | Filed                herewith                                                                                                                                                                                                                 |

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| 10.29  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30  | 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                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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

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**SIGNATURES**

|   |                                         |   | **GENENTECH,                INC.**Registrant |
|--------|----------------------------------------------|--------|----------------------------------------------|
|   |                                         |   |
|   |                                         |   |                                         |   |
|   |                                         |   |                                         |   |
| Date:  |   February                17, 2006 |   | By:                                          | /s/                JOHN M. WHITING |
|   |                                         |   |                                         | John                M. Whiting |
|   |                                         |   |                                         | Vice                President, Controller, andChief                Accounting Officer |

**POWER      OF ATTORNEY**

| **Signature**                                       |   | **Title**                                                  |   | **Date**                         |
|-----------------------------------------------------|--------|------------------------------------------------------------|--------|----------------------------------|
|                                                |   |                                                       |   |                             |
| **Principal                Executive Officer:**     |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
| /s/                ARTHUR D. LEVINSON               |   | Chairman                and Chief Executive Officer        |   | February                17, 2006 |
| Arthur                D. Levinson                   |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
| **Principal                Financial Officer:**     |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
| /s/                DAVID                A. EBERSMAN |   | Executive                Vice                President and |   | February                17, 2006 |
| David                A. Ebersman                    |   | Chief                Financial Officer                     |   |                             |
|                                                |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
| **Principal                Accounting Officer:**    |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
|                                                |   |                                                       |   |                             |
| /s/                JOHN M. WHITING                  |   | Vice                President, Controller, and             |   | February                17, 2006 |
| John                M. Whiting                      |   | Chief                Accounting Officer                    |   |                             |

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| **Signature**                            |   | **Title** |   | **Date**                         |
|------------------------------------------|--------|-----------|--------|----------------------------------|
|                                     |   |      |   |                             |
| **Directors:**                           |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
| /s/                HERBERT W. BOYER      |   | Director  |   | February                17, 2006 |
| Herbert                W. Boyer          |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
| /s/                WILLIAM M. BURNS      |   | Director  |   | February                17, 2006 |
| William                M. Burns          |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
| /s/                ERICH HUNZIKER        |   | Director  |   | February                17, 2006 |
| Erich                Hunziker            |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
| /s/                JONATHAN K.C. KNOWLES |   | Director  |   | February                17, 2006 |
| Jonathan                K.C. Knowles     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
| /s/                DEBRA L. REED         |   | Director  |   | February                17, 2006 |
| Debra                L. Reed             |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
|                                     |   |      |   |                             |
| /s/                CHARLES A. SANDERS    |   | Director  |   | February                17, 2006 |
| Charles                A. Sanders        |   |      |   |                             |

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**SCHEDULE      II**

**GENENTECH,      INC.**

**VALUATION      AND QUALIFYING ACCOUNTS**

*(in      thousands)*

|                                               |   | **Balance                at****Beginning****of                Period** |   | **Addition****Charged                to****Cost                and****Expenses** |   | **Deductions*** |   | **Balance                at****End                of****Period** |     |
|----------------------------------------------------|--------|------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|-----------------|--------|------------------------------------------------------------------|----------|
| **Accounts                receivable allowances:** |   |                                                                   |   |                                                                             |   |            |   |                                                             |     |
| Year                Ended December 31, 2005:       |   | $                                                                      | 61,557 |                                                                             | $      | 306,726         |   | $                                                                | (284,439 | ) | $ | 83,844 |   |
| Year                Ended December 31, 2004:       |   | $                                                                      | 47,290 |                                                                             | $      | 187,737         |   | $                                                                | (173,470 | ) | $ | 61,557 |   |
| Year                Ended December 31, 2003:       |   | $                                                                      | 35,713 |                                                                             | $      | 146,612         |   | $                                                                | (135,035 | ) | $ | 47,290 |   |
| **Inventory                reserves:**             |   |                                                                   |   |                                                                             |   |            |   |                                                             |     |   |   |   |   |
| Year                Ended December 31, 2005:       |   | $                                                                      | 45,837 |                                                                             | $      | 33,177          |   | $                                                                | (24,266  | ) | $ | 54,748 |   |
| Year                Ended December 31, 2004:       |   | $                                                                      | 20,683 |                                                                             | $      | 56,657          |   | $                                                                | (31,503  | ) | $ | 45,837 |   |
| Year                Ended December 31, 2003:       |   | $                                                                      | 20,975 |                                                                             | $      | 16,232          |   | $                                                                | (16,524  | ) | $ | 20,683 |   |

|   | 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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