**EXHIBIT 13**

**GENZYMECORPORATION AND SUBSIDIARIESFINANCIAL STATEMENTS**
|                                                                                                                                        | ** ** | **Page No.** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| Consolidated Selected Financial Data                                                                                                   |       | F-2               |
| Management’s Discussion and Analysis of Genzyme  Corporation and Subsidiaries’ Financial Condition and Results of Operations |       | F-7               |
| Report of Independent Registered Public Accounting  Firm                                                                               |       | F-69              |
| Consolidated Statements of Operations and  Comprehensive Income for the Years Ended December 31, 2006, 2005 and  2004             |       | F-71              |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                                                     |       | F-72              |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005  and 2004                                      |       | F-73              |
| Consolidated Statements  of Stockholders’ Equity for the Years Ended December 31, 2006,  2005 and 2004                       |       | F-75              |
| Notes to Consolidated Financial Statements                                                                                             |       | F-76              |

 

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**GENZYME CORPORATION AND SUBSIDIARIESConsolidated Selected Financial Data**

These selected financial data have been derived fromour audited, consolidated financial statements, including the consolidatedbalance sheets at December 31, 2006 and 2005 and the related consolidatedstatements of operations and of cash flows for the three years ended December 31,2006 and notes thereto appearing elsewhere herein. You should read thefollowing information in conjunction with our audited, consolidated financialstatements and related notes contained elsewhere in this Annual Report on Form 10-K.These selected financial data may not be indicative of our future financialcondition due to the risks and uncertainties associated with operating ourbusiness, including those described under the caption “Management’s Discussionand Analysis of Genzyme Corporation and Subsidiaries’ Financial Condition andResults of Operations—Risk Factors” included in this Annual Report on Form 10-K.

**CONSOLIDATEDSTATEMENTS OF OPERATIONS DATA**

| ** **                                                                           | ** ** | **For the Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                           | ** ** | **(Amounts in thousands)**                          | ** ** |
| Revenues:                                                                            |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net product sales                                                                    |       | $                                                             | 2,887,409  |   | $ | 2,453,303 |   | $ | 1,976,191 |   | $ | 1,563,509 |   | $ | 1,199,617 |   |
| Net service sales                                                                    |       | 282,118                                                       |       | 261,379 |   | 212,392 |   | 130,984 |   | 114,493 |   |
| Research and development revenue                                                     |       | 17,486                                                        |       | 20,160 |   | 12,562 |   | 19,378 |   | 15,362 |   |
| Total revenues                                                                       |       | 3,187,013                                                     |       | 2,734,842 |   | 2,201,145 |   | 1,713,871 |   | 1,329,472 |   |
| Operating  costs and expenses:                                                       |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cost of products sold (1)                                                            |       | 536,388                                                       |       | 462,177 |   | 448,442 |   | 399,961 |   | 309,634 |   |
| Cost of services sold (1)                                                            |       | 199,283                                                       |       | 170,475 |   | 140,144 |   | 75,683 |   | 66,575 |   |
| Selling, general and administrative (1)                                              |       | 1,010,400                                                     |       | 787,839 |   | 599,388 |   | 519,977 |   | 438,035 |   |
| Research and development (1)                                                         |       | 649,951                                                       |       | 502,657 |   | 391,802 |   | 335,256 |   | 308,487 |   |
| Amortization of intangibles                                                          |       | 209,355                                                       |       | 181,632 |   | 109,473 |   | 80,257 |   | 70,278 |   |
| Purchase of in-process research and development (2)                             |       | 552,900                                                       |       | 29,200 |   | 254,520 |   | 158,000 |   | 1,879 |   |
| Charges for impaired goodwill (3)                                                    |       | 219,245                                                       |       | — |   | — |   | 102,792 |   | — |   |
| Charges for impaired assets                                                          |       | —                                                        |       | — |   | 4,463 |   | 10,894 |   | 22,944 |   |
| Total operating costs and expenses                                                   |       | 3,377,522                                                     |       | 2,133,980 |   | 1,948,232 |   | 1,682,820 |   | 1,217,832 |   |
| Operating income (loss)                                                              |       | (190,509                                                      | )          | 600,862 |   | 252,913 |   | 31,051 |   | 111,640 |   |
| Other income (expenses):                                                             |       |                                                          |       |   |   |   |   |   |   |   |   |
| Equity in income (loss) of equity method investments                            |       | 15,705                                                        |       | 151 |   | (15,624 | ) | (16,743 | ) | (16,858 | ) |
| Minority interest                                                                    |       | 10,418                                                        |       | 11,952 |   | 5,999 |   | 2,232 |   | — |   |
| Gains (losses) on investments in equity securities, net  (4)                    |       | 73,230                                                        |       | 5,698 |   | (1,252 | ) | (1,201 | ) | (14,497 | ) |
| Loss on sale of product lines (5)                                                    |       | —                                                        |       | — |   | — |   | (27,658 | ) | — |   |
| Other                                                                                |       | (2,045                                                        | )          | (1,535 | ) | (357 | ) | 959 |   | 40 |   |
| Investment income                                                                    |       | 56,001                                                        |       | 31,429 |   | 24,244 |   | 43,015 |   | 51,038 |   |
| Interest expense                                                                     |       | (15,478                                                       | )          | (19,638 | ) | (38,227 | ) | (26,600 | ) | (27,152 | ) |
| Total other income (expenses)                                                        |       | 137,831                                                       |       | 28,057 |   | (25,217 | ) | (25,996 | ) | (7,429 | ) |
| Income (loss) before income taxes (1)                                                |       | (52,678                                                       | )          | 628,919 |   | 227,696 |   | 5,055 |   | 104,211 |   |
| (Provision for) benefit from income taxes (1,3)                                      |       | 35,881                                                        |       | (187,430 | ) | (141,169 | ) | (72,647 | ) | (19,015 | ) |
| Net income (loss) before cumulative effect of changes in  accounting principles |       | (16,797                                                       | )          | 441,489 |   | 86,527 |   | (67,592 | ) | 85,196 |   |
| Cumulative effect of changes in accounting principles (6)                       |       | —                                                        |       | — |   | — |   | — |   | (98,270 | ) |
| Net income (loss) (1)                                                                |       | $                                                             | (16,797    | ) | $ | 441,489 |   | $ | 86,527 |   | $ | (67,592 | ) | $ | (13,074 | ) |

 

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**GENZYME CORPORATION AND SUBSIDIARIES Consolidated Selected Financial Data  (Continued)**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS DATA(Continued)**

| ** **                                                             | ** ** | **For the Years Ended December 31,**                      | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                             | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| **Net income (loss) per share:**                                       |       |                                                                               |       |   |   |   |   |   |   |   |   |
| **Allocated to Genzyme Stock (7):**                                    |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss)  allocated to Genzyme Stock                          |       | $                                                                                  | (16,797    | ) | $ | 441,489 |   | $ | 86,527 |   | $ | 94,283 |   | $ | 178,526 |   |
|                                                                   |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss) per share of Genzyme Stock:                          |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                  |       | $                                                                                  | (0.06      | ) | $ | 1.73 |   | $ | 0.38 |   | $ | 0.43 |   | $ | 0.83 |   |
| Diluted (1,8)                                                          |       | $                                                                                  | (0.06      | ) | $ | 1.65 |   | $ | 0.37 |   | $ | 0.42 |   | $ | 0.81 |   |
| Weighted average shares outstanding:                                   |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                  |       | 261,624                                                                            |       | 254,758 |   | 228,175 |   | 219,376 |   | 214,038 |   |
| Diluted (1,8)                                                          |       | 261,624                                                                            |       | 272,224 |   | 234,318 |   | 225,976 |   | 219,388 |   |
| **Allocated to Biosurgery Stock (7):**                                 |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net loss allocated  to Biosurgery Stock                                |       |                                                                               |       |   |   |   |   | $ | (152,651 | ) | $ | (167,886 | ) |
| Net loss per share  of Biosurgery Stock—basic and diluted         |       |                                                                               |       |   |   |   |   | $ | (3.76 | ) | $ | (4.20 | ) |
| Weighted average  shares outstanding                                   |       |                                                                               |       |   |   |   |   | 40,630 |   | 39,965 |   |
| **Allocated to Molecular Oncology Stock (7):**                         |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net loss allocated  to Molecular Oncology Stock                        |       |                                                                               |       |   |   |   |   | $ | (9,224 | ) | $ | (23,714 | ) |
| Net loss per share of Molecular Oncology Stock—basic  and diluted |       |                                                                               |       |   |   |   |   | $ | (0.54 | ) | $ | (1.41 | ) |
| Weighted average  shares outstanding                                   |       |                                                                               |       |   |   |   |   | 16,958 |   | 16,827 |   |

 

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**GENZYME CORPORATION AND SUBSIDIARIES Consolidated Selected Financial Data  (Continued)**

**CONSOLIDATED BALANCE SHEET DATA**

| ** **                                                                                            | ** ** | **December 31,**                | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                            | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                            | ** ** | **(Amounts in thousands)** | ** ** |
| Cash and  investments (9)                                                                             |       | $                                    | 1,285,604  |   | $ | 1,089,102 |   | $ | 1,079,454 |   | $ | 1,227,460 |   | $ | 1,195,004 |   |
| Working capital                                                                                       |       | 1,338,062                            |       | 1,114,976 |   | 1,009,231 |   | 930,951 |   | 630,936 |   |
| Total assets                                                                                          |       | 7,191,188                            |       | 6,878,865 |   | 6,069,421 |   | 5,004,528 |   | 4,093,199 |   |
| Long-term  debt, capital lease obligations and convertible debt, including current  portion (10) |       | 816,029                              |       | 820,113 |   | 940,494 |   | 1,435,759 |   | 894,775 |   |
| Stockholders’  equity                                                                            |       | 5,660,711                            |       | 5,149,867 |   | 4,380,156 |   | 2,936,412 |   | 2,697,847 |   |
| There were no cash dividends paid.                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
|                                                                                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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       (1)   Effective January 1, 2006,we adopted the provisions of FAS 123R, “Share-Based Payment, an amendmentof FASB Statement Nos. 123 and 95,” which requires us to recognize stock-basedcompensation expense in our financial statements for all share-basedpayment awards made to employees and directors based upon the grant date fairvalue of those awards. For the year ended December 31, 2006, we recordedpre-tax stock-based compensation expense, net of estimated forfeitures, whichwere allocated based on the functional cost center of each employee as follows(amounts in thousands, except per share amounts):

| ** **                                    | ** ** | **For the Year Ended  December 31, 2006** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Cost of products  and services sold           |       |                                                               | $          | (21,430 | ) |   |
| Selling, general  and administrative          |       |                                                               | (121,822   | ) |   |
| Research and  development                     |       |                                                               | (65,248    | ) |   |
| Total                                         |       |                                                               | (208,500   | ) |   |
| Less: tax benefit  of stock options           |       |                                                               | 66,331     |   |   |
| Stock-based  compensation expense, net of tax |       |                                                               | $(142,169  | ) |   |
| Net loss per share—basic and diluted     |       |                                                               | $          | (0.54 | ) |   |

 

       (2)  Includes charges for pre-tax IPR&D incurred in connection withthe following acquisitions:

·       2006—$552.9million related to our acquisition of AnorMED;

·       2005—$7.0 millionrelated to our acquisition of gene therapy assets from Avigen, $12.7 millionrelated to our acquisition of Bone Care and $9.5 million related to ouracquisition of Verigen;

·       2004—$254.5 millionrelated to our acquisition of ILEX Oncology, Inc., or ILEX Oncology; and

·       2003—$158.0 millionrelated to our acquisition of SangStat.

       (3)   Chargefor impaired goodwill includes the following charges recorded in accordancewith FAS 142, “Goodwill and Other Intangible Assets”:

·       2006—a $219.2 millionpre-tax impairment charge and $69.8 million of related tax benefits to writeoff the goodwill of our Genetics reporting unit; and

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**GENZYME CORPORATION AND SUBSIDIARIES Consolidated Selected Financial Data  (Continued)**

·       2003—a $102.8 million charge to write off thegoodwill associated with our orthopaedics business unit.

       (4)   For 2006, includes a $69.4million gain on the sale of our investment in Cambridge Antibody TechnologyGroup plc, or CAT, a $6.4 million gain on the sale of our investment inBioMarin and $2.8 million of net gains on the sales of other investments inequity securities, offset by $5.4 million of impairment charges related to ourinvestments in ViaCell, Inc., or ViaCell, Cortical Pty Ltd. and RenaMedBiologics, Inc., or RenaMed.

 

       (5)   Reflects a loss of $27.7 million related to the sale ofsubstantially all of the tangible and intangible assets directly associatedwith our cardiac device business to Teleflex Inc.

       (6)   Effective January 1, 2002,in connection with the adoption of FAS 142, we tested the goodwill of ourcardiothoracic business unit for impairment and as a result, reduced goodwillby recording a cumulative effect impairment charge of $98.3 million in ourconsolidated statements of operations for the year ended December 31,2002.

       (7)   Through June 30, 2003, wehad three outstanding series of common stock—Genzyme General Stock, GenzymeBiosurgery Stock and Genzyme Molecular Oncology Stock, which we refer to as “trackingstock.” Unlike typical common stock, each of our tracking stocks was designedto reflect the value and track the financial performance of a specific subsetof our business operations and its allocated assets, rather than operations andassets of our entire company. Through June 30, 2003, we allocated earningsor losses to each series of tracking stock based on the net income or lossattributable to the corresponding division determined in accordance withaccounting principles generally accepted in the United States, as adjusted forthe allocation of tax benefits. Effective July 1, 2003, we eliminated ourtracking stock capital structure and, as a result, ceased allocating earningsto Biosurgery Stock and Molecular Oncology Stock. Effective July 1, 2003,we have one outstanding series of common stock, which we refer to as GenzymeStock, and as of that date, all of our earnings are allocated to Genzyme Stock.Earnings or losses allocated to Biosurgery Stock and Molecular Oncology Stockprior to that date remain allocated to those series of stock in the preparationof our consolidated financial statements and are not affected by theelimination of our tracking stock structure. Accordingly, earnings or lossesallocated to Biosurgery Stock and Molecular Oncology Stock represent earningsallocated to those tracking stocks through June 30, 2003. Earnings orlosses allocated to Genzyme Stock through June 30, 2003 represent theearnings or losses of Genzyme General, as adjusted for the allocation of taxbenefits. Earnings or losses allocated to Genzyme Stock after June 30,2003 represent the earnings or losses for the corporation as a whole.

       (8)   For the year ended December 31,2006, basic and diluted earnings per share are the same due to our net loss forthe period. Diluted earnings per share for the year ended December 31,2005, reflects the retroactive restatement of diluted earnings per share anddiluted weighted average shares outstanding in accordance with Emerging IssuesTask Force, or EITF, Issue No. 04-8, “The Effect of ContingentlyConvertible Debt on Diluted Earnings Per Share.” The potentially dilutiveeffect of the 9.7 million shares of Genzyme Stock issuable upon conversionof our $690.0 million in principal of 1.25% convertible senior notes isexcluded from the calculation of diluted earnings per share for the year ended December 31,2004 because the effect would be anti-dilutive. Diluted earnings per share forthe year ended December 31, 2003 was not impacted by the adoption ofEITF 04-8 because our 1.25% 

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**GENZYME CORPORATION AND SUBSIDIARIES Consolidated Selected Financial Data  (Continued)**

convertible senior noteswere issued in and only outstanding for a portion of the month of December2003.

       (9)   Includes cash, cashequivalents, short- and long-term investments.

(10)   Long-term debt, capitallease obligations and convertible debt, including current portions, consists of(amounts in millions):

| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| 1.25% convertible  senior notes                       |       | $                     | 690.0      |   | $ | 690.0 |   | $ | 690.0 |   | $ | 690.0 |   | $ | — |   |
| Capital lease  obligations                            |       | 117.1                 |       | 121.4 |   | 150.1 |   | 154.5 |   | 25.8 |   |
| Revolving credit  facility maturing in July 2011 |       | —                |       | — |   | — |   | — |   | — |   |
| Revolving credit  facility terminated in July 2006    |       | —                |       | — |   | 100.0 |   | — |   | 284.0 |   |
| 3% convertible  subordinated debentures               |       | —                |       | — |   | — |   | 575.0 |   | 575.0 |   |
| Other                                                 |       | 8.9                   |       | 8.7 |   | 0.4 |   | 16.3 |   | 10.0 |   |
| Total                                                 |       | $                     | 816.0      |   | $820.1 |   | $ | 940.5 |   | $ | 1,435.8 |   | $ | 894.8 |   |
|                                                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-6

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF GENZYME CORPORATIONAND SUBSIDIARIES’ FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

When reviewing thediscussion below, you should keep in mind the substantial risks anduncertainties that characterize our business. In particular, we encourage youto review the risks and uncertainties described under “Factors Affecting FutureOperating Results” below. These risks and uncertainties could cause actualresults to differ materially from those forecasted in forward-lookingstatements or implied by past results and trends. Forward-lookingstatements are statements that attempt to project or anticipate futuredevelopments in our business; we encourage you to review the examples offorward-looking statements under “Note Regarding Forward-LookingStatements” at the beginning of this report. These statements, like allstatements in this report, speak only as of the date of this report (unlessanother date is indicated), and we undertake no obligation to update or revisethe statements in light of future developments.

**INTRODUCTION**

We area global biotechnology company dedicated to making a major impact on the livesof people with serious diseases. Our broad product and service portfolio isfocused on rare disorders, renal diseases, orthopaedics, organ transplant, anddiagnostic and predictive testing. We are organized into five financialreporting units, which we also consider to be our reporting segments:

·       Renal,which develops, manufactures and distributes products that treat patientssuffering from renal diseases, including chronic renal failure. The unitderives substantially all of its revenue from sales of Renagel (including salesof bulk sevelamer) and Hectorol;

·       Therapeutics,which develops, manufactures and distributes therapeutic products, with anexpanding focus on products to treat patients suffering from genetic diseasesand other chronic debilitating diseases, including a family of diseases knownas lysosomal storage disorders, or LSDs, and other specialty therapeutics, suchas Thyrogen. The unit derives substantially all of its revenue from sales ofCerezyme, Fabrazyme, Myozyme and Thyrogen;

·       Transplant,which develops, manufactures and distributes therapeutic products that addressthe pre-transplantation, prevention and treatment of acute rejection inorgan transplantation, as well as other auto-immune disorders. The unitderives substantially all of its revenue from sales of Thymoglobulin andLymphoglobuline;

·       Biosurgery,which develops, manufactures and distributes biotherapeutics and biomaterial-basedproducts, with an emphasis on products that meet medical needs in theorthopaedics and broader surgical areas. The unit derives substantially all ofits revenue from sales of Synvisc, the Sepra line of products, Carticel andMACI; and

·       Genetics,which provides testing services for the oncology, prenatal and reproductivemarkets.

We report the activities of our diagnostic products,oncology, bulk pharmaceuticals and cardiovascular business units under thecaption “Other.” We report our corporate, general and administrative operationsand corporate science activities under the caption “Corporate.”

Effective January 1, 2006, as a result of changesin how we review our business, certain general and administrative expenses, aswell as research and development expenses related to our preclinicaldevelopment programs, which were formerly allocated amongst our reportingsegments and Other, are now allocated to Corporate.

Our diagnostic products business unit was formerlyreported combined with our Genetics business unit under the caption“Diagnostics/Genetics.”  Beginning withthis report, we now include our diagnostic products business unit under thecaption “Other.”

F-7

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We have revised our 2005and 2004 segment disclosures to conform to our 2006 presentation.

**MERGERS ANDACQUISITIONS**

***Acquisition of AnorMED***

In November 2006, we acquired AnorMED, a publicly-tradedchemical-based biopharmaceutical company based in Langley, British Columbia,Canada with a focus on the discovery, development and commercialization of newtherapeutic products in the area of hematology, oncology and humanimmunodeficiency virus, or HIV. We paid gross consideration of$589.2 million in cash, including $584.2 million for the shares ofAnorMED’s common stock outstanding on the date of acquisition and approximately$5 million for acquisition costs. Net consideration was$569.0 million as we acquired AnorMED’s cash and short-term investmentstotaling $20.2 million. As part of the transaction, we acquired Mozobil, alate-stage product candidate in development for hematopoietic stem celltransplantation, which we have added to our Transplant business. Multipleearlier studies showed that Mozobil rapidly increases the number of stem cells thatmove out of the bone marrow and into a patient’s blood, which is an importantstep in preparing a patient for a stem cell transplant. We included AnorMED’s resultsof operations in our consolidated statements of operations from November 7,2006, the date of acquisition.

The purchase price was allocated to the tangible andintangible assets acquired and liabilities assumed based on their estimatedfair values at the date of acquisition. The excess of the purchase price overthe estimated fair value of the assets acquired and liabilities assumedamounted to $29.1 million, which was allocated to goodwill. We expect thatsubstantially all of the amount allocated to goodwill will be deductible fortax purposes.

The allocation of thepurchase price remains subject to potential adjustments, including adjustmentsfor liabilities associated with certain exit activities and tax restructuringactivities.

***Acquisition of Surgi.B***

In March 2006,through a series of transactions we acquired Surgi.B, a privately-held companybased in Beauzelle, France, which owned the exclusive rights to manufacture andsell GlucaMesh and GlucaTex, two beta glucan-coated mesh products for usein the surgical repair of inguinal hernias, for an aggregate up-front cashpayment of $5.5 million. We allocated the entire purchase price to licensefees, a component of other intangible assets on our consolidated balance sheet,based on their estimated fair values as of March 30, 2006, the date of acquisition.In addition, we are obligated to make certain contingent milestone paymentstotaling up to approximately $6 million and contingent royalty paymentsbased on future sales of GlucaMesh and GlucaTex. Currently, GlucaMesh is soldonly in France.

***Acquisition of Gene Therapy Assets from Avigen***

In December 2005, weacquired certain gene therapy assets from Avigen, a publicly-traded,biopharmaceutical company based in Alameda, California with a focus on uniquesmall molecule therapeutics and biologics to treat serious neurologicaldisorders, in exchange for an up-front cash payment of$12.0 million. We allocated the purchase price to the intangible assetsacquired based on their estimated fair values as of December 19, 2005, thedate of acquisition. We allocated $5.0 million of the up-front cashpayment to technology in other intangible assets on our consolidated balancesheet and recorded a charge of $7.0 million to IPR&D. In addition, wemay be obligated to make up to approximately $38 million of potentialmilestone payments based on the development and approval of, and royaltypayments based on the sale of, products developed between now and 2020 thatrely on the intellectual property purchased from Avigen.

F-8

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***Acquisition of Equal Diagnostics***

In July 2005, we acquired Equal Diagnostics, aprivately-held diagnostics company based in Exton, Pennsylvania, thatformerly served as a distributor for our clinical chemistry reagents. We paid$5.0 million in initial cash payments and issued promissory notes to the threeformer shareholders of Equal Diagnostics totaling $10.0 million inprincipal and interest. These notes bear interest at 3.86% and are payable overeight years in equal annual installments commencing on March 31, 2007. Inaddition to these guaranteed payments, we may be obligated to make additionalcash payments of up to an aggregate of approximately $8 million during theperiod commencing March 31, 2007 and ending March 31, 2014 based uponthe gross margin of the acquired business, as defined in the purchaseagreement. We included Equal Diagnostics’ results of operations in ourconsolidated statements of operations from July 15, 2005, the date ofacquisition.

The purchase price wasallocated to the tangible and intangible assets acquired and liabilitiesassumed based on their estimated fair values at the date of acquisition. Theexcess of the purchase price over the estimated fair value of the assetsacquired and liabilities assumed amounted to $5.3 million, which wasallocated to goodwill. We expect that substantially all of the amount allocatedto goodwill will be deductible for tax purposes.

***Acquisition of Bone Care***

In July 2005, we acquired Bone Care, a publicly-heldspecialty pharmaceutical company based in Middleton, Wisconsin with a focus onnephrology. We paid gross consideration of $712.3 million in cash,including $668.4 million for outstanding shares of Bone Care’s commonstock, $39.9 million to buy out options to purchase shares of Bone Care’scommon stock and restricted stock outstanding on the date of acquisition, andapproximately $4 million for acquisition costs. Net consideration was$604.3 million as we acquired Bone Care’s cash and short-terminvestments totaling $108.0 million. As part of the transaction, weacquired Hectorol, a line of vitamin D2 pro-hormone products used to treatsecondary hyperparathyroidism in patients on dialysis and those with earlierstage CKD, which we have added to our Renal business. We included Bone Care’s resultsof operations in our consolidated statements of operations from July 1,2005, the date of acquisition.

In October 2004, Bone Care was one of sevencompanies, all of which market treatments, therapies or diagnostics for kidneydisease patients, that received a subpoena from the office of the United StatesAttorney for the Eastern District of New York. The subpoena required Bone Careto provide a wide range of documents related to numerous aspects of itsbusiness and operations. The subpoena included specific requests for documentsrelated to testing for parathyroid hormone levels and vitamin D therapies. BoneCare has cooperated, and we continue to cooperate, with the government’sinvestigation. To our knowledge, no civil or criminal proceedings have beeninitiated against Bone Care or Genzyme at this time, although we cannot predictwhen or if any proceedings might be initiated. As a result, we have notrecorded any contingent liabilities related to this investigation. Any suchliabilities that may arise out of this investigation in the future will berecorded as a charge in our consolidated statements of operations in the periodin which such liabilities become probable and estimable.

The purchase price, as adjusted, was allocated to thetangible and intangible assets acquired and liabilities assumed based on theirestimated fair values at the date of acquisition. The excess of the purchaseprice over the estimated fair value of the assets acquired and liabilitiesassumed amounted to $228.8 million, which was allocated to goodwill. Weexpect that substantially all of the amount allocated to goodwill will not bedeductible for tax purposes.

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***Acquisition of Verigen***

In February 2005, weacquired Verigen, a private company based in Leverkusen, Germany with aproprietary cell therapy product for cartilage repair (referred to as MACI)that is currently sold in Europe and Australia. We paid gross consideration of$12.7 million, including $0.9 million for acquisition costs, and maybe obligated to make additional cash payments of up to an aggregate of approximately$38 million over the next six years, based upon the achievement ofdevelopment and commercial milestones relating to regulatory approval andcommercialization of MACI in the United States, as well as contingent paymentson worldwide sales of that product. Net consideration was $11.8 million aswe acquired Verigen’s cash totaling $0.9 million. We acquiredapproximately 96% of Verigen’s outstanding shares in February 2005 andacquired the remaining outstanding shares in August 2005. We included itsresults of operations in our consolidated statements of operations from February 8,2005, the date of acquisition.

***Acquisition of Synvisc Sales and Marketing Rights fromWyeth***

In January 2005, weconsummated an arrangement with Wyeth under which we reacquired the sales andmarketing rights to Synvisc in the United States, as well as Germany, Poland,Greece, Portugal and the Czech Republic. In exchange for the sales andmarketing rights, we paid initial payments totaling $121.0 million in cashto Wyeth and otherwise incurred $0.3 million of acquisition costs. We havealso accrued contingent royalty payments to Wyeth totaling $118.3 million,of which $110.0 million had been paid as of December 31, 2006.Distribution rights (a component of other intangible assets, net) in ourconsolidated balance sheet as of December 31, 2006 includes a total of$239.6 million for the initial and contingent royalty payments (made andaccrued) as of that date. We will make a series of additional contingentroyalty and milestone payments to Wyeth based on the volume of Synvisc sales inthe covered territories. These contingent royalty and milestone payments couldextend out to June 2012, or could total a maximum of $293.7 million,whichever comes first.

***Acquisition of ILEX Oncology***

In December 2004, we acquired ILEX Oncology, anoncology drug development company, for approximately $1 billion. We includedits results of operations in our consolidated statements of operations from December 20,2004, the date of acquisition.

The purchase price wasallocated to the intangible assets acquired and liabilities assumed based ontheir estimated fair values at the date of acquisition. We also recorded anestimated tax liability of $47.5 million related to the integration ofILEX Oncology. The excess of the purchase price over the estimated fair valueof the assets acquired and liabilities assumed amounted to $445.6 million,which was allocated to goodwill. We expect that substantially all of the amountallocated to goodwill will not be deductible for tax purposes.

***Acquisition of Physician Services and AnalyticalServices Business Units of IMPATH, Inc.***

In May 2004, we acquired substantially all of thepathology/oncology testing assets related to the Physician Services andAnalytical Services business units of IMPATH, Inc., or IMPATH, a nationalmedical testing provider, for total cash consideration of $215.3 million,including acquisition costs. At the time of the purchase, IMPATH operated thesebusiness units as “debtors-in-possession” under the United States BankruptcyCode. The assets were sold by IMPATH by means of a sale process conductedpursuant to Section 363 of the United States Bankruptcy Code. We includedthe results of operations related to the acquired business units in ourconsolidated statements of operations from May 1, 2004, the date ofacquisition. The purchase price was subject to adjustment based upon thecompletion of a post-closing assessment of the working capital of theacquired business units as of April 30, 2004. Pursuant to a Settlement andRelease Agreement with IMPATH that was approved by the Bankruptcy Court on 

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December 28, 2006,the working capital dispute was resolved  with no resulting adjustment to the purchaseaccounting.

**CRITICAL ACCOUNTINGPOLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES**

The significantaccounting policies and methods used in the preparation of our consolidatedfinancial statements are described in Note A., “Summary of SignificantAccounting Policies.” The preparation of consolidated financial statementsunder accounting principles generally accepted in the United States requires usto make certain estimates and judgments that affect reported amounts of assets,liabilities, revenues, expenses, and disclosure of contingent assets andliabilities in our financial statements. Our actual results could differ fromthese estimates under different assumptions and conditions. We believe that thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of our consolidated financial statements:

·       RevenueRecognition;

·       Stock-BasedCompensation;

·       IncomeTaxes;

·       Inventories;

·       Long-Livedand Intangible Assets;

·       AssetImpairments;

·       In-ProcessResearch and Development; and

·       Strategic EquityInvestments.

**Revenue Recognition**

***Product Sales***

The timing of product shipments and receipts by thecustomer can have a significant impact on the amount of revenue recognized in aparticular period. Also, most of our products, are sold at least in partthrough wholesalers and specialty distributors, along with direct sales tohospitals, homecare, government, and physicians. Inventory in the distributionchannel consists of inventory held by wholesalers and specialty distributors,who are our customers, and inventory held by retailers, such as pharmacies andhospitals. Our revenue in a particular period can be impacted by increases ordecreases in channel inventories. If wholesaler or retail inventories increasedto excessive levels, we could experience reduced purchases in subsequentperiods, or product returns from the distribution channel due to overstocking,low end-user demand or product expiration.

We use a variety of data sources to determine theamount of inventory in our channel. For most product lines with this customerbase, we receive data on sales and inventory levels directly from our primarycustomers. For key product lines such as our Therapeutics and Renal areas, ourdata sources also include prescription and wholesaler data purchased fromexternal data providers. As part of our efforts to limit inventory held bydistributors and to gain improved visibility into the distribution channel, wehave executed agreements to cap the amounts of inventory that they carry andprovide ongoing reports to verify inventory and sales data.

***Product Sales Allowances***

We record productsales net of the following significant categories of product sales allowances:

·       **Contractual discounts andrebates—**We offer rebates and discounts to various government andprivate institutions and account for such by establishing an accrual in anamount equal to our 

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estimate of the discountor rebate. We determine our estimate primarily based on historical experienceand current contract prices. We consider the sales performance of productssubject to these rebates and discounts and levels of inventory in thedistribution channel and adjust the accrual periodically throughout eachquarter to reflect actual experience.

·       **Sales returns**—We record allowances for product returns as areduction of revenue at the time product sales are recorded. The productreturns reserve is estimated based on our experience of returns for each of ourproducts, or for similar products. If the history of product returns changes,the reserve is adjusted appropriately. We determine our estimates of the salesreturn accrual for new products primarily based on the historical sales returnsexperience of similar products, such as those within the same line of productor those within the same or similar therapeutic category.

·       **Prompt payment discounts—**Insome countries related to certain products, we offer cash discounts, generallyas a percentage of the sales price, as an incentive for prompt payment. Weaccount for cash discounts by reducing accounts receivable by the full amountsof the discounts. We consider payment performance and adjust the accrual toreflect actual experience.

***Distributor Fees***

EITF IssueNo. 01-09, “Accounting for Consideration given by a Vendor to aCustomer (including a Reseller of a Vendor’s Products)” specifies that cashconsideration (including a sales incentive) given by a vendor to a customer ispresumed to be a reduction of the selling prices of the vendor’s products orservices and, therefore, shouldbe characterized as a reduction of revenue. That presumption is overcome andthe consideration should be characterized as a cost incurred if, and to theextent that, both of the following conditions are met:

·       thevendor receives, or will receive, an identifiable benefit (goods or services)in exchange for the consideration; and

·       thevendor can reasonably estimate the fair value of the benefit received.

We record fees paid to our distributors for servicesas operating expense only if the criteria set forth above are met. Feesincurred for these services, which were recorded in SG&A in ourconsolidated statements of operations, were $10.6 million in 2006, $14.5million in 2005 and $12.4 million in 2004.

***Collaborations***

We evaluate revenue from agreements that have multipleelements to determine whether the components of the arrangement representseparate units of accounting as defined in EITF Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables.” To recognize revenue for adelivered item in a multiple element arrangement, EITF Issue No. 00-21requires that:

·  thedelivered items have value to the customer on a stand-alone basis;

·  thereis objective and reliable evidence of fair value of the undelivered items; and

·  deliveryor performance is probable and within our control for any delivered items thathave a right of return.

The determination that multiple elements in anarrangement meet the criteria for separate units of accounting requires us toexercise our judgment.

We consider the factors or indicators set forth inEITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versusNet as an Agent,” in deciding whether to record revenue on a gross or netbasis. The determination of whether we should recognize revenue on a gross ornet basis involves judgment based on 

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the relevant facts andcircumstances which relate primarily to whether we act as a principal or agentin the process of generating revenues for the revenue transactions.

**Stock-Based Compensation**

Prior to January 1, 2006, we elected to:

·       accountfor share-based payment awards under Accounting Principles Board OpinionNo., or APB, 25, “Accounting for Stock Issued to Employees,” as amended byFAS 148, “Accounting for Stock-Based Compensation—Transition andDisclosures,” which we refer to collectively as APB 25; and

·       disclosethe pro forma impact of expensing the fair value of our employee and directorstock options and purchases made under our employee stock purchase plan, orESPP, only in the notes to our financial statements.

EffectiveJanuary 1, 2006, we adopted the provisions of:

·       FAS 123R,“Share-Based Payment, an amendment of FASB Statement Nos. 123 and 95,”which requires us to recognize stock-based compensation expense in ourfinancial statements for all share-based payment awards made to employeesand directors based upon the grant date fair value of those awards; and

·       StaffAccounting Bulletin No., or SAB, 107, “Share-Based Payment,” which providesguidance to public companies related to the adoption of FAS 123R.

FAS 123R applies tostock options granted under our employee and director stock option plans andpurchases made under our ESPP, and would also apply to any restricted stock orrestricted stock units we may grant in the future.

Weadopted FAS 123R using the modified prospective transition method, whichrequires us to apply the standard to new equity awards and to equity awardsmodified, repurchased or canceled after January 1, 2006, our adoptiondate. Additionally, compensation expense for the unvested portion of awardsgranted prior to our adoption date shall be:

·       recognizedover the requisite service period, which is generally commensurate with thevesting term; and

·       basedon the original grant date fair value of those awards, as calculated in our proforma disclosures, prior to January 1, 2006, under FAS 123, “Accountingfor Stock-Based Compensation,” as amended by FAS 148, “Accountingfor Stock-Based Compensation—Transition and Disclosures,” which we referto collectively as FAS 123. Changes to the grant date fair value of equityawards granted prior to our adoption date are not permitted underFAS 123R.

The modified prospective transition method does notallow for the restatement of prior periods. Accordingly, our results ofoperations for the year ended December 31, 2006 and future periods willnot be comparable to our results of operations prior to January 1, 2006because our historical results prior to that date do not reflect the impact ofexpensing the fair value of share-based payment awards.

Prior to January 1, 2006, in the pro formadisclosures regarding stock-based compensation included in the notes toour financial statements, we recognized forfeitures of stock options only asthey occurred. Effective January 1, 2006, in accordance with theprovisions of FAS 123R, we are now required to estimate an expectedforfeiture rate for stock options, which is factored into the determination ofour monthly stock-based compensation expense. As a result of the adoptionof FAS 123R, we recorded pre-tax stock-based compensation expensetotaling $208.5 million, net of estimated forfeitures, in our consolidatedstatements of operations for the year ended December 31, 2006.

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We estimate the fair value of each stock option grantusing the Black-Scholes option pricing model. Use of a valuation model requiresmanagement to make certain assumptions with respect to selected model inputs.The key assumptions in the Black-Scholes model are the risk-free interest rate,the dividend yield, the expected option life (in years) and the expectedvolatility of the price of Genzyme Stock. The risk-free interest rate is basedon the U.S. Treasury yield curve in effect on the date of grant. The dividendyield percentage is zero because we do not currently pay dividends nor intendto do so during the expected option life. We use historical data on exercisesof our stock options and other factors to estimate the expected option life (inyears), or term, of the share-based payments granted. We estimate the expectedvolatility rate for our stock options based on the expected term of the equityaward granted. We determine separate volatility rates for each enrollment underour ESPP based on the period from the commencement date of each enrollment toeach applicable purchase date. Changes in these input variables would affectthe amount of expense associated with stock-based compensation. Thecompensation expense recognized for all share-based awards is net of estimated forfeitures.We estimate forfeiture rates based on historical analysis of optionforfeitures. If actual forfeitures should vary from estimated forfeitures,adjustments to stock-based compensation expense may be required in futureperiods.

In connection with theadoption of FAS 123R, we were also required to change the classification,in our consolidated statements of cash flows, of any tax benefits realized uponthe exercise of stock options in excess of that which is associated with theexpense recognized for financial reporting purposes. These amounts arepresented as a financing cash inflow rather than as a reduction of income taxespaid in our consolidated statements of cash flows for the year ended December 31,2006.

**Income Taxes**

We use the asset and liability method of accountingfor deferred income taxes.

Our calculation of theincome tax provision includes significant estimates, including estimates ofincome from foreign sales, research and development credits, orphan drugcredits, state and foreign income taxes and other permanent items. On aquarterly basis throughout the fiscal year, we make our best estimate of thefull year impact of these items on our tax rate and adjust our estimated taxrate accordingly.

We are currently under IRS audits for tax years 2002to 2003, 2004 to 2005, and in certain state and foreign jurisdictions. Webelieve that we have provided sufficiently for all audit exposures andassessments. Settlement of these audits or the expiration of the statute oflimitations on the assessment of income taxes for any tax year may result in anincrease or reduction of future tax provisions. Through December 31, 2006,tax reserves established for uncertain tax provisions were released only uponfinal resolution of the audits or expiration of the applicable statute oflimitations. Our assessment of the potential impact of the required adoption ofFIN 48 effective January 1, 2007 is included under the heading“Recent Accounting Pronouncements—FIN 48, *“Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB StatementNo. 109*,*”* ” included inthis report.

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**Inventories**

We value inventories atcost or, if lower, fair value. We determine cost using the first-in,first-out method. We analyze our inventory levels quarterly and writedown inventory that has become obsolete, inventory that has a cost basis inexcess of its expected net realizable value and inventory in excess of expectedrequirements. Expired inventory is disposed of and the related costs arewritten off. If actual market conditions are less favorable than thoseprojected by management, additional inventory write-downs may berequired.

We capitalize inventoryproduced for commercial sale, which may result in the capitalization ofinventory prior to regulatory approval. In no event is inventory capitalizedprior to completion of a phase 3 clinical trial. If a product is notapproved for sale, it would result in the write off of the inventory and acharge to earnings. Our total inventories at December 31, 2006 do notinclude any inventory for products that have not yet been approved for sale.Our total inventories at December 31, 2005 included $18.8 million ofMyozyme inventory, primarily consisting of finished goods, which had not yetbeen approved for sale. We received marketing authorization for Myozyme fromthe European Union in March 2006 and in the United States inApril 2006

**Long-Lived and Intangible Assets**

***Property, Plant and Equipment***

*As ofDecember 31, 2006, there was $1.6 billion of net property, plant and equipmenton our consolidated balance sheet. We generally depreciate property, plant and equipmentusing the straight-line method over its estimated economic life, whichranges from 3 to 40 years. Determining the economic lives of property,plant and equipment requires us to make significant judgments that canmaterially impact our operating results. There can be no assurance that ourestimates are accurate. If our estimates require adjustment, it could have amaterial impact on our reported results.*

In the ordinary course ofour business, we incur substantial costs to purchase and construct property,plant and equipment. The treatment of costs to purchase or construct theseassets depends on the nature of the costs and the stage of construction. Costsincurred in the initial design and evaluation phase, such as the cost ofperforming feasibility studies and evaluating alternatives, are charged toexpense. Qualifying costs incurred in the committed project planning and designphase, and in the construction and installation phase, are capitalized as partof the cost of the asset. We stop capitalizing costs when an asset issubstantially complete and ready for its intended use. Determining theappropriate period during which to capitalize costs, and assessing whetherparticular costs qualify for capitalization, requires us to make significantjudgments. These judgments can have a material impact on our reported results.

Equipment and facilitiesused to manufacture products subject to FDA or other governmental regulationare required to comply with standards of those regulatory agencies. Theactivities necessary to obtain approval from these regulatory agencies arereferred to as validation costs. We capitalize the cost of validating newequipment and facilities for the underlying manufacturing process. We begincapitalization when we consider the product and manufacturing process to havedemonstrated technological feasibility, and end capitalization when the assetis substantially complete and ready for its intended use. Costs capitalizedinclude incremental labor and direct material, and incremental fixed overhead.Determining whether to capitalize validation costs requires judgment, and canhave a significant impact on our reported results. Also, if we were unable tosuccessfully validate the manufacturing process for any future product, wewould have to write off to current operating expense any validation costs thathad been capitalized during the unsuccessful validation process. Costs toinitiate new projects in an existing facility are treated as start-up costs andexpensed as incurred. To date, all of our manufacturing process validationefforts have been successful. As of December 31, 2006, capitalizedvalidation costs, net of accumulated depreciation, were $17.2 million.

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***Goodwill and Other Intangible Assets***

As of December 31,2006, there was approximately $1.3 billion of net goodwill and$1.5 billion of net other intangible assets on our consolidated balancesheet. We amortize intangible assets using the straight-line method overtheir estimated economic lives, which range from 1 and 15 years, or usingthe economic use method if that method results in significantly greateramortization than the straight-line method. Determining the economiclives of acquired intangible assets requires us to make significant judgmentand estimates, and can materially impact our operating results. For certainacquired intangible assets, we may be required to make additional paymentscontingent upon meeting certain sales targets. We record amortization expensefor these intangibles based on estimated future sales of the related productsand include in the determination of amortization all contingent payments thatwe believe are probable of being made. We apply this amortization model to ourSynvisc distribution rights (acquired from Wyeth), our license agreement withSynpac related to Myozyme patent and technology rights and our license of twoproducts acquired from Surgi.B. We review the sales forecasts of these productson a quarterly basis and assess the impact changes in the forecasts have on therate of amortization and the likelihood that contingent payments wil be made.Adjustments to amortization expense resulting from changes in estimated salesare reflected prospectively.

**Asset Impairments**

***Impairment ofGoodwill***

FAS 142 requires periodictests of goodwill for impairment and that other intangible assets be amortizedover their useful lives unless these lives are determined to be indefinite. FAS142 requires goodwill be tested using a two-step process. The first stepcompares the fair value of the reporting unit with the unit’s carrying value,including goodwill. When the carrying value of the reporting unit is greaterthan fair value, the unit’s goodwill may be impaired, and the second step mustbe completed to measure the amount of the goodwill impairment charge, if any.In the second step, the implied fair value of the reporting unit’s goodwill iscompared with the carrying amount of the unit’s goodwill. If the carryingamount is greater than the implied fair value, the carrying value of thegoodwill must be written down to its implied fair value. We determine the impliedfair value by discounting, to present value, the estimated future cash flow ofthe reporting unit, which includes various analyses, assumptions and estimatesincluding discount rates, projected results and estimated cash flows.

We are required to performimpairment tests under FAS 142 annually and whenever events or changes incircumstances suggest that the carrying value of an asset may not berecoverable. For all of our acquisitions, various analyses, assumptions andestimates were made at the time of each acquisition specifically regardingproduct development, market conditions and cash flows that were used todetermine the valuation of goodwill and intangibles. We completed the requiredannual impairment tests for our $1.5 billion of net goodwill related toour reporting units during 2006, which was the balance at the time, anddetermined that the $219.2 million of goodwill assigned to our Geneticsreporting unit was impaired.

We determined the fairvalue of the net assets of our Genetics reporting unit by discounting, topresent value, its estimated future cash flows. Due to the reduction ofreimbursement rates for certain test offerings and increased infrastructurecosts, the discounted future cash flows of our Genetics reporting unit werenegatively impacted causing the fair value of the net assets of our Geneticsreporting unit to be lower than the carrying value. We calculated the fairvalue of the goodwill and determined that the goodwill assigned to our Geneticsreporting unit was fully impaired and we recorded a pre-tax impairmentcharge of $219.2 million and $69.8 million of related tax benefits inSeptember 2006. No additional impairment charges were required for theremaining $1.3 billion of goodwill related to our other reporting units. Whenwe perform impairment tests in future years, the possibility exists thatchanges in forecasts and estimates from those used at the acquisition datecould result in impairment charges.

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***Impairment ofTangible and Intangible Assets, Other Than Goodwill***

Weperiodically evaluate long-lived assets for potential impairment underFAS 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” We perform these evaluations whenever events or changes incircumstances suggest that the carrying value of an asset or group of assets isnot recoverable. If we believe an indicator of potential impairment exists, wetest to determine whether the impairment recognition criteria in FAS 144have been met. In evaluating long-lived assets for potential impairment,we make several significant estimates and judgments, including:

·       determiningthe appropriate grouping of assets at the lowest level for which cash flows areavailable;

·       estimatingfuture cash flows associated with the asset or group of assets; and

·       determiningan appropriate discount rate to use in the analysis.

Use of different estimatesand judgments could yield significantly different results in this analysis andcould result in materially different asset impairment charges.

In the third quarter of2006, in connection with recording the charge for impaired goodwill assigned toour Genetics reporting unit, we also tested the long-lived assets for ourGenetics business unit to determine whether any of the impairment recognitioncriteria in FAS 144 had been met. We determined that the long-lived assets forour Genetics business unit were not impaired and, therefore, no impairmentcharge was required for those assets.

**In-Process Researchand Development**

In accounting foracquisitions, we allocate the purchase price to the fair value of the acquiredtangible and intangible assets, including acquired IPR&D. This allocationrequires us to make several significant judgments and estimates. For example,we generally estimate the value of acquired intangible assets and IPR&Dusing a discounted cash flow model, which requires us to make assumptions andestimates about, among other things:

·       thetime and investment that will be required to develop products and technologies;

·       ourability to develop and commercialize products before our competitors developand commercialize products for the same indications;

·       theamount of revenues that will be derived from the products; and

·       theappropriate discount rates to use in the analysis.

Use of different estimatesand judgments could yield materially different results in our analysis, andcould result in materially different asset values and IPR&D charges.

**Strategic EquityInvestments**

We invest in marketablesecurities as part of our strategy to align ourselves with technologies andcompanies that fit with Genzyme’s future strategic direction. Most often wewill collaborate on scientific programs and research with the issuer of themarketable securities.

On aquarterly basis, we review the fair market value of these marketable securitiesin comparison to historical cost. If the fair market value of a marketablesecurity is less than our carrying value, we consider all available evidence inassessing when and if the value of the investment can be expected to recover toat least its historical cost. This evidence would include:

·       continuedpositive progress in the issuer’s scientific programs;

·       ongoingactivity in our collaborations with the issuer;

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·       alack of any other substantial company-specific adverse events causingdeclines in value; and

·       overallfinancial condition and liquidity of the issuer of the securities.

If our review indicatesthat the decline in value is “other than temporary,” we write down ourinvestment to the then current market value and record an impairment charge toour consolidated statements of operations. The determination of whether anunrealized loss is “other than temporary” requires significant judgment, andcan have a material impact on our reported results.

**RESULTS OF OPERATIONS**

The following discussionsummarizes the key factors our management believes are necessary for anunderstanding of our consolidated financial statements.

**REVENUES**

The components ofour total revenues are described in the following table:

| ** **                        | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product revenue                   |       | $                                    | 2,887,409  |       | $          | 2,453,303  |       | $                                               | 1,976,191  |                                            |       | 18 | % |   |   | 24 | % |   |
| Service revenue                   |       | 282,118                              |       | 261,379    |       | 212,392    |       |                                            | 8          | %                                               |       |   | 23 | % |   |
| Total product and service revenue |       | 3,169,527                            |       | 2,714,682  |       | 2,188,583  |       |                                            | 17         | %                                               |       |   | 24 | % |   |
| Research and  development revenue |       | 17,486                               |       | 20,160     |       | 12,562     |       |                                            | (13        | )%                                              |       |   | 60 | % |   |
| Total revenues                    |       | $                                    | 3,187,013  |       | $          | 2,734,842  |       | $                                               | 2,201,145  |                                            |       | 17 | % |   |   | 24 | % |   |

 

**Product Revenue**

Wederive product revenue from sales of:

·       Renalproducts, including Renagel for the reduction of elevated serum phosphoruslevels in end-stage renal disease patients on hemodialysis, Hectorol forthe treatment of secondary hyperparathyroidism in patients on dialysis andthose with CKD, and bulk sevelamer;

·       Therapeuticsproducts, including Cerezyme for the treatment of Gaucher disease, Fabrazymefor the treatment of Fabry disease, Myozyme for the treatment of Pompe diseaseand Thyrogen, which is an adjunctive diagnostic agent used in the follow-uptreatment of patients with well-differentiated thyroid cancer;

·       Transplantproducts for the treatment of immune-mediated diseases, primarilyThymoglobulin and Lymphoglobuline, each of which induce immunosuppression ofcertain types of immune cells responsible for acute organ rejection intransplant patients;

·       Biosurgeryproducts, including orthopaedic products, such as Synvisc, and the Sepra lineof products, such as Seprafilm; and

·       Otherproducts, including:

·        diagnosticproducts, including infectious disease and cholesterol testing products;

·        oncologyproducts, including Campath for the treatment of B-cell chronic lymphocyticleukemia in patients who have been treated with alkylating agents and who havefailed fludarabine therapy, and Clolar for the treatment of children (ages1-21) with refractory or relapsed acute lymphoblastic leukemia; and

·        bulkpharmaceuticals, including WelChol, which is a mono and adjunctive therapy forthe reduction of LDL cholesterol in patients with primary hypercholesterolemia.

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Thefollowing table sets forth our product revenue on a reporting segment basis:

| ** **                                  | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Renal:                                      |       |                                 |       |       |       |       |       |                                            |       |                                            |       |   |   |   |   |
| Renagel (including sales of bulk sevelamer) |       | $                                    | 515,119    |       | $          | 417,485    |       | $                                               | 363,720    |                                            |       | 23 | % |   |   | 15 | % |   |
| Hectorol                                    |       | 93,360                               |       | 34,515     |       | —     |       |                                            | >100    | %                                               |       |   | N/A |   |   |
| Total Renal                                 |       | 608,479                              |       | 452,000    |       | 363,720    |       |                                            | 35         | %                                               |       |   | 24 | % |   |
| Therapeutics:                               |       |                                 |       |       |       |       |       |                                            |       |                                            |       |   |   |   |   |
| Cerezyme                                    |       | 1,007,036                            |       | 932,322    |       | 839,366    |       |                                            | 8          | %                                               |       |   | 11 | % |   |
| Fabrazyme                                   |       | 359,274                              |       | 305,064    |       | 209,637    |       |                                            | 18         | %                                               |       |   | 46 | % |   |
| Thyrogen                                    |       | 93,687                               |       | 77,740     |       | 63,454     |       |                                            | 21         | %                                               |       |   | 23 | % |   |
| Myozyme                                     |       | 59,238                               |       | 3,827      |       | 257        |       |                                            | >100    | %                                               |       |   | >100 | % |   |
| Other Therapeutics                          |       | 410                                  |       | 2,292      |       | 2,205      |       |                                            | (82        | )%                                              |       |   | 4 | % |   |
| Total Therapeutics                          |       | 1,519,645                            |       | 1,321,245  |       | 1,114,919  |       |                                            | 15         | %                                               |       |   | 19 | % |   |
| Transplant:                                 |       |                                 |       |       |       |       |       |                                            |       |                                            |       |   |   |   |   |
| Thymoglobulin/Lymphoglobuline               |       | 149,541                              |       | 127,739    |       | 108,928    |       |                                            | 17         | %                                               |       |   | 17 | % |   |
| Other Transplant                            |       | 6,425                                |       | 18,143     |       | 42,125     |       |                                            | (65        | )%                                              |       |   | (57 | )% |   |
| Total Transplant                            |       | 155,966                              |       | 145,882    |       | 151,053    |       |                                            | 7          | %                                               |       |   | (3 | )% |   |
| Biosurgery:                                 |       |                                 |       |       |       |       |       |                                            |       |                                            |       |   |   |   |   |
| Synvisc                                     |       | 233,860                              |       | 218,906    |       | 88,296     |       |                                            | 7          | %                                               |       |   | >100 | % |   |
| Sepra products                              |       | 85,338                               |       | 68,171     |       | 61,647     |       |                                            | 25         | %                                               |       |   | 11 | % |   |
| Other Biosurgery                            |       | 28,020                               |       | 27,402     |       | 30,415     |       |                                            | 2          | %                                               |       |   | (10 | )% |   |
| Total Biosurgery                            |       | 347,218                              |       | 314,479    |       | 180,358    |       |                                            | 10         | %                                               |       |   | 74 | % |   |
| Genetics                                    |       | —                               |       | —     |       | 753        |       |                                            | N/A        |                                            |       |   | (100 | )% |   |
| Other product revenue                       |       | 256,101                              |       | 219,697    |       | 165,388    |       |                                            | 17         | %                                               |       |   | 33 | % |   |
| Total product  revenue                      |       | $                                    | 2,887,409  |       | $          | 2,453,303  |       | $                                               | 1,976,191  |                                            |       | 18 | % |   |   | 24 | % |   |

 

**2006 As Compared to2005**

***Renal***

Sales of Renagel, including sales of bulk sevelamer,increased 23% to $515.1 million for 2006, as compared to 2005, primarilydue to a $89.9 million increase in 2006 in sales related to increasedcustomer volume, of which $68.0 million is primarily attributable to increasedend-user demand worldwide, and $21.9 million is attributable to a 9.5% priceincrease for Renagel in the United States, which became effective in December 2005.The 1% increase in the Euro against the U.S. dollar for 2006, as compared to2005, positively impacted Renagel revenue by $1.5 million in 2006. Sales ofRenagel, including sales of bulk sevelamer, were 18% of our total productrevenue for 2006, as compared to 17% for 2005.

Our acquisition of Bone Care on July 1, 2005expanded our Renal product offerings with the addition of Hectorol, acomplimentary product to Renagel used to treat secondary hyperparathyroidism inpatients on dialysis and those with CKD. Bone Care’s operations are integratedinto our Renal business, and our sales representatives are selling Hectorol tonephrologists in the United States. Sales of Hectorol increased 

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more than 100% to $93.4 millionfor 2006 as compared to $34.5 million for 2005 because we did not ownHectorol until July 1, 2005 and due to higher wholesaler inventories onthe date of acquisition.

We conducted a 2,100-patient post-marketingstudy of Renagel called the DCOR trial, which evaluated the ability of Renagelto improve patient morbidity and mortality and compared Renagel to calcium-basedphosphate binders with respect to overall morbidity and mortality. We releasedtop-line data from this trial in July 2005 and presented the data atthe American Society of Nephrology meeting in November 2005. While thestudy did not meet its primary end point of a statistically significantreduction in mortality from all causes, in a pre-specified sub-groupanalysis, Renagel demonstrated a significant reduction in mortality from allcauses in patients 65 years of age or older and in patients using Renagel fortwo years or more. The DCOR study included morbidity data from the CMS, which werepresented at the 2006 ASN meeting. This data showed patients receiving Renagelexperienced lower rates of hospitalization, fewer days in the hospital, andreduced overall health care expenditures compared to patients treated withcalcium-based phosphate binders. In early 2007, Kidney International publishedfindings from the RIND study that showed a significantly lower rate of deathamong patients with Renagel from the time they began dialysis compared withthose using calcium-based phosphate binders.

We expect sales of Renageland Hectorol to increase, driven primarily by growing patient access to ourproducts, including the Medicare Part D program in the United States, andthe continued adoption of the products by nephrologists worldwide. We expectadoption rates for Renagel to trend favorably as a result of our DCOR trial andthe growing acceptance of the National Kidney Foundation’s 2003 Kidney DiseaseOutcome Quality Initiative, or ­K/DOQI, Guidelines for Bone Metabolism andDisease in CKD. Renagel and Hectorol compete with several other products andour future sales may be impacted negatively by these products. We discuss thesecompetitors under the heading “Risk Factors—Our future success will depend onour ability to effectively develop and market our products and services againstthose of our competitors” in this report. In addition, our ability to continueto increase sales of Renagel and Hectorol will depend on many other factors,including our ability to optimize dosing and improve patient compliance withdosing of Renagel, the availability of reimbursement from third-partypayors and the extent of coverage, including under the Medicare Part Dprogram, and the accuracy of our estimates of fluctuations in the payor mix.Also our ability to effectively manage wholesaler inventories and the levels ofcompliance with the inventory management programs we implemented for Renageland Hectorol with our wholesalers could impact the revenue from our Renalreporting segment that we record from period to period.

***Therapeutics***

Therapeutics product revenue increased 15% to$1.5 billion for 2006, as compared to 2005, primarily due to continuedgrowth in sales of Cerezyme, Fabrazyme and Thyrogen and the launch of Myozymein the European Union, United States and Canada in 2006.

The 8% growth in sales of Cerezyme to$1.0 billion for 2006, as compared to 2005, is attributable to ourcontinued identification of new Gaucher disease patients, particularly ininternational markets. Our price for Cerezyme has remained consistent fromperiod to period. Although we expect Cerezyme to continue to be a substantialcontributor to revenues in the future, it is a mature product, and as a result,we do not expect that the current new patient growth trend will continue. The1% increase in the Euro against the U.S. dollar in 2006, as compared to 2005, positivelyimpacted Cerezyme revenue by $3.2 million in 2006.

Our results of operations are highly dependent onsales of Cerezyme and a reduction in revenue from sales of this product wouldadversely affect our results of operations. Sales of Cerezyme wereapproximately 35% of our total product revenue in 2006 and 38% in 2005. Revenuefrom Cerezyme would be impacted negatively if competitors developed alternativetreatments for Gaucher disease, and the 

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alternative productsgained commercial acceptance, if our marketing activities are restricted, or ifcoverage, pricing or reimbursement is limited. Although orphan drug status forCerezyme, which provided us with exclusive marketing rights for Cerezyme in theUnited States for seven years, expired in May 2001, we continue to havepatents protecting our method of manufacturing Cerezyme until 2010 and thecomposition of Cerezyme as made by that process until 2013. The expiration ofmarket exclusivity and orphan drug status will likely subject Cerezyme toincreased competition, which may decrease the amount of revenue we receive fromthis product or the growth of that revenue. We are aware of companies that havedeveloped or have initiated efforts to develop competitive products, and othercompanies may do so in the future. We discuss these competitors under theheading “Risk Factors—Our future success will depend on our ability toeffectively develop and market our products and services against those of ourcompetitors,” in this report.

The 18% increase to $359.3 million for 2006 insales of Fabrazyme, as compared to 2005, was primarily attributable toincreased patient identification worldwide as Fabrazyme is introduced into newmarkets. In addition, we recognized $3.4 million in September 2006 uponreceiving reimbursement approval for past shipments of Fabrazyme in Canada. The1% increase in the Euro against the U.S. dollar in 2006, as compared to 2005,positively impacted Fabrazyme revenue by $1.0 million in 2006.

Sales of Thyrogen increased 21% to $93.7 millionfor 2006, as compared to 2005, due to worldwide volume growth which positivelyimpacted sales by $15.4 million. Additionally, a 10% increase in price impactedsales by $3.6 million in 2006, as compared to 2005. The 1% increase in theEuro against the U.S. dollar during 2006, as compared to 2005, did not have amaterial impact on Thyrogen revenue in 2006.

Sales of Myozyme were $59.2 million for 2006 ascompared to $3.8 million in 2005. In March 2006, we received marketingauthorization for Myozyme in the European Union. We are introducing Myozyme ona country-by-country basis in the European Union, as pricing and reimbursementapprovals are obtained. In April 2006, the FDA granted marketing approvalfor Myozyme. We launched Myozyme in the United States in May 2006, inEurope a month later and in Canada in September 2006. Myozyme has receivedorphan drug designation in the United States, which provides seven years ofmarket exclusivity, and in the European Union, which provides ten years ofmarket exclusivity. Myozyme sales are expected to significantly increase aspatients transition from clinical trials or expanded access programs and as newpatients are identified. A marketing application for Myozyme has been submittedin Japan. We also expect to file for approval in several additional countriesin 2007. The 1% increase in the Euro against the U.S. dollar during 2006, ascompared to 2005, positively impacted Myozyme revenue by $2.0 million in2006.

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We currently manufactureMyozyme in the United States. In the future, we expect to also produce Myozymeat our new protein manufacturing facility in Geel, Belgium, and at our new fill-finishfacility in Waterford, Ireland, to help ensure that we are able to meet theanticipated demand for the product throughout the world.

***Transplant***

Transplant product revenue increased 7% to$156.0 million for 2006, as compared to 2005. The increase is primarilydue to a $22.7 million increase in sales of Thymoglobulin as a result ofincreased utilization of Thymoglobulin in transplant procedures worldwide. Theincrease was partially offset by a $9.0 million decrease in revenue from anupfront license fee we had received from Procter & GamblePharmaceuticals, Inc., or PGP, a subsidiary of The Procter and GambleCompany in 2005, for which there was no comparable amount in 2006. In December 2005,PGP exercised its option to terminate an agreement under which we had grantedPGP an exclusive, worldwide license to develop and market RDP58 for thetreatment of gastrointestinal and other disorders.

We expect sales of Thymoglobulin to increase, drivenprimarily by our continued entry into new geographical markets, together withan overall growth in solid organ and living donor renal transplants.Thymoglobulin competes with several other products and our future sales may beimpacted negatively by these products. We discuss these competitors under theheading “Risk Factors—Our future success will depend on our ability toeffectively develop and market our products and services against those of ourcompetitors” in this report.

***Biosurgery***

Biosurgery product revenue increased 10% to$347.2 million for 2006, as compared to 2005. The increase was largelyattributable to a $17.2 million increase in sales of our Sepra productsand a $15.0 million increase in sales of Synvisc. Sales of Seprafilm increased$15.1 million primarily due to greater penetration into the U.S. and Japanese market.Synvisc sales increased primarily due to an expanded sales and marketinginvestment. Currently, Synvisc is delivered through three injections atone-week intervals. In December 2006 we completed a pivotal trial evaluating a single-injectionregimen of Synvisc, which showed that patients who received a single-injectionregimen of Synvisc achieved a statistically significant improvement in painfrom osteoarthritis of the knee in 26 weeks compared to those using placebo.We anticipate filing for approval of single-injection Synvisc in the EuropeanUnion and in the U.S. in the first half of 2007 and we expect to launch thisproduct in the European Union by the end of 2007 and in the United States inthe first half of 2008. The clinical advantages of a single-injection regimenof Synvisc has the potential to expand the market for Synvisc.

We are aware of several products that compete withSynvisc, several companies that have initiated efforts to develop competitiveproducts and several companies that market products designed to relieve thepain of osteoarthritis. These products could have an adverse effect on futuresales of Synvisc. In addition, a substantial portion of our revenue on sales ofSynvisc comes from third party payors, including government healthadministration authorities and private health insurers who may not continue toprovide adequate health insurance coverage or reimbursement for Synvisc.Furthermore, governmental regulatory bodies, such as CMS, may from time-to-timemake unilateral changes to the reimbursement rates for Synvisc. For example, inOctober 2006, CMS announced a change to the billing code forviscosupplementation products effective January 2007 that, if unchanged,could have resulted in Medicare reimbursement for Synvisc at a rate that waslower than the price healthcare providers are currently paying for the product.In December 2006, the CMS reversed this decision. If the CMS billing codedecision had been left unchanged, our Synvisc revenues would have beenadversely affected because healthcare providers would have been less willing touse Synvisc. We discuss these competitors under the heading 

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“Risk Factors—Ourfuture success will depend on our ability to effectively develop and market ourproducts and services against those of our competitors” included in thisreport.

***Other Product Revenue***

Other product revenueincreased 17% to $256.1 million for 2006, as compared to 2005, primarilydue to a 10%, or $10.8 million, increase in sales of our diagnostics productsand a 14%, or $11.7 million, increase in sales of bulk pharmaceuticals,including WelChol. The increase in sales of diagnostics products wasattributable to a 17%, or $10.2 million, increase in clinical chemistry revenueresulting from our acquisition of Equal Diagnostics in July 2005. Theincrease in sales of bulk pharmaceuticals was primarily due to a 22%, or$7.2 million, increase in 2006, of bulk sales of and royalties earned onWelChol due to an increased demand from our U.S. marketing partner, SankyoPharma, Inc. In addition, oncology product revenue increased 41% to$48.1 million for 2006, as compared to 2005, due to an increase in demandfor Campath and Clolar.

**2005 As Compared to2004**

***Renal***

Sales of Renagel, including sales of bulk sevelamer,increased 15% to $417.5 million for 2005, as compared to 2004, primarilydue to a $49.9 million increase in 2005 in sales related to increasedcustomer volume, driven primarily by increased end-user demand in theUnited States and Europe. The 1% increase in net sales price in 2005, ascompared to 2004, did not have a significant impact on sales of Renagel. Theaverage exchange rate for the Euro remained relatively stable against the U.S.dollar for 2005, as compared to 2004, therefore having no significant impact onRenagel revenue. However, a 17% decrease in the average exchange rate for theBrazilian Real against the U.S. dollar for 2005, as compared to 2004,positively impacted Renagel revenue by $3.0 million in 2005. Sales ofRenagel, including sales of bulk sevelamer, were 17% of our total productrevenue for 2005, as compared to 18% for 2004.

Sales of Hectorol were$34.5 million for 2005, reflecting sales beginning on July 1, 2005,the date we acquired Bone Care.

***Therapeutics***

Therapeutics product revenue increased 19% to$1.3 billion for 2005, as compared to 2004, primarily due to continuedgrowth in sales of Cerezyme, Fabrazyme and Thyrogen.

The 11% growth in sales of Cerezyme to$932.3 million for 2005, as compared to 2004, is attributable to ourcontinued identification of new Gaucher disease patients, particularly in internationalmarkets. Our price for Cerezyme remained consistent from period to period. Theaverage exchange rate for the Euro against the U.S. dollar remained relativelystable in 2005, as compared to 2004, resulting in very little impact on thesales of Cerezyme. Sales of Cerezyme were approximately 38% of our totalproduct revenue in 2005 and 42% in 2004.

The 46% increase to $305.1 million for 2005 insales of Fabrazyme, as compared to 2004, was primarily attributable toincreased patient identification worldwide as Fabrazyme is introduced into newmarkets.

The sales of Thyrogenincreased 23% to $77.7 million for 2005, as compared to 2004, primarilydue to worldwide volume growth.

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***Transplant***

Transplant product revenuedecreased 3% to $145.9 million for 2005, as compared to 2004. The decreasewas primarily due to a $32.5 million decrease in sales of Gengraf, whichwe formerly co-promoted with Abbott Laboratories under an agreement thatexpired on December 31, 2004. The decrease was partially offset by a$16.0 million increase in sales of Thymoglobulin as a result of increasedutilization of Thymoglobulin in transplant procedures and $9.0 million ofpreviously deferred revenue related to an upfront license fee we had receivedfrom PGP.

***Biosurgery***

Biosurgery product revenueincreased 74% to $314.5 million for 2005, as compared to 2004. Theincrease was largely attributable to a $130.6 million increase in sales ofSynvisc, primarily due to our reacquisition of the Synvisc sales and marketingrights from Wyeth in January 2005 in several countries. Upon closing thistransaction, we began to record revenue from sales of Synvisc to end-usersin the United States, as well as Germany, Poland, Portugal and the CzechRepublic. We began selling Synvisc directly to end-users in Greeceeffective July 1, 2005.

***Other Product Revenue***

Other product revenueincreased 33% to $219.7 million for 2005, as compared to 2004, primarilydue to a 14% increase to $104.2 million in sales of diagnostics products and an18% increase, to $81.3 million, in sales of bulk pharmaceuticals,including WelChol. The increase in sales of diagnostics products wasattributable to a 21%, or $10.3 million, increase in clinical chemistry revenuedue to additional sales resulting from our acquisition of Equal Diagnostics in July 2005and a result of higher order volume by several large customers. The increase insales of bulk pharmaceuticals is primarily due to an increased demand forliquid crystals and a 33% increase in bulk sales of and royalties earned onWelChol due to an increased demand from our U.S. marketing partner, SankyoPharma, Inc. Other product revenue includes a $28.8 million increasein oncology revenue primarily due to the addition of sales from two oncologyproducts, Campath and Clolar, that we acquired in the ILEX Oncology transactionin December 2004.

**Service Revenue**

We derive servicerevenues primarily from the following principal sources:

·       salesof MACI, a proprietary cell therapy product for cartilage repair in Europe andAustralia, Carticel for the treatment of cartilage damage, and Epicel for thetreatment of severe burns, all of which are included in our Biosurgeryreporting segment; and

·       geneticand pathology/oncology testing services, which are included in our Geneticsreporting segment.

Thefollowing table sets forth our service revenue on a segment basis:

| ** **             | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **             | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Biosurgery             |       | $                                    | 39,458     |       | $          | 38,553     |       | $                                               | 24,917     |                                            |       | 2 | % |   |   | 55 | % |   |
| Genetics               |       | 240,857                              |       | 222,328    |       | 187,413    |       |                                            | 8          | %                                               |       |   | 19 | % |   |
| Other                  |       | 1,803                                |       | 498        |       | 62         |       |                                            | >100    | %                                               |       |   | >100 | % |   |
| Total service  revenue |       | $                                    | 282,118    |       | $          | 261,379    |       | $                                               | 212,392    |                                            |       | 8 | % |   |   | 23 | % |   |

 

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**2006 As Compared to2005**

Service revenue attributable to our Biosurgeryreporting segment increased 2% to $39.5 million for 2006, as compared to2005. The increase is primarily due to a full year of MACI sales during 2006. Weacquired MACI from Verigen in February 2005. In addition, sales of Epicelincreased due to an increase in patient demand in 2006.

Service revenueattributable to our Genetics reporting segment increased 8% to$240.9 million for 2006, as compared to 2005. The increase was primarilyattributable to continued growth in sales of DNA testing services as well as theprenatal screening and diagnosis market.

**2005 As Compared to2004**

Service revenue attributable to our Biosurgeryreporting segment increased 55% to $38.6 million for 2005, as compared to2004. The increase is primarily due to the addition of sales of MACI in February 2005.

Service revenueattributable to our Genetics reporting segment increased 19% to$222.3 million for 2005, as compared to 2004. The increase was primarilyattributable to:

·       additionalservice revenue resulting from our acquisition of substantially all of thepathology/oncology testing assets of IMPATH in May 2004; and

·       increased sales of DNAtesting services, primarily due to growth in the cystic fibrosis screening anddiagnosis market, as well as the prenatal screening and diagnosis market.

**InternationalProduct and Service Revenue**

Asubstantial portion of our revenue was generated outside of the United States.The following table provides information regarding the change in internationalproduct and service revenue as a percentage of total product and servicerevenue during the periods presented:

| ** **                                   | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| International  product and service   revenue |       | 1,455,795                            |       | $          | 1,215,621  |       | $          | 992,643                                         |       |                                            | 20         | % |   |   | 22 | % |   |
| % of total product and  service revenue      |       | 46                                   | %          | 45         | %          | 45         | %          |                                            |       |                                            |       |   |   |   |   |
|                                              |            |                                      |            |            |            |            |            |                                                 |            |                                                 |            |  |  |  |  |  |  |

 

**2006 As Compared to2005**

The 20% increase to $1.5 billion for 2006 ininternational product and service revenue, as compared to 2005, is primarilydue to a $221.8 million increase in the combined international sales ofRenagel, Cerezyme, Fabrazyme, Thyrogen, Myozyme, Thymoglobulin, Synvisc andCampath, primarily due to an increase in the number of patients using theseproducts in countries outside of the United States.

The Euro increased 1% against the U.S. dollar for2006, as compared to 2005. Therefore, total product and service revenue waspositively impacted by $8.8 million.

International product andservice revenue as a percentage of total product and service revenue increased 1%for 2006, as compared to 2005. This was primarily due to the increase in totalrevenue outside the United States, as we continue to identify new patients inthe international market for our products and services.

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**2005 As Compared to2004**

The 22% increase to$1.2 billion for 2005 in international product and service revenue, ascompared to 2004, is primarily due to:

·       a$180.1 million increase in the combined international sales of Renagel,Cerezyme, Fabrazyme and Thyrogen, primarily due to an increase in the number ofpatients using these products in countries outside of the United States; and

·       a $7.7 millionincrease in international sales of Thymoglobulin and Lymphoglobuline due to anincrease in volume and price.

**Research andDevelopment Revenue**

The following table setsforth our research and development revenue on a segment basis:

| ** **                              | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Therapeutics                            |       | $                                    | 1,068      |       | $          | 789        |       | $                                               | —     |                                            |       | 35 | % |   |   | N/A |   |   |
| Transplant                              |       | —                               |       | 30         |       | 310        |       |                                            | (100       | )%                                              |       |   | (90 | )% |   |
| Biosurgery                              |       | 893                                  |       | 144        |       | 4,241      |       |                                            | >100    | %                                               |       |   | (97 | )% |   |
| Other                                   |       | 15,153                               |       | 17,478     |       | 5,109      |       |                                            | (13        | )%                                              |       |   | >100 | % |   |
| Corporate                               |       | 372                                  |       | 1,719      |       | 2,902      |       |                                            | (78        | )%                                              |       |   | (41 | )% |   |
| Total research and  development revenue |       | $                                    | 17,486     |       | $          | 20,160     |       | $                                               | 12,562     |                                            |       | (13 | )% |   |   | 60 | % |   |

 

**2006 As Compared to2005**

Total research anddevelopment revenue decreased $2.7 million for 2006, as compared to 2005,primarily due to lower revenue recognized by our cardiovascular business as aresult of lower spending on MG Biotherapeutics, Inc., our joint venturewith Medtronic, Inc., or Medtronic. Other research and development revenuefor the year ended December 31, 2006, includes $9.3 million of revenue forresearch and development work related to alemtuzumab for the treatment ofmultiple sclerosis and Campath that we perform on behalf of Bayer ScheringPharma AG. Other research and development revenue also includes revenue relatedto our pharmaceuticals and cardiovascular businesses.

**2005 As Compared to2004**

Total research and developmentrevenue increased $7.6 million for 2005, as compared to 2004, primarilydue to a $12.4 million increase in other research and development revenue. Thisincrease is attributable to $7.0 million of additional revenue in 2005resulting from research and development work related to Campath that weperformed on behalf of Bayer Schering Pharma, under agreements we assumed inconnection with our acquisition of ILEX Oncology in December 2004. Thisincrease was partially offset by a decrease in Biosurgery research anddevelopment revenue, primarily due to the completion, in 2004, of a developmentprogram for Hylaform and reimbursements received from Wyeth in 2004 fordevelopment projects associated with Synvisc. There were no comparable amounts forthe reimbursements from Wyeth in 2005.

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**MARGINS**

Thecomponents of our total margins are described in the following table:

| ** **                              | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product margin                          |       | $                                    | 2,351,021  |       | $          | 1,991,126  |       | $                                               | 1,527,749  |                                            |       | 18 | % |   |   | 30 | % |   |
| % of total  product revenue             |       | 81                                   | %          | 81         | %          | 77         | %          |                                            |       |                                            |       |   |   |   |   |
| Service margin                          |       | $                                    | 82,835     |       | $          | 90,904     |       | $                                               | 72,248     |                                            |       | (9 | )% |   |   | 26 | % |   |
| % of total  service revenue             |       | 29                                   | %          | 35         | %          | 34         | %          |                                            |       |                                            |       |   |   |   |   |
| Total product and  service gross margin |       | $                                    | 2,433,856  |       | $          | 2,082,030  |       | $                                               | 1,599,997  |                                            |       | 17 | % |   |   | 30 | % |   |
| % of total product and  service revenue |       | 77                                   | %          | 77         | %          | 73         | %          |                                            |       |                                            |       |   |   |   |   |

 

**Product Margin**

**2006 As Compared to2005**

Our overall productmargin increased $359.9 million, or 18%, for 2006, as compared to 2005.This is primarily due to:

·       improvedmargins for Renagel due to increased customer volume and increased efficiencyat our global manufacturing facilities;

·       anincrease in product margin for Cerezyme, Fabrazyme, Thyrogen, and Thymoglobulindue to increased sales and improved unit costs;

·       improvedmargins for Myozyme due to the launch of Myozyme in the European Union, UnitedStates and Canada in 2006;

·       afull year of Hectorol’s margin contribution in 2006, as compared to six monthsin 2005 as a result of the acquisition of Bone Care in July 2005; and

·       anincrease in product margin for our oncology business due to the increase inglobal sales of Campath and Clolar.

These increases in product margin were partiallyoffset by stock-based compensation expenses of $12.0 million associatedwith our adoption of FAS 123R in 2006 for which there was no comparable amountin 2005.

Total product margin as a percentage of productrevenue for 2006 was consistent with 2005.

The amortization ofproduct related intangible assets is included in amortization expense and, as aresult, is excluded from cost of products sold and the determination of productmargins.

**2005 As Compared to2004**

Our overall productmargin increased $463.4 million, or 30%, for 2005, as compared to 2004.This is primarily due to:

·       a$130.6 million, or 148%, increase in sales of Synvisc resulting from ourreacquisition of Synvisc sales and marketing rights from Wyeth in January 2005;

·       improvedmargins for Renagel, Cerezyme, Fabrazyme and Thymoglobulin due to increasedsales and increased utilization of capacity at our global manufacturingfacilities;

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·       Hectorol’smargin contribution in the second half of 2005 due to the acquisition of BoneCare in July 2005; and

·       $9.0 millionof previously deferred revenue related to an upfront license fee received fromPGP was recognized in our results of operations in December 2005 for whichthere was no comparable amount recorded in 2004.

These increases in productmargin were partially offset by the write off of $28.1 million ofCerezyme, Myozyme and Clolar inventory to cost of sales. The write off ofCerezyme and Myozyme inventory was due to unsuccessful production runs of theseproducts that occurred at our Allston Landing manufacturing plant. The writeoff of Clolar inventory was due to expired inventory acquired in connectionwith our acquisition of ILEX Oncology.

**Service Margin**

**2006 As Compared to2005**

Our overall service margin decreased$8.1 million, or 9%, for 2006, as compared to 2005. This is primarily dueto additional costs in Corporate of $9.5 million related to the adoptionof FAS 123R in 2006 for which there was no comparable amount in 2005. This was partiallyoffset by an increase in service margin related to our Biosurgery reportingsegment due to an increased demand for Epicel in 2006.

Total service margin as apercent of total service revenue decreased in 2006, as compared to 2005,primarily due to additional costs in Corporate related to the adoption of FAS123R in 2006. Genetics service margin as a percentage of total service revenuedecreased for 2006, as compared to 2005 due to higher costs for payroll,chemicals and supplies.

**2005 As Compared to2004**

Our overall service marginincreased $18.7 million, or 26%, for 2005, as compared to 2004. This isprimarily due to a $13.6 million, or 55%, increase in sales of Biosurgeryservices as well as a $34.9 million, or 19%, increase in sales of Geneticsservices. Total service margin as a percent of total service revenue increasedin 2005, as compared to 2004, primarily due to increased sales of higher marginBiosurgery services such as Carticel and MACI, which offset increased sales oflower margin testing services attributable to our acquisition of substantiallyall of the pathology/oncology testing assets related to the Physician Servicesand Analytical Services business units of IMPATH in May 2004.

**OPERATING EXPENSES**

**Selling, Generaland Administrative Expenses**

Thefollowing table provides information regarding the change in SG&A duringthe periods presented:

| ** **                                    | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general  and administrative expenses |       | $                                    | 1,010,400  |       | $          | 787,839    |       | $                                               | 599,388    |                                            |       | 28 | % |   |   | 31 | % |   |
| % of total revenue                            |       | 32                                   | %          | 29         | %          | 27         | %          |                                            |       |                                            |       |   |   |   |   |
|                                               |            |                                      |            |            |            |            |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |

 

F-28

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**2006 As Compared to2005**

SG&A increased$222.6 million for 2006, as compared to 2005, primarily due to increasesof:

·       $26.8 millionfor Renal products, primarily due to our acquisition of Bone Care in July 2005and continued support of Renal’s international business operations growth;

·       $21.8 millionfor Therapeutics products, primarily due to expenses incurred to launch Myozymein the United States, Canada and in several countries in the European Union andto prepare for its launch in additional countries in 2007;

·       $16.8 millionfor Biosurgery products and services, primarily due to additional expensesrelated to an increase in staffing and an increase in marketing efforts; and

·       $148.5 millionfor Corporate SG&A, primarily due to $121.8 million of stock-basedcompensation expenses related to our adoption of FAS 123R and increasedspending on legal and information technology expenses.

**2005 As Compared to2004**

SG&A increased$188.5 million for 2005, as compared to 2004, primarily due to increasesof:

·       $33.9 millionfor Renal products, primarily due to our acquisition of Bone Care in July 2005;

·       $39.5 millionfor Therapeutics products, primarily due to increased spending on additionalresources to support volume growth and new country launches for Cerezyme,Fabrazyme and Thyrogen and the anticipated launch of Myozyme;

·       $58.5 millionfor Biosurgery products and services, primarily due to the additional expensesrelated to the Synvisc sales force we assumed from Wyeth, and because we beganperforming all marketing for Synvisc in the United States, as well as Germany,Poland, Portugal, the Czech Republic and, as of July 1, 2005, Greece;

·       $6.0 millionfor Genetics, primarily due to our acquisition of substantially all of thepathology/oncology testing assets of IMPATH in May 2004;

·       $17.1 millionfor Other SG&A, primarily due to the increase in expenses for our diagnosticproducts business as a result of our acquisition of Equal Diagnostics in July2005 and an increase in expenses for our oncology business as a result of ouracquisition of ILEX Oncology in December 2004; and

·       $33.9 million for CorporateSG&A, primarily due to increased legal, information technology, recruitingand advertising expenses.

**Research andDevelopment Expenses**

Thefollowing table provides information regarding the change in research anddevelopment expense during the periods presented:

| ** **                         | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                         | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development expenses |       | $                                    | 649,951    |       | $          | 502,657    |       | $                                               | 391,802    |                                            |       | 29 | % |   |   | 28 | % |   |
| % of total revenue                 |       | 20                                   | %          | 18         | %          | 18         | %          |                                            |       |                                            |       |   |   |   |   |
|                                    |            |                                      |            |            |            |            |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |

 

F-29

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**2006 As Compared to2005**

Research anddevelopment expenses increased $147.3 million for 2006, as compared to2005, primarily due to:

·       a$29.7 million increase in spending on Renal research and developmentprograms, primarily due to our acquisition of Bone Care in July 2005 andto a $12.6 million increase in spending on the tolevamer program due toaccelerated patient enrollment in clinical studies;

·       a$19.5 million increase in spending on certain Therapeutics research anddevelopment programs including $7.3 million in spending for the Myozymeprogram due to FDA required post-marketing commitments and $8.9 million ofspending for the Parkinson’s disease program we acquired from Avigen;

·       a$7.9 million increase in spending on Transplant research and developmentprograms, primarily due to our acquisition of AnorMED in November 2006;

·       a$10.2 million increase in spending on Biosurgery research and developmentprograms, primarily on next generation orthopaedics products;

·       a$19.7 million increase in sepending on Other research and development programsprimarily on our Campath and Clolar product lines; and

·       an$84.6 million increase in spending on Corporate research and developmentprograms primarily due to stock-based compensation expenses of $65.2 millionrecorded in 2006 related to our adoption of FAS 123R.

These increases were partially offset by decreases inresearch and development expenses of $24.3 million in spending on certainTherapeutics research and development programs, including:

·       $5.1 millionon our Cerezyme program, as patients completed clinical studies during thesecond quarter of 2006, resulting in a decrease in spending on follow-upmonitoring;

·       $5.6 millionon our deferitrin (iron chelator) program due to the completion of our phase1/2 study in 2005; and

·       $6.8 million from theconsolidation of Dyax-Genzyme LLC. Spending decreased for DX-88 in bothperiods due to the completion of clinical trials.

**2005 As Compared to2004**

Research anddevelopment expenses increased $110.9 million for 2005, as compared to2004, primarily due to:

·       a$32.9 million increase in spending on Renal research and development programsprimarily due to our acquisition of Bone Care in July 2005 and to a$10.0 million charge recorded in 2005, representing a portion of theapproximately $23 million of funding we are obligated to provide under ourcollaboration with RenaMed, for which there was no comparable charge in 2004;

·       a$14.5 million increase in spending on Therapeutics research anddevelopment programs including spending on the DX-88 program due to fullenrollment in a clinical trial and additional manufacturing runs in 2005;

·       a$41.0 million increase in spending on Other research and developmentprograms primarily due to Campath and Clolar clinical trial activity; and

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·       a $15.3 million increase inspending for Corporate research and development efforts related to ourcorporate science activities, including research initiatives for existingproducts, that we do not allocate to our reporting segments.

**Amortization ofIntangibles**

Thefollowing table provides information regarding the change in amortization ofintangibles expense during the periods presented:

| ** **                   | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortization of  intangibles |       | $                                    | 209,355    |       | $          | 181,632    |       | $                                               | 109,473    |                                            |       | 15 | % |   |   | 66 | % |   |
| % of total  revenue          |       | 7                                    | %          | 7          | %          | 5          | %          |                                            |       |                                            |       |   |   |   |   |
|                              |            |                                      |            |            |            |            |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |

 

**2006 As Compared to2005**

Amortization ofintangibles expense increased $27.7 million for 2006, as compared to 2005,primarily due to additional amortization expense attributable to the intangibleassets acquired in connection with our acquisitions of Surgi.B in March 2006and Bone Care in July 2005, as well as the reacquisition of Synvisc salesand marketing rights in several countries from Wyeth in January 2005.

**2005 As Compared to2004**

Amortization of intangibles expense increased $72.2 millionfor 2005, as compared to 2004, primarily due to additional amortization expenseattributable to the intangible assets acquired in connection with our acquisitionsof Bone Care, Equal Diagnostics, Verigen and the Synvisc sales and marketingrights from Wyeth all in 2005 and ILEX Oncology in 2004. In addition, the 2005amortization of intangibles expense includes a full year of expense related tothe intangible assets attributable to our acquisition of substantially all ofthe pathology/oncology testing assets of IMPATH in May 2004, as comparedto seven months in 2004.

As discussed in Note H.,“Goodwill and Other Intangible Assets,” to our financial statements included inthis report, we calculate amortization expense for the Synvisc sales andmarketing rights we reacquired from Wyeth and the Myozyme patent and technologyrights pursuant to a license agreement with Synpac by taking into accountforecasted future sales of Synvisc and Myozyme, respectively and the resultingestimated future contingent payments we will be required to make to Wyeth andSynpac. As a result, we expect amortization of intangibles to fluctuate overthe next five years based on these future contingent payments.

**Purchase of In-ProcessResearch and Development**

In connection with five of our acquisitions since 2004,we have acquired various IPR&D projects. Substantial additional research anddevelopment will be required prior to any of our acquired IPR&D programsand technology platforms reaching technological feasibility. In addition, onceresearch is completed, each product candidate acquired from AnorMED, Avigen,Bone Care, Verigen and ILEX Oncology will need to complete a series of clinicaltrials and receive FDA or other regulatory approvals prior tocommercialization. Our current estimates of the time and investment required todevelop these products and technologies may change depending on the differentapplications that we may choose to pursue. We cannot give assurances that theseprograms will ever reach technological feasibility or develop into productsthat can be marketed profitably. In addition, we cannot guarantee that we willbe able to develop and commercialize products before our competitors developand commercialize products for the 

F-31

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same indications. Ifproducts based on our acquired IPR&D programs and technology platforms donot become commercially viable, our results of operations could be materiallyadversely affected.

Thefollowing table sets forth IPR&D projects for companies and certain assetsacquired since 2004 (amounts in millions, except percent data):
| Company/Assets Acquired | ** ** | ** ** | ** ** | **Purchase Price** | ** ** | **IPR&D(1)** | ** ** | **Programs Acquired** | ** ** | **Discount Rate  Used in  Estimating  Cash  Flows(1)** | ** ** | **Year of  Expected  Launch** | ** ** | **Estimated  Cost to  Complete** | ** ** |
|-------------------------|------------|------------|------------|-------------------------|------------|------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| AnorMED (2006)          |       |       | $          | 589.2                   |       |             |       | $                          | 526.8      |                                                             |       | Mozobil (stem cell transplant)     |       |                                  | 15         | % |   | 2008-2013 |   |   | $ | 125 |   |   |
|                         |       |       |       |                    |       |             | 26.1       |                       |       | AMD070 (HIV)(2)                                                  |       |                               | 15         | %                                     |       |   |   |   |   |   |   |
|                         |       |       |       |                    |       |             | $          | 552.9                      |       |                                                             |       |                               |       |                                  |       |   |   |   |   |   |   |   |
| Avigen (2005)           |       |       | $          | 12.0                    |       |             |       | $                          | 7.0        |                                                             |       | AV201 (Parkinson’s  disease)  |       |                                  | N/A        |   |   | 2016 |   |   | $ | 74 |   |   |
| Bone Care (2005)        |       |       | $          | 712.3                   |       |             |       | $                          | 12.7       |                                                             |       | LR-103 (secondary                  |       |                                  |       |   |   |   |   |   |   |   |   |
|                         |       |       |       |                    |       |             |       |                       |       | hyperparathyroidism)                                             |       |                               | 25         | %                                     |       | 2012 |   |   | $ | 15 |   |   |
| Verigen (2005)          |       |       | $          | 12.7                    |       |             |       | $                          | 9.5        |                                                             |       | MACI (cartilage repair)            |       |                                  | 24         | % |   | 2012-2014 |   |   | $ | 20-$35 |   |   |
| ILEX Oncology (2004)    |       |       | $          | 1,080.3                 |       |             |       | $                          | 96.9       |                                                             |       | Campath (alemtuzumab)              |       |                                  | 11         | % |   | 2009-2011 |   |   | $ | 194 |   |   |
|                         |       |       |       |                    |       |             | 113.4      |                       |       | Clolar                                                           |       |                               | 12         | %                                     |       | 2008-2011 |   |   | $ | 99 |   |   |
|                         |       |       |       |                    |       |             | 44.2       |                       |       | Tasidotin                                                        |       |                               | 16         | %                                     |       | 2011-2014 |   |   | $ | 44 |   |   |
|                         |       |       |       |                    |       |             | $          | 254.5                      |       |                                                             |       |                               |       |                                  |       |   |   |   |   |   |   |   |

----

(1)             Management assumes responsibility for determining thevaluation of the acquired IPR&D projects. The fair value assigned toIPR&D for each acquisition is estimated by discounting, to present value,the cash flows expected once the acquired projects have reached technologicalfeasibility. The cash flows are probability-adjusted to reflect the risks ofadvancement through the product approval process. In estimating the future cashflows, we also considered the tangible and intangible assets required forsuccessful exploitation of the technology resulting from the purchasedIPR&D projects and adjusted future cash flows for a charge reflecting thecontribution to value of these assets.

(2)             Year of expected launch and estimated costto complete data is not provided for AMD070 at this time because we areassessing our future plans for this program.

**Charge for ImpairedGoodwill**

We are required to perform impairment tests related toour goodwill under FAS 142 annually and whenever events or changes incircumstances suggest that the carrying value of an asset may not berecoverable. We completed the required annual impairment tests for our$1.5 billion of net goodwill, which was the balance at the time, in thethird quarter of 2006 and determined that the $219.2 million of goodwillassigned to our Genetics reporting unit was fully impaired. We discuss ourassessment of goodwill for potential impairment under the heading “CriticalAccounting Policies—Asset Impairments—Impairment of Goodwill” included in thisreport.

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**OTHER INCOME ANDEXPENSES**

| ** **                                               | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                               | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity in income (loss)  of equity method investments    |       | $                                    | 15,705     |       | $          | 151        |       | $                                               | (15,624    | )                                               |       | >100 | % |   |   | >(100 | )% |   |
| Minority interest                                        |       | 10,418                               |       | 11,952     |       | 5,999      |       |                                            | (13        | )%                                              |       |   | 99 | % |   |
| Gains (losses) on  investments in equity securities, net |       | 73,230                               |       | 5,698      |       | (1,252     | )          |                                            | >100    | %                                               |       |   | >(100 | )% |   |
| Other                                                    |       | (2,045                               | )          | (1,535     | )          | (357       | )          |                                            | 33         | %                                               |       |   | >100 | % |   |
| Investment income                                        |       | 56,001                               |       | 31,429     |       | 24,244     |       |                                            | 78         | %                                               |       |   | 30 | % |   |
| Interest expense                                         |       | (15,478                              | )          | (19,638    | )          | (38,227    | )          |                                            | (21        | )%                                              |       |   | (49 | )% |   |
| Total other income  (expenses)                           |       | $                                    | 137,831    |       | $          | 28,057     |       | $                                               | (25,217    | )                                               |       | >100 | % |   |   | >(100 | )% |   |

 

**2006 As Compared to2005**

***Equity in Income (Loss) of Equity Method Investments***

Under this caption, we record our portion of theresults of our joint ventures with BioMarin and Medtronic, and our investmentsin Peptimmune, Inc., or Peptimmune, and Therapeutic Human Polyclonals, Inc.,or THP.

Equity in income (loss) ofequity method investments increased more than 100% to $15.7 million in2006, as compared to 2005, primarily due to an increase of $11.4 millionin our portion of the net income of BioMarin/Genzyme LLC attributable toincreased sales of Aldurazyme.

***Minority Interest***

As a result of our application of FIN 46R, “Consolidationof Variable Interest Entities,” we have consolidated the results of Dyax-GenzymeLLC and Excigen Inc. Our consolidated balance sheet as of December 31,2006, includes assets related to Dyax-Genzyme LLC, which are notsignificant, and substantially all of which are lab equipment net of theirassociated accumulated depreciation. We have recorded Dyax’s portion of thisjoint venture’s losses as minority interest in our consolidated statements ofoperations. The results of Excigen were not significant.

In February 2007, we agreed with Dyax Corp., or Dyax,to terminate our participation and interest in Dyax-Genzyme LLC effectiveFebruary 20, 2007.  In connection with thistermination, we made a capital contribution of approximately $17 million incash to Dyax-Genzyme LLC and Dyax purchased our interest in the joint venturefor 4.4 million shares of Dyax common stock, valued at $16.9 million,based on the closing price of Dyax common stock on February 23, 2007.

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***Gains (Losses) on Investments in Equity Securities,net***

Werecorded the following realized gains on investments in equity securities, netof charges for impaired investments, during the periods presented (amounts inthousands):

| ** **                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross gains on  investments in equity securities:        |       |     |       |     |       |     |       |
| CAT                                                      |       | $        | 69,359     |     | $          | —   |       | $ | — |   |
| BioMarin                                                 |       | 6,416    |       | —   |       | —   |       |
| Theravance, Inc.                                         |       | —   |       | 4,510    |       | —   |       |
| Other                                                    |       | 2,848    |       | 1,188    |       | 1,610    |       |
| Total gains on investments in equity securities          |       | 78,623   |       | 5,698    |       | 1,610    |       |
| Less: charges for  impaired investments                  |       | (5,393   | )          | —   |       | (2,862   | )          |
| Gains (losses) on  investments in equity securities, net |       | $        | 73,230     |     | $          | 5,698    |       | $ | (1,252 | ) |

 

**Gross Gains onInvestments in Equity Securities**

In May 2006, we recorded a $7.0 million gainon the sale of a portion of our investment in CAT. In June 2006, inconnection with the acquisition of CAT by AstraZeneca plc, or AstraZeneca, we recordeda $62.4 million gain on the tender of our remaining investment in CAT,which became unconditional on June 21, 2006.

In January 2006, we recorded a $6.4 milliongain in connection with the sale of our entire investment of 2.1 millionshares of the common stock of BioMarin for net cash proceeds of $24.4 million.

In April 2005, wesold our entire investment in the common stock of Theravance, Inc., orTheravance, for $4.5 million in cash. Our investment in Theravance had azero cost basis and, as a result, we recorded a gain of $4.5 million in April 2005related to this sale.

**Charges forImpaired Investments**

We review the carrying value of each of our strategicinvestments in equity securities on a quarterly basis for potential impairment.Gains (losses) on investments in equity securities, net, includes charges forimpaired investments of $5.4 million for 2006, including $2.5 millionto write-off our investment in RenaMed and $2.2 million to write down ourinvestment in ViaCell for which there were no comparable amounts in 2005. Weconcluded that it was unclear over what period the recovery of the stock pricesfor these investments would take place and that any evidence suggesting thatthe investment would recover to at least our historical cost was not sufficientto overcome the presumption that the current market price was the bestindicator of the value of these investments.

***Investment Income***

Our investment incomeincreased 78% to $56.0 million for 2006, as compared to $31.4 millionfor 2005, primarily due to higher average cash balances and an increase in ouraverage portfolio yield.

***Interest Expense***

Our interest expensedecreased 21% to $15.5 million for 2006, as compared to $19.6 millionfor 2005, primarily due to reduced interest expense of $2.2 million on our 2003revolving credit facility, which we replaced with the 2006 credit facility inJuly 2006, and a $1.5 million decrease due to the payoff of a capital leaseobligation related to our administriatve offices in Waltham, Massachusetts inOctober 2005.

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**2005 As Compared to2004**

***Equity in Income (Loss) of Equity Method Investments***

Under this caption, we record our portion of theresults of our joint ventures with BioMarin, and Medtronic, and our investmentsin Peptimmune and THP.

Previously our equity inincome (loss) of equity method investments was a net loss, of which the largestcomponent was our portion of the net losses from our joint venture withBioMarin. However, this joint venture became profitable in the first quarter of2005 due to increased sales of Aldurazyme. As a result, we recorded income of$7.1 million in 2005, representing our portion of the net income of thejoint venture for 2005, as compared to a charge of $9.7 million in 2004,representing our portion of the net losses of the joint venture for 2004.

***Minority Interest***

As a result of ourapplication of FIN 46R, “Consolidation of Variable Interest Entities,” we haveconsolidated the results of Dyax-Genzyme LLC, and Excigen Inc. Ourconsolidated balance sheet as of December 31, 2005, includes assetsrelated to Dyax-Genzyme LLC, which are not significant, and substantiallyall of which are lab equipment net of their associated accumulateddepreciation. We have recorded Dyax’s portion of this joint venture’s losses asminority interest in our consolidated statements of operations. The results ofExcigen were not significant.

***Gains (Losses) on Investments in Equity Securities***

We review the carrying value of each of our strategicinvestments in equity securities on a quarterly basis for potential impairment.Gains (losses) on investments in equity securities for 2005 includes a$4.5 million gain on the sale of our investment in the common stock ofTheravance, which we recorded in our consolidated statement of operations in April 2005and for which there was no comparable amount in 2004. A $2.9 millionimpairment charge was recorded in 2004 in connection with our investment inMacroGenics for which there is no comparable amount in 2005.

***Investment Income***

Our investment income increased 30% to$31.4 million for 2005, as compared to 2004, primarily due to an increasein the average portfolio yield. This increase was offset, in part, by lower averagecash and investment balances in interest-bearing accounts and an increasein the realized losses from our U.S. investment portfolio.

***Interest Expense***

Our interest expensedecreased 49% to $19.6 million for 2005, as compared to 2004, primarilydue to $17.9 million of interest expense and charges related to theredemption of our $575.0 million in principal of 3% convertiblesubordinated debentures for cash in June 2004 for which there are nosimilar amounts in the same period of 2005, including $8.3 million ofinterest expense, a charge of $4.3 million for the premium paid uponredemption and a charge of $5.3 million to write off the unamortized debtfees associated with these debentures. This decrease was offset, in part, by$0.5 million of additional interest expense for 2005 related to the$350.0 million in principal drawn under our 2003 revolving credit facilityto fund the acquisition of Bone Care.

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**(Provision for) Benefit from Income Taxes**
|                                            | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **06/05  Increase/  (Decrease)  % Change** | ** ** | **05/04  Increase/  (Decrease)  % Change** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Provision for) benefit  from income taxes |       | $                                    | 35,881     |       | $          | (187,430   | )          | $                                               | (141,169   | )                                               |       | >(100 | )% |   |   | 33 | % |   |
| Effective tax rate                         |       | (68                                  | )%         | 30         | %          | 62         | %          |                                            |       |                                            |       |   |   |   |   |
|                                            |            |                                      |            |            |            |            |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |

 

Ourprovisions for income taxes were at rates other than the U.S. federal statutorytax rate for the following reasons:

| ** **                            | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax provision at U.S.  statutory rate |       | (35.0                                                     | )%         | 35.0 | % | 35.0 | % |
| State taxes, net                      |       | (1.7                                                      | )          | 1.6 |   | 2.8 |   |
| Export sales benefits                 |       | (37.2                                                     | )          | (2.8 | ) | (7.1 | ) |
| Domestic manufacturing  deduction     |       | (15.5                                                     | )          | (1.2 | ) | — |   |
| Tax credits                           |       | (30.5                                                     | )          | (4.1 | ) | (4.7 | ) |
| Foreign rate  differential            |       | 76.0                                                      |       | 0.1 |   | (4.4 | ) |
| Charges for IPR&D                 |       | —                                                    |       | 1.2 |   | 39.1 |   |
| Stock compensation                    |       | 15.8                                                      |       | — |   | — |   |
| Goodwill impairment                   |       | 19.6                                                      |       | — |   | — |   |
| Audit settlements                     |       | (62.9                                                     | )          | — |   | — |   |
| Other                                 |       | 3.3                                                       |       | — |   | 1.3 |   |
| Effective tax rate                    |       | (68.1                                                     | )%         | 29.8 | % | 62.0 | % |

 

Oureffective tax rate for all periods varies from the U.S. statutory tax rate as aresult of:

·       ourprovision for state income taxes;

·       thetax benefits from export sales;

·       thetax benefits from domestic production activities;

·       benefitsrelated to tax credits, primarily orphan drug credits; and

·       incomeand expenses taxed at rates other than the U.S. statutory tax rate.

Oureffective tax rate for  2006, was alsoimpacted by:

·       thedeductible charge for IPR&D of $552.9 million recorded in November 2006in connection with our acquisition of AnorMED, of which $195.7 million wastaxed at rates other than the U.S. statutory tax rate;

·       $33.2million of non-deductible stock compensation expenses;

·       acharge for impaired goodwill of $219.2 million recorded inSeptember 2006, of which $29.5 million was not deductible for taxpurposes; and

·       thesettlement of the 1996 to 1999 IRS audit and various state and foreign incometax audits. We recorded a $33.2 million tax benefit to our income tax provisionprimarily related to export sales benefits, tax credits and deductible intangiblesfrom a prior period acquisition. In conjunction with those settlements, wereduced our tax reserves by approximately $13.2 million and recordedcurrent and deferred tax benefits for the remaining portion of the settlementamounts.

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Oureffective tax rates for 2005 and 2004 were also impacted by non-deductiblecharges for IPR&D of:

·       $22.2 millionin 2005, of which $9.5 million was recorded in the first quarter of 2005in connection with our acquisition of Verigen and $12.7 million wasrecorded in the third quarter of 2005 related to our acquisition of Bone Care;and

·       $254.5 millionin 2004, all of which was recorded in December 2004 in connection with ouracquisition of ILEX Oncology.

In addition, our overalltax rate has changed significantly due to fluctuations in our income (loss)before taxes, which was $(52.7) million in 2006, $628.9 million in2005 and $227.7 million in 2004.

**Ourassessment of the potential impact of the required adoption of FIN 48effective January 1, 2007 is included under the heading “Recent AccountingPronouncements—FIN 48, *“Accounting for Uncertaintyin Income Taxes—an Interpretation of FASB Statement No. 109,’’*’’ included in this report.**

**Research andDevelopment Programs**

Ourresearch and development programs are focused on the areas of medicine where wemarket commercial products, namely rare inherited disorders, kidney disease,transplant and immune diseases, orthopaedics and oncology. We also conductresearch in cardiovascular disease, diagnostic testing and other areas of unmetmedical needs. Before we can commercialize our development-stage products,we will need to:

·       conductsubstantial research and development;

·       undertakepre-clinical and clinical testing;

·       developand scale-up manufacturing processes and validate facilities; and

·       pursueregulatory approvals and, in some countries, pricing approvals.

This process is risky,expensive, and may take several years. We cannot guarantee that we will be ableto successfully develop any product, or that we would be able to recover ourdevelopment costs upon commercialization of a product that we successfullydevelop.

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Belowis a brief description of our significant research and development programs:

| Program                        | ** ** | ** **                                                                | ** ** | **Program   Description   or Indication**                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Development   Status   at December 31, 2006** | ** ** | **Year of   Expected   Product   Launch** |
|--------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|
| Renvela  (sevelamer carbonate) |       | Control of serum  phosphorus in patients with CKD on and off hemodialysis |       | Completed  enrollment in trial for hemodialysis patients in 2005. Completed open-label  study to compare powder to tablet formulation that showed the two formulations  are equivalent in controlling serum phosphorus in hemodialysis patients.  Commenced enrollment in trial for powder formulation to allow once daily  dosing in 2006. Filed NDA with the FDA for approval for the control of serum  phosphorus in patients with CKD on hemodialysis in December 2006. |       | 2008                                                 |
| Tolevamer(1)                   | * *   | *C.  difficile*-associated  disease                                       |       | Phase 2 trials  completed in 2004; phase 3 trial ongoing and anticipated to be completed in  the second half of 2007.                                                                                                                                                                                                                                                                                                                                                            |       | 2008                                                 |
| Fabrazyme                      |       | Fabry disease                                                             |       | Marketed in the European  Union since 2001, the U.S. since 2003, and Japan since 2004; marketing  approval received in 45 countries and commercial sales in 35 countries;  several post-marketing commitments ongoing.                                                                                                                                                                                                                                                      |       | Product was  launched in 2001                        |

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| Myozyme               |   | Pompe disease                                                                     |   | Received  marketing approval in the European Union in March 2006, in the U.S. in  April 2006 and in Canada in August 2006; marketing approval  received in 28 countries and commercial sales in 23 countries; several  post-marketing commitments to be initiated in 2007; regulatory submissions  filed and under review in Japan, Switzerland, Brazil, Argentina and Colombia  with several more planned for submission in 2007. |   | Product was  launched in 2006 |
|-----------------------|--------|-----------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|
| GENZ-112638           |   | Gaucher disease                                                                   |   | Enrollment of  patients in a phase 2 trial commenced in July 2006 and is ongoing.                                                                                                                                                                                                                                                                                                                                                                 |   | 2011                          |
| TGF-beta  antagonists |   | Idiopathic  pulmonary fibrosis                                               |   | Phase 1 trial  commenced in 2005; preliminary results anticipated in 2007. We record 50% of  the research and development costs incurred under our collaboration with CAT.                                                                                                                                                                                                                                                                             |   | 2013                          |
| Aldurazyme            |   | MPS I                                                                             |   | Marketed in the  U.S. and the European Union since 2003; marketing approval received in 50  countries and commercial sales in 36 countries; several post-marketing  commitments ongoing.                                                                                                                                                                                                                                                          |   | Product was  launched in 2003 |
| Mozobil(2)            |   | Improve the  efficacy of stem cell transplantation in patients with blood cancers |   | Enrollment  completed in a phase 3 trial for patients with multiple myeloma and a phase 3  trial for non-Hodgkin’s lymphoma in 2006.                                                                                                                                                                                                                                                                                                              |   | 2008, through  2013           |

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| Synvisc(3)                  |   | Viscosupplementation  products to treat osteoarthritis of the knee and other joints |   | Received marketing  approval in the European Union for Synvisc in the shoulder and ankle in late  2006 and launched Synvisc for those indications in December 2006; clinical  development of single-injection Synvisc is ongoing; anticipate  launching single-injection Synvisc in the European Union in 2007 and in  the United States in 2008.                  |   | 2007 through 2008 |
|-----------------------------|--------|-------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|
| Hylastan                    |   | Next generation  viscosupplementation product                                       |   | Pivotal trial  anticipated to be completed in the first half of 2007; anticipate filing for  approval in the U.S. and the European Union in 2007.                                                                                                                                                                                                                  |   | 2008              |
| Sepra products(3)           |   | Next stage products to  prevent surgical adhesions for various indications          |   | Preclinical.                                                                                                                                                                                                                                                                                                                                                       |   | 2009 through 2012 |
| Campath(4)                  |   | B-cell chronic  lymphocytic leukemia                                                |   | Phase 3 clinical trial  in front-line CLL completed in 2006; phase 3 combination therapy trial  in second-line CLL ongoing; phase 2 subcutaneous administration trial in relapsed/retractory  CLL ongoing; anticipated commencement of phase 2 trial in 2007 to  compare Campath from new manufacturing process with the existing product in  front-line CLL. |   | 2009 through 2011 |
| Alemtuzumab (Campath) MS(4) |   | Multiple Sclerosis                                                                  |   | Data from phase 2 trial  (CAMMS23) analyzed at the predefined 1 and 2 year interim analyses; anticipated  commencement of two phase 3 trials in 2007.                                                                                                                                                                                                         |   | 2010              |

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| Clolar(4) |   | Pediatric and  adult leukemias and solid tumors |   | Phase 2 trial in  pediatric acute leukemias ongoing; phase 2 trial in adult hematologic cancers  commenced in 2006 and is ongoing; phase 1 trial in solid tumors ongoing;  phase 3 trial in older patients with acute myelogenous leukemia commenced in  2006; anticipated initiation of phase 1 study for treatment of myelodysplastic  syndromes in 2007. |   | 2008 through 2011 |
|-----------|--------|-------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|

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(1)          Program acquired inconnection with the December 2000 acquisition of GelTex Pharmaceuticals,Inc., or GelTex.

(2)          Program acquired inconnection with the November 2006 acquisition of AnorMED.

(3)          Program acquired inconnection with the December 2000 acquisition of Biomatrix.

(4)          Program acquired inconnection with the December 2004 acquisition of ILEX Oncology.

**Theaggregate actual and estimated research and development expense for theprograms described above is as follows (amounts in millions):**

| Costs incurred  for the year ended December 31, 2005 |   | $ | 205.0         |   |
|-----------------------------------------------------------|--------|---|---------------|--------|
| Costs incurred  for the year ended December 31, 2006 |   | $ | 234.6         |   |
| Cumulative costs  incurred as of December 31, 2006   |   | $ | 1,102.6       |   |
| Estimated costs to  complete as of December 31, 2006 |   | $ | 800 to $1,000 |   |

 

Our current estimates ofthe time and investment required to develop these products may change dependingon the approach we take to pursue them, the results of preclinical and clinicalstudies, and the content and timing of decisions made by the FDA and otherregulatory authorities. We cannot provide assurance that any of these programswill ever result in products that can be marketed profitably. In addition, wecannot guarantee that we will be able to develop and commercialize productsbefore our competitors develop and commercialize products for the sameindication. If certain of our development-stage programs do not result incommercially viable products, our results of operations could be materiallyadversely affected.

**Liquidity andCapital Resources**

We continue to generate cash from operations. We hadcash, cash equivalents and short- and long-term investments of $1.3 billion at December 31,2006 and $1.1 billion at December 31, 2005.

The following is a summaryof our statements of cash flows for 2006 and 2005.

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***Cash Flows from Operating Activities***

Cashflows from operating activities are as follows (amounts in thousands):

| ** **                                                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                        |       |     |       |     |       |
| Net income (loss)                                                                                             |       | $        | (16,797    | )        | $          | 441,489 |   |
| Non-cash charges                                                                                              |       | 978,677  |       | 427,635  |       |
| Decrease in cash  from working capital changes (excluding impact of acquired assets and assumed  liabilities) |       | (73,311  | )          | (137,347 | )          |
| Cash flows from  operating activities                                                                         |       | $        | 888,569    |     | $          | 731,777 |   |

 

Cash provided by operatingactivities increased $156.8 million in 2006, as compared to 2005,primarily driven by a $92.8 million increase in earnings, excludingnon-cash charges, and a $64.0 million decrease in cash used for workingcapital. In connection with our adoption of FAS 123R, we were required tochange the classification in our consolidated statements of cash flows of anytax benefits realized upon the exercise of stock options in excess of thatwhich is associated with the expense recognized for financial reportingpurposes.

***Cash Flows from Investing Activities***

Cashflows from investing activities are as follows (amounts in thousands):

| ** **                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  investing activities:                                                 |       |     |       |     |       |
| Net sales  (purchases) of investments, excluding investments in equity securities |       | $        | 13,168     |     | $          | (131,628 | ) |
| Net sales  (purchases) of investments in equity securities                             |       | 132,588  |       | (410     | )          |
| Purchases of  property, plant and equipment                                            |       | (333,675 | )          | (192,461 | )          |
| Distributions  from equity method investments                                          |       | 19,800   |       | 3,000    |       |
| Purchases of other  intangible assets                                                  |       | (105,348 | )          | (172,092 | )          |
| Acquisitions, net  of acquired cash                                                    |       | (568,953 | )          | (703,074 | )          |
| Other investing  activities                                                            |       | 6,008    |       | 5,682    |       |
| Cash flows from  investing activities                                                  |       | $        | (836,412   | )        | $          | (1,190,983 | ) |

 

In 2006,acquisitions, capital expenditures and purchases of intangible assets accountedfor significant cash outlays for investing activities. In 2006 we used:

·       $569.0million in cash to fund the acquisition of AnorMED;

·       $333.7 millionin cash to fund the purchase of property, plant and equipment, primarilyrelated to the ongoing expansion of our manufacturing capacity in the Republicof Ireland, the United Kingdom and Belgium, and the construction of a newresearch and development facility in Framingham, Massachusetts; and

·       $105.3 millionin cash for purchases of other intangible assets.

These decreases in cash were partially offset by cashprovided by:

·       $132.6 millionin cash from the net sales of investments in equity securities, of which$24.4 million is attributable to the sale of our entire investment of2.1 million shares in the common stock of BioMarin in January 2006,$11.4 million is attributable to the sale of a portion of our investmentin 

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the common stock of CAT inMay 2006 and $99.0 million is attributable to the sale of theremainder of our investment in the common stock of CAT in July 2006;

·       $19.8 millionof cash distributions from our joint venture with BioMarin; and

·       $13.2million in cash from the net sales of investments.

In 2005, netpurchases of investments, including investments in equity securities,acquisitions and capital expenditures accounted for significant cash outlaysfor investing activities. In 2005, we used:

·       $703.1 millionin cash for the acquisitions of Bone Care, Equal Diagnostics, Verigen and genetherapy assets of Avigen, net of acquired cash;

·       $192.5 millionin cash to fund the purchase of property, plant and equipment, primarilyrelated to the ongoing expansion of our manufacturing capacity in the Republicof Ireland, the United Kingdom, Belgium and the United States;

·       $172.1 millionin cash for our reacquisition of the Synvisc sales and marketing rights fromWyeth; and

·       $132.0 million in cashfor net purchases of investments, including equity investments.

***Cash Flows from Financing Activities***

Our cash flows from financing activities are asfollows (amounts in thousands):

| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  financing activities:                     |       |     |       |     |       |
| Proceeds from  issuance of common stock                    |       | $        | 158,305    |     | $          | 354,708 |   |
| Excess tax  benefits from stock-based compensation         |       | 7,114    |       | —   |       |
| Proceeds from  draws on our 2003 revolving credit facility |       | —   |       | 350,000  |       |
| Payments of debt  and capital lease obligations            |       | (4,501   | )          | (478,770 | )          |
| Increase  (decrease) in bank overdrafts                    |       | (21,124  | )          | 17,951   |       |
| Minority interest  contributions                           |       | 11,153   |       | 11,423   |       |
| Other financing  activities                                |       | 1,210    |       | 3,261    |       |
| Cash flows from  financing activities                      |       | $        | 152,157    |     | $          | 258,573 |   |

 

In 2006, cash flows from financing activitiesdecreased $106.4 million, as compared to 2005, primarily due to a$196.4 million decrease in cash proceeds from the issuance of common stockand $350.0 million of cash proceeds drawn under our 2003 revolving creditfacility in 2005 for which there were no similar amounts in 2006. Thesedecreases were offset, in part, by a $474.3 million decrease in cash used forthe payment of debt and capital lease obligations. Cash used for the payment ofdebt and capital lease obligations in 2005 includes the repayment of$450.0 million in principal drawn under our 2003 revolving credit facilityfor which there are no similar repayments in 2006.

In 2005, financing activitiesgenerated $258.6 million of cash, primarily due to $350.0 million ofproceeds drawn under our revolving credit facility that matures in 2006 and$354.7 million of proceeds from the issuance of common stock under ourstock plans, offset in part by $478.8 million in cash utilized to repaydebt including $350.0 million drawn under our revolving credit facilityand capital lease obligations.

***Revolving CreditFacility***

In December 2003,we entered into a three-year $350.0 million revolving credit facility withBank of America, N.A., successor-by merger to Fleet National Bank, asadministrative agent and a syndicate of 

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lenders,maturing in December 2006, which we refer to as our 2003 revolving creditfacility. On July 14, 2006, we terminated our 2003 revolving creditfacility and replaced it with a new five-year $350.0 million seniorunsecured revolving credit facility with JPMorgan Chase Bank, N.A., asadministrative agent, Bank of America, N.A., as syndication agent, ABN AMROBank N.V., Citizens Bank of Massachusetts and Wachovia Bank, NationalAssociation, as co-documentation agents, and a syndicate of lenders, which werefer to as our 2006 revolving credit facility. The proceeds of loans under our2006 revolving credit facility can be used to finance working capital needs andfor general corporate purposes. Our 2006 revolving credit facility may beincreased at any time by up to an additional $350.0 million in theaggregate, as long as no default or event of default has occurred or iscontinuing and certain other customary conditions are satisfied. Borrowingsunder our 2006 revolving credit facility will bear interest as follows:

·       revolvingloans denominated in U.S. dollars or a foreign currency (other than Euros) bearinterest at a variable rate equal to LIBOR for loans in U.S. dollars and acomparable index rate for foreign currency loans, plus an applicable margin;

·       revolvingloans denominated in Euros bear interest at a variable rate equal to theEURIBOR Rate plus an applicable margin;

·       atour option, U.S. dollar swingline loans (demand loans requiring only one day ofadvance notice, which grant us access to up to $20.0 million of our 2006revolving credit facility in order to cover possible working capitalshortfalls) bear interest at the greater of the Prime Rate and the FederalFunds Effective Rate plus one half of one percent; and

·       multicurrencyswingline loans bear interest at a rate equal to the average rate at whichovernight deposits in the currency in which such swingline loan is denominated,and approximately equal in principal amount to such swingline loan, areobtainable by the swingline lender for such swingline loan in the interbankmarket plus an applicable margin.

The applicable margins for LIBOR and multicurrencyrevolving loans range from 0.180% to 0.675% per annum, and for multicurrencyswingline loans from 0.430% to 0.925% per annum, in each case determined by ourcredit ratings. In addition, we are required to pay a facility fee of between 7to 20 basis points based on the aggregate commitments under our 2006 revolvingcredit facility, and in certain circumstances a utilization fee of 10 basispoints.

The terms of our 2006 revolving credit facilityinclude various covenants, including financial covenants that require us tomeet minimum interest coverage ratios and maximum leverage ratios. As of December 31,2006, we were in compliance with these covenants.

As of December 31,2006, no amounts were outstanding under our 2006 revolving credit facility.

***1.25% Convertible Senior Notes***

In December 2003 we issued $690.0 million of1.25% convertible senior notes. Holders of the notes may require us torepurchase all or any part of the notes for cash, common stock, or a combination,at our option, on December 1, 2008, 2013 or 2018, at a price equal to 100%of the principal amount of the notes plus accrued and unpaid interest throughthe date prior to the date of repurchase. Additionally, upon a change ofcontrol, each holder may require us to repurchase for cash, at 100% of theprincipal amount of the notes plus accrued interest, all or a portion of theholder’s notes. On or after December 1, 2008, we may redeem for cash at100% of the principal amount of the notes plus accrued interest, all or part ofthe notes that have not been previously converted or repurchased.

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***Contractual Obligations***

As of December 31,2006, we had committed to make the following payments under contractualobligations (amounts in millions):

| ** **                               | ** ** | **Payments Due by Period** | ** **   |
|------------------------------------------|------------|-------------------------------------------|--------------|
| **Contractual Obligations**         | ** ** | ** **                                | ** **   | **Total** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **After 2011** | ** ** |
| Long-term  debt obligations (1)          |       | $                                         | 698.9        |   | $ | 1.0 |   | $ | 691.0 | (1) | $ | 1.1 |   | $ | 1.1 |   | $ | 1.1 |   |   | $ | 3.6 |   |   |
| Capital lease  obligations (1)           |       | 195.7                                     |         | 15.6 |   | 15.5 |   | 15.5 |   | 15.4 |   | 15.4 |   |   | 118.3 |   |   |
| Operating leases  (1)                    |       | 308.6                                     |         | 53.5 |   | 45.5 |   | 34.4 |   | 26.0 |   | 21.7 |   |   | 127.5 |   |   |
| Contingent  payments (2)                 |       |  —                              |    |  — |    |  — |    |  — |    |  — |    |  — |    |   |  — |   |   |
| Interest  obligations (3)                |       | 17.6                                      |         | 8.9 |   | 8.1 |   | 0.2 |   | 0.2 |   | 0.1 |   |   | 0.1 |   |   |
| Defined pension  benefit plans payments  |       | 18.4                                      |         | 1.3 |   | 1.3 |   | 1.5 |   | 1.4 |   | 1.6 |   |   | 11.3 |   |   |
| Unconditional  purchase obligations      |       | 173.7                                     |         | 30.1 |   | 30.4 |   | 30.3 |   | 27.4 |   | 27.6 |   |   | 27.9 |   |   |
| Capital  commitments (4)                 |       | 583.2                                     |         | 407.9 |   | 82.4 |   | 67.4 |   | 8.7 |   | 5.0 |   |   | 11.8 |   |   |
| Research and  development agreements (5) |       | 146.8                                     |         | 29.0 |   | 30.9 |   | 30.9 |   | 18.7 |   | 18.7 |   |   | 18.6 |   |   |
| Total contractual  obligations           |       | $                                         | 2,142.9      |   | $ | 547.3 |   | $ | 905.1 |   | $ | 181.3 |   | $ | 98.9 |   | $ | 91.2 |   |   | $ | 319.1 |   |   |
|                                          |            |                                           |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          See Note L., “Long-termDebt and Leases” to our consolidated financial statements for additionalinformation on long-term debt and lease obligations.

(2)          From time to time, as aresult of mergers, acquisitions or license arrangements, we may enter intoagreements under which we may be obligated to make contingent payments upon theoccurrence of certain events, and/or royalties on sales of acquired products ordistribution rights. The actual amounts for and the timing of contingentpayments may depend on numerous factors outside of our control, including thesuccess of our preclinical and clinical development efforts with respect to theproducts being developed under these agreements, the content and timing ofdecisions made by the United States Patent and Trademark Office, or USPTO, theFDA and other regulatory authorities, the existence and scope of third partyintellectual property, the reimbursement and competitive landscape around theseproducts, the volume of sales or gross margin of a product in a specifiedterritory and other factors described under the heading “Risk Factors” below.Because we cannot predict with certainty the amount or specific timing ofcontingent payments, we have not included any amounts for contingent paymentsin our contractual obligations table. See Note C., “Mergers and Acquisitions”to our consolidated financial statements for additional information oncontingent payments resulting from our acquisitions of Verigen, EqualDiagnostics and the sales and marketing rights to Synvisc from Wyeth.

(3)          Represents interestpayment obligations related to our 1.25% convertible senior notes due December 2023but callable beginning on December 1, 2008 and the promissory notes tothree former shareholders of Equal Diagnostics.

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(4)          Consistsof contractual commitments to vendors that we have entered into as of December 31,2006 for construction on our outstanding capital projects. Our estimated costof completion for assets under construction as of December 31, 2006 is $583.2 million,as follows (amounts in millions):

| **Location**                      | ** ** | ** ** | ** ** | **Cost to  Complete at  December 31, 2006** | ** ** |
|-----------------------------------|------------|------------|------------|-----------------------------------------------------------------|------------|
| Framingham,  Massachusetts, U.S.  |       |       | $          | 111.2                                                           |       |   |
| Lyon, France                      |       |       | 136.9      |                                                            |       |
| Geel, Belgium                     |       |       | 48.6       |                                                            |       |
| Waterford,  Ireland               |       |       | 46.6       |                                                            |       |
| Allston,  Massachusetts, U.S.     |       |       | 57.8       |                                                            |       |
| Haverhill, United  Kingdom        |       |       | 38.9       |                                                            |       |
| Waltham,  Massachusetts, U.S.     |       |       | 8.2        |                                                            |       |
| Other                             |       |       | 135.0      |                                                            |       |
| Total estimated  cost to complete |       |       | $          | 583.2                                                           |       |   |

 

(5)          Fromtime to time, we enter into agreements with third parties to obtain access toscientific expertise or technology that we do not already have. Theseagreements frequently require that we pay our licensor or collaborator atechnology access fee, milestone payments upon the occurrence of certainevents, and/or royalties on sales of products that utilize the licensedtechnology or arise out of the collaborative research. In addition, theseagreements may call for us to fund research activities not being performed byus. The amounts indicated on the research and development agreements line ofthe contractual obligations table above represent committed funding obligationsto our key collaborators under our significant development programs. Should weterminate any of our license or collaboration agreements, the fundingcommitments contained within them would expire. In addition, the actual amountsthat we pay our licensors and collaborators will depend on numerous factorsoutside of our control, including the success of our preclinical and clinicaldevelopment efforts with respect to the products being developed under theseagreements, the content and timing of decisions made by the USPTO, the FDA andother regulatory authorities, the existence and scope of third partyintellectual property, the reimbursement and competitive landscape around theseproducts, and other factors described under the heading “Risk Factors” below.

**Dyax Corp.**

***Agreements with Dyax Corp.***

In October 1998, we entered into a collaborationagreement with Dyax to develop and commercialize DX-88, one of Dyax’sproprietary compounds for the treatment of chronic inflammatory diseases. InMay 2002, we restructured our collaboration agreement with Dyax. In 2003,we acquired a 49.99% interest in Dyax-Genzyme LLC, formerly known as KallikreinLLC, a joint venture with Dyax for the development of DX-88 forhereditary angioedema, or HAE, and other chronic inflammatory diseases. Underthe terms of the collaboration agreement and related manufacturing agreement,both companies shared development costs of DX-88, except for the first$14.5 million of manufacturing and validation costs for DX-88 activepharmaceutical ingredient, which were the responsibility of Dyax. As a resultof our application of FIN 46, we have consolidated the results of Dyax-GenzymeLLC. Our consolidated balance sheet as of December 31, 2006 includesassets related to Dyax-Genzyme LLC, which are not significant and substantiallyall of which are lab equipment net of their associated accumulateddepreciation. We have recorded Dyax’s portion of this joint venture’s losses asminority interest in our consolidated statements of operations.

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In February 2007, we agreed with Dyax toterminate our participation and interest in Dyax-Genzyme LLC effectiveFebruary 20, 2007. In connection with this termination, we made a capitalcontribution of approximately $17 million in cash to Dyax-Genzyme LLC and Dyaxpurchased our interest in the joint venture for 4.4 million shares of Dyaxcommon stock, valued at $16.9 million, based on the closing price of Dyaxcommon stock on February 23, 2007. Dyax now owns all of the assets of thejoint venture, including worldwide rights to develop and commercialize DX-88.Pursuant to the termination agreement, we agreed to:

·       a5 year standstill period during which we will not acquire any additional sharesof Dyax;

·       notenter into any future licensing or collaboration arrangements for theprevention and or treatment of hereditary, acquired or drug-induced angioedemafor 2 years; and

·       negotiatein good faith a transitional services agreement for us to provide certainservices to Dyax.

***Note Receivable from Dyax Corp.***

In May 2002, we extended to Dyax a $7.0 millionline of credit. Dyax issued a senior secured promissory note in the principalamount of $7.0 million to us under which it can request periodic advances ofnot less than $250,000 in principal, subject to certain conditions. Advancesunder this note were due, together with any accrued but unpaid interest, inMay 2005. In May 2005, Dyax exercised its right to extend thematurity of the note from May 2005 to May 2007.

In August 2006, we amended our $7.0 millionsecured promissory note receivable from Dyax to extend the maturity date fromMay 2007 to May 2010, eliminate the existing financial covenants andreplace the original collateral on the note with a letter of credit from amajor bank for $7.0 million plus 90 days of interest at the Prime Rate plus 2%.As of December 31, 2006, $7.3 million of principal and accrued interestreceivable remains due to us from Dyax under this note, which we have recordedas a note receivable-related party in our consolidated balance sheet. Thetermination of our participation and interest in the joint venture had noeffect on our note receivable from Dyax.

We considered Dyax to be arelated party as of December 31, 2006 because the chairman and chiefexecutive officer of Dyax was a member of our board of directors andDyax-Genzyme LLC was operational during the periods presented. As ofDecember 31, 2006, we held approximately 1% of the outstanding shares ofDyax common stock and as of February 28, 2007, as a result of theadditional 4.4 million shares of Dyax common stock we received in connectionwith the termination of our participation and interest in Dyax-Genzyme LLC, ourownership interest in Dyax increased to approximately 11%.

***Financial Position***

We believe that ouravailable cash, investments and cash flows from operations will be sufficientto fund our planned operations and capital requirements for the foreseeablefuture. Although we currently have substantial cash resources and positive cashflow, we have used or intend to use substantial portions of our available cashand may make additional borrowings under our 2006 revolving credit facilityfor:

·       productdevelopment and marketing;

·       businesscombinations and other strategic business initiatives;

·       expandingexisting and constructing new facilities;

·       expandingstaff; and

·       workingcapital, including satisfaction of our obligations under capital and operatingleases.

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Our cash reserves may be further reduced to payprincipal and interest on the $690.0 million in principal under our 1.25%convertible senior notes due December 1, 2023. The notes are initiallyconvertible into Genzyme Stock at a conversion price of approximately $71.24per share. Holders of the notes may require us to repurchase all or any part ofthe notes for cash, common stock, or a combination, at our option, onDecember 1, 2008, 2013 or 2018, at a price equal to 100% of the principalamount of the notes plus accrued and unpaid interest through the date prior tothe date of repurchase. Additionally, upon a change of control, each holder mayrequire us to repurchase for cash, at 100% of the principal amount of the notesplus accrued interest, all or a portion of the holder’s notes. On or afterDecember 1, 2008, we may redeem for cash at 100% of the principal amountof the notes plus accrued interest, all or part of the notes that have not beenpreviously converted or repurchased.

In addition, we have several outstanding legalproceedings. Involvement in investigations and litigation can be expensive anda court may ultimately require that we pay expenses and damages. As a result oflegal proceedings, we also may be required to pay fees to a holder of proprietaryrights in order to continue certain operations. We have provided you detail oncertain pending legal proceedings in the notes to our consolidated financialstatements.

**Tosatisfy these and other commitments, we may have to obtain additional financing.We cannot guarantee that we will be able to obtain any additional financing,extend any existing financing arrangement, or obtain either on favorable terms.**

**Off-Balance Sheet Arrangements**

We do not use specialpurpose entities or other off-balance sheet financing arrangements. Weenter into guarantees in the ordinary course of business related to theguarantee of our own performance and the performance of our subsidiaries. Inaddition, we have joint ventures and certain other arrangements that are focusedon research, development, and the commercialization of products. Entitiesfalling within the scope of FIN 46R are included in our consolidated statementsof operations if we qualify as the primary beneficiary. Entities not subject toconsolidation under FIN 46R are accounted for under the equity method ofaccounting if our ownership percent exceeds 20% or if we exercise significantinfluence over the entity. We account for our portion of the income/losses ofthese entities in the line item “Equity in income (loss) of equity methodinvestments” in our statements of operations. We also acquire companies inwhich we agree to pay contingent consideration based on attaining certainthresholds.

**Significant Relationships**

The table below describesour significant relationships. This information is taken from questionnairesthat our directors and senior executives are asked to complete on an annualbasis in January. We have not undertaken to independently confirm the accuracyof this information.

| **Entity**         | ** ** | ** **               | ** ** | **Affiliation with Genzyme**                                                                  | ** ** | **Officers & Directors   Relationship** | ** ** | **Officer & Director Ownership   in and Compensation from   the Entity** | ** ** |
|--------------------|------------|--------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **               | ** ** | ** **                                                                                              | ** ** | **Stock   Shares**                                    | ** ** | **Stock   Options**                                                                                             | ** ** | **2006 Cash   Compensation** | ** ** |
| ABIOMED, Inc. |       | -Cost  method investment |       | Henri A. Termeer, Genzyme  Chairman, President and Chief Executive Officer, is a director of ABIOMED.   |       | 29,551                                                |       |                                                                                                            | 112,351    |   |   |   | $ | 22,200 |   |   |
| Aventis Pasteur SA |       | -Supplier                |       | Charles L. Cooney,  Genzyme director, taught an Executive Education course for Aventis in Lyon,  France |       | —                                                |       |                                                                                                            | —     |   |   |   | $ | 25,000 |   |   |

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| Bank of America          |   | -Banking partner                        |   | Senator Connie  Mack III, Genzyme director, is a passive investor in Bank of America.                                                                 |   | 193     |   |   | —  |   |   |   | — |   |   |
|--------------------------|--------|-----------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                     |   |                                    |   | Robert J.  Carpenter, Genzyme director, is a passive investor in Bank of America.                                                                     |   | 712     |   |   | —  |   |   |   | — |   |   |
|                     |   |                                    |   | Evan M. Lebson, Genzyme  officer, is a passive investor in Bank of America.                                                                           |   | 275     |   |   | —  |   |   |   | — |   |   |
|                     |   |                                    |   | Mary McGrane, Genzyme  officer, is a passive investor in Bank of America; holding 250 shares; 90 shares  held solely by spouse.                  |   | 340     |   |   | —  |   |   |   | — |   |   |
| Bayer Schering Pharma AG |   | -Commercialization  partner for Campath |   | Henry E. Blair, Genzyme  director, is the Chairman and Chief Executive Officer of Dyax, which  maintains an agreement with Bayer Schering Pharma AG.  |   | —  |   |   | —  |   |   |   | — |   |   |
| CAT                      |   | -Collaboration partner                  |   | Henry E. Blair, Genzyme  director, is the Chairman and Chief Executive Officr of Dyax. There is an  ongoing licensing agreement between Dyax and CAT. |   | —  |   |   | —  |   |   |   | — |   |   |
| Citibank, N.A.           |   | -Banking partner                        |   | Evan M. Lebson, Genzyme  officer, is a passive investor in Citibank, N.A.                                                                             |   | 250     |   |   | —  |   |   |   | — |   |   |
|                     |   |                                    |   | Mary McGrane, Genzyme  officer, is a passive investor in Citibank, N.A.; holding 240 shares;  240 shares held solely by spouse.             |   | 480     |   |   | —  |   |   |   | — |   |   |
| Dyax Corp.               |   | -Cost method investment                 |   | Henri A. Termeer, Genzyme  Chairman, President and Chief Executive Officer, is a former strategic advisory  committee member.                         |   | 2,649   |   |   | 2,000   |   |   |   | — |   |   |
|                     |   |                                    |   | Henry E. Blair, Genzyme  director, is the Chairman and Chief Executive Officer of Dyax(1).                                                            |   | 555,320 |   |   | 792,253 |   |   |   | — |   |   |
|                     |   |                                    |   | Charles L. Cooney,  Genzyme director, is a former strategic advisory committee member.                                                                |   | 7,857   |   |   | 20,255  |   |   |   | — |   |   |
|                     |   |                                    |   | Mark R. Bamforth, Genzyme  officer, is a passive investor in Dyax.                                                                                    |   | 1,000   |   |   | —  |   |   |   | — |   |   |
|                     |   |                                    |   | Peter Wirth, Genzyme  officer, is a former strategic advisory committee member.                                                                       |   | 9,780   |   |   | —  |   |   |   | — |   |   |
|                     |   |                                    |   | The wife of Donald  E. Pogorzelski,  Genzyme officer, is a passive investor in Dyax.                                                                  |   | 5,000   |   |   | —  |   |   |   | — |   |   |

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| Excigen, Inc.              |   | -Collaboration partner                                               |   | Earl M.  Collier, Jr. and James A. Geraghty, both Genzyme officers, are directors  of Excigen.                                                               |   | — |   |   | —  |   |   |   | —  |   |   |
|---------------------------------|--------|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| GTC  Biotherapeutics, Inc. |   | -Cost method investment  -Supply Agreement  -Services Agreement      |   | Henri A. Termeer, Genzyme  Chairman, President and Chief Executive Officer is a former director of GTC.                                                           |   | 9,500  |   |   | 40,500  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Henry E. Blair, Genzyme  director, is a former director of GTC.                                                                                                   |   | 1,000  |   |   | 3,000   |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Charles L. Cooney,  Genzyme director, is a member of the strategic advisory board for GTC                                                                         |   | — |   |   | 3,000   |   |   |   | —  |   |   |
|                            |   |                                                                 |   | James A. Geraghty,  Genzyme officer, is a director of GTC.                                                                                                        |   | 62,791 |   |   | 147,500 |   |   |   | $19,500 |   |   |
|                            |   |                                                                 |   | Earl M.  Collier, Jr., Genzyme officer, is a passive investor in GTC.                                                                                        |   | 1,000  |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Richard H.  Douglas, Genzyme officer, is a passive investor in GTC.                                                                                               |   | 180    |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Peter Wirth, Genzyme  officer(2).                                                                                                                                 |   | — |   |   | 2,000   |   |   |   | —  |   |   |
| Harvard University              |   | -Landlord for property  leased by Genzyme in  Allston, Massachusetts |   | The wife of Peter  Wirth, Genzyme officer, is an employee of Harvard University.                                                                                  |   | — |   |   | —  |   |   |   | —  |   |   |
| JP Morgan Chase                 |   | -Banking partner                                                     |   | Henry E. Blair, Genzyme  director, is the Chairman and Chief Executive Officer of Dyax, which  maintains an investment banking relationship with JP Morgan Chase. |   | — |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Senator Connie  Mack III, Genzyme director, is a passive investor in JP Morgan Chase.                                                                             |   | 215    |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | C. Ann Merrifield,  Genzyme officer, is a passive investor in JP Morgan Chase, shares held  jointly with spouse.                                                  |   | 46     |   |   | —  |   |   |   | —  |   |   |
| Medtronic, Inc.            |   | -Joint venture  partner  with Genzyme in MG  Biotherapeutics LLC     |   | Gail K. Boudreaux,  Genzyme director, is a passive investor in Medtronic.                                                                                         |   | 52     |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Earl M.  Collier, Jr., Genzyme officer, is a passive investor in Medtronic.                                                                                  |   | 1,000  |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Elliott D.  Hillback, Genzyme officer, is a passive investor in Medtronic.                                                                                        |   | 2,800  |   |   | —  |   |   |   | —  |   |   |
|                            |   |                                                                 |   | Donald E.  Pogorzelski, Genzyme officer, is a passive investor in Medtronic. 400 shares held  jointly with spouse; 1,000 shares held solely by spouse.            |   | 1,400  |   |   | —  |   |   |   | —  |   |   |

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|                                     |   |                                             |   | James A. Geraghty,  Genzyme officer, is a passive investor in Medtronic.                                                                                                    |   | —             |   |   | —         |   |   |   | — |           |   |
|------------------------------------------|--------|--------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|----------------|--------|--------|--------|--------|----------------|--------|
| MG Biotherapeutics LLC                   |   | -Joint venture with  Medtronic, Inc.        |   | James A. Geraghty,  Genzyme officer, is a director of MG Biotherapeutics LLC.M                                                                                              |   | —             |   |   | —         |   |   |   | — |           |   |
| Myosix S.A.                              |   | -Consolidated investment  -Collaboration partner |   | Earl M.  Collier, Jr. and James A. Geraghty, both Genzyme officers, are directors  of Myosix.                                                                          |   | —             |   |   | —         |   |   |   | — |           |   |
| Oxford Bioscience Partners IV, L.P.      |   | -Cost method investment                          |   | Peter Wirth, Genzyme  officer, is a limited partner in the MRNA Fund II, L.P., an affiliate fund, and  has a made a $100,000 capital commitment to the partnership.         |   | —             |   |   | —         |   |   |   | — |           |   |
|                                     |   |                                             |   | Henry E. Blair, Genzyme  director, is the Chairman and Chief Executive Officer of Dyax, is a limited  partner and has made a $50,000 capital commitment to the partnership. |   | —             |   |   |           |   |   |   |   |           |   |
|                                     |   |                                             |   | Alison Lawton, Genzyme  officer, is a limited partner and has made a $50,000 capital commitment to  the partnership.                                                        |   | —             |   |   | —         |   |   |   | — |           |   |
| Peptimmune, Inc.                    |   | -Equity method investment  -Service agreements   |   | Robert J.  Carpenter, Genzyme director, is the Executive Chairman of Peptimmune.                                                                                            |   | 595,238  2,018,750 | *  **  |   | 31,250  — |   |   |   | $      | 75,000  — |   |   |
|                                     |   |                                             |   | * Series B  preferred stock.  ** Common stock.                                                                                                                         |   | —             |   |   | —         |   |   |   | — |           |   |
| Sirtris Pharmaceuticals, Inc.       |   | -Cost method investment                          |   | Robert J.  Carpenter, Genzyme director, is a passive investor in Sirtris  Pharmaceuticals, Inc. and holds Series A preferred stock.                               |   | 25,000             |   |   | —         |   |   |   | — |           |   |
| Therapeutic Human Polyclonals, Inc. |   | -Equity method investment                        |   | James A. Geraghty,  Genzyme officer, is a director of THP.                                                                                                                  |   | —             |   |   | —         |   |   |   | — |           |   |
| UBS Securities LLC                       |   | -Banking partner                                 |   | C. Ann Merrifield,  Genzyme officer, is a passive investor in UBS Securities LLC, holding 13,362 shares;  6,478 shares and 13,980 options held solely by spouse.            |   | 19,840             |   |   | 13,980         |   |   |   | — |           |   |
|                                     |   |                                             |   | Henry E. Blair, Genzyme  director, is the Chairman and Chief Executive Officer of Dyax, which  maintains an investment banking relationship with UBS Securities LLC.        |   | —             |   |   | —         |   |   |   | — |           |   |
| Wachovia Bank National Association       |   | -Banking/lending partner                         |   | Gail K. Boudreaux,  Genzyme director, is a passive investor in Wachovia Bank National  Association.                                                                         |   | 64                 |   |   | —         |   |   |   | — |           |   |
|                                          |        |                                                  |        |                                                                                                                                                                             |        |                    |        |        |                |        |        |        |        |                |        |  |

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(1)             Mr. Blair’s 2006 compensation from Dyax can befound in Dyax’s 2007 proxy statement.

(2)             Mr. Wirth received these stock options in 1998when Genzyme was affiliated with GTC.

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**Recent AccountingPronouncements**

*FAS 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106 and 132(R.)”*   InSeptember 2006, the FASB issued FAS 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106 and 132(R).” FAS 158 requires us to recognize theoverfunded or underfunded status of any pension or other postretirement planswe may have as a net asset or a net liability on our statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur as an adjustment to accumulated other comprehensive income instockholders’ equity. Currently, we have defined benefit pension plans forcertain of our foreign subsidiaries and a defined benefit postretirement planfor one of our U.S. subsidiaries, which has been frozen since 1995 and is notsignificant. Under FAS 158, actuarial gains and losses, prior servicecosts or credits, and any remaining transition assets or obligations that havenot been recognized for our defined benefit pension plans under previousaccounting standards must be recognized in accumulated other comprehensiveincome, net of tax effects, until they are amortized as a component of netperiodic benefit cost. In addition, FAS 158 requires that the measurementdate, which is the date at which the benefit obligation and plan assets aremeasured, be as of our fiscal year end, which is December 31. FAS 158is effective for our fiscal year ending December 31, 2006, except for themeasurement date provisions, which are effective for us for our fiscal yearending December 31, 2008. Accordingly, we have recognized the underfundedstatus of our defined benefit pension plans in our consolidated balance sheets asof December 31, 2006, including $12.8 million of additional minimum pensionliabilities and $3.9 million of related taxes, offset by an$8.9 million charge, net of tax, to accumulated other comprehensive incomein stockholders’ equity. We have also provided the disclosures required byFAS 158 as of December 31, 2006 in Note P., “Benefit Plans,” to ourfinancial statements included in this report. The adoption of FAS 158 didnot have a material impact on our financial condition or results of operations.

*SAB 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements.”*   In September 2006, the SEC staff issued SAB 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements,” to address the diversity in practiceregarding the quantification of financial statement misstatements under the twomethods most commonly used by preparers and auditors—the income statement, or “roll-over,”approach, and the balance sheet, or “iron curtain,” approach. Prior to SAB 108,companies could evaluate the materiality of financial statement misstatementsusing either the income statement approach, focusing on new misstatements addedin the current year, or the balance sheet approach, focusing on the cumulativeamount of misstatement present in a company’s balance sheet. Misstatements thatwould be material under one approach could be viewed as immaterial underanother approach, and subsequently, not be corrected. The SEC staff believesthat reliance on only one of these methods, to the exclusion of the other, doesnot appropriately quantify all misstatements that could be material tofinancial statement users. As a result, SAB 108 now requires that companiesutilize a dual approach to assessing the quantitative effects of financial statementmisstatements, which includes both an income statement focused assessment and abalance sheet focused assessment. The guidance in SAB 108 is effective for ourcurrent fiscal year ending December 31, 2006. Although restatement of prioryears’ financial statements is permitted, it is not required if we properlyapplied our previous approach (income statement or balance sheet) andconsidered all relevant qualitative factors in our assessment of previouserrors. In lieu of the prior period restatement, we were permitted to reportthe cumulative effect of adopting SAB 108 as an adjustment to the openingbalance of assets and liabilities, with an offsetting adjustment to the openingbalance of retained earnings as of January 1, 2006, the year of adoption,and disclose the nature and amount of each individual error being corrected inthe cumulative effect adjustment, when and how each error being correctedarose, and the fact that the errors had previously been considered immaterial.  We did not record any cumulative effectadjustments related to the adoption of SAB 108. The adoption of SAB 108 didnot impact our financial position or results of operations.

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*FIN 48, “Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109.”*   InJuly 2006, the FASB issued FIN 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109,” which seeks to reducethe significant diversity in practice associated with certain aspects ofmeasurement and recognition in accounting for income taxes. FIN 48 prescribes arecognition threshold and measurement attribute for financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return, and also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 is effective for us as of January 1, 2007. Uponadoption, the cumulative effect of any changes in net assets resulting from theapplication of FIN 48 will be recorded as an adjustment to accumulated earnings(deficit). Additional guidance from the FASB on FIN 48 is pending. As aresult, we are currently unable to finalize our estimate of the impact thatadopting the interpretation will have on our financial position or results ofoperations.

*FAS 157, “Fair ValueMeasurements.”*   In September 2006, the FASBissued FAS 157, “Fair Value Measurements,” which provides enhancedguidance for using fair value to measure assets and liabilities. FAS 157establishes a common definition of fair value, provides a framework formeasuring fair value under accounting principles generally accepted in theUnited States and expands disclosure requirements regarding fair valuemeasurements. FAS 157 is effective for us as of January 1, 2008. Weare currently evaluating the impact, if any, the adoption of FAS 157 willhave on our financial position and results of operations.

**Market Risk**

We are exposed topotential loss from exposure to market risks represented principally by changesin interest rates, foreign exchange rates and equity prices. At December 31,2006, we held various derivative contracts in the form of foreign exchangeforward contracts. The derivatives contain no leverage or option features. Wealso held a number of other financial instruments, including investments inmarketable securities and various debt securities we issued. We do not holdderivatives or other financial instruments for trading purposes.

**Equity Price Risk**

We hold investments in alimited number of U.S. and European equity securities. We estimated thepotential loss in fair value due to a 10% decrease in the equity prices of eachmarketable securities held at December 31, 2006 to be $4.2 million,as compared to $11.6 million at December 31, 2005. This estimate assumesno change in foreign exchange rates from quarter-end spot rates andexcludes any potential risk associated with securities that do not have readilydeterminable market value.

**Interest Rate Risk**

We are exposed to potential loss due to changes ininterest rates. Our principal interest rate exposure is to changes in U.S.interest rates. Instruments with interest rate risk include short- andlong-term investments in fixed income securities. Other exposures tointerest rate risk include fixed rate convertible debt and fixed rate debt. Toestimate the potential loss due to changes in interest rates, we performed asensitivity analysis using the instantaneous adverse change in interest ratesof 100 basis points across the yield curve.

We used thefollowing assumptions in preparing the sensitivity analysis for our convertiblebonds:

·       convertiblenotes that are “in-the-money” at year end are considered equitysecurities and are excluded;

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·       convertiblenotes that are “out-of-the-money” at year end are analyzed bytaking into account both fixed income and equity components; and

·       convertiblenotes will mature on the first available date.

On this basis, we estimatethe potential loss in fair value that would result from a hypothetical 1% (100basis points) increase in interest rates to be $4.2 million as of December 31,2006, as compared to $5.9 million as of December 31, 2005. Thedecrease is primarily due to decreases in interest rate sensitivity on ourfixed income investment portfolio, our $690.0 million in principal of1.25% convertible notes, and the capital lease for our corporate headquartersin Cambridge, Massachusetts, which has a remaining principal balance of $116.9 millionat December 31, 2006.

**Foreign ExchangeRisk**

As a result of our worldwide operations, we may faceexposure to adverse movements in foreign currency exchange rates, primarily tothe Euro, British pound and Japanese yen. These exposures are reflected inmarket risk sensitive instruments, including foreign currency receivables andpayables, foreign exchange forward contracts and foreign equity holdings.

As of December 31,2006, we estimate the potential loss in fair value of our foreign currencycontracts that would result from a hypothetical 10% adverse change in exchangerates to be $34.2 million, as compared to $2.9 million as of December 31,2005. The change from the prior period is primarily due to:

·       anew forward contract to hedge approximately $160 million of foreign currency exposurerelated to an intercompany note denominated in Euros; and

·       anew forward contract to hedge approximately $108 million of foreign currencyexposure related to the British pound.

**Risk Factors**

Our future operatingresults could differ materially from the results described in this report dueto the risks and uncertainties related to our business, including thosediscussed below.

**Our financialresults are highly dependent on sales of Cerezyme.**

We generate a significantportion of our revenue from sales of Cerezyme, our enzyme-replacementproduct for patients with Gaucher disease. Sales of Cerezyme totaled$1.0 billion in 2006, representing approximately 35% of our consolidatedtotal product revenue in 2006. Because our business is highly dependent onCerezyme, negative trends in revenue from this product could have a significantadverse effect on our results of operations and cause the value of oursecurities to decline substantially. We will lose revenue if alternativetreatments gain commercial acceptance, if our marketing activities arerestricted, or if reimbursement is limited. In addition, the patient populationwith Gaucher disease is not large. Because a significant percentage of thatpopulation already uses Cerezyme, opportunities for future sales growth areconstrained. Furthermore, changes in the methods for treating patients withGaucher disease, including treatment protocols that combine Cerezyme with othertherapeutic products or reduce the amount of Cerezyme prescribed, could limitgrowth, or result in a decline, in Cerezyme sales.

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**If we fail toincrease sales of several products and services, we will not meet our financialgoals.**

Over the next fewyears, our success will depend substantially on our ability to increase revenuefrom many different products and services. These products and services include Renagel,Synvisc, Fabrazyme, Aldurazyme, Myozyme, Hectorol, Thymoglobulin, Thyrogen,Clolar, Campath and diagnostic testing services. Our ability to increase saleswill depend on a number of factors, including:

·       acceptanceby the medical community of each product or service;

·       theavailability of competing treatments that are deemed more efficacious, moreconvenient to use, or more cost effective;

·       ourability, and the ability of our collaborators, to efficiently manufacturesufficient quantities of each product to meet demand and to do so in a costefficient manner;

·       regulationby the U.S. Food and Drug Administration, commonly referred to as the FDA, andthe European Agency for the Evaluation of Medicinal Products, or EMEA, andother regulatory authorities of these products and the facilities in whichthese products are manufactured;

·       thescope of the labeling approved by regulatory authorities for each product andcompetitive products;

·       theeffectiveness of our sales force;

·       theavailability and extent of coverage, pricing and level of reimbursement fromgovernmental agencies and third party payors; and

·       thesize of the patient population for each product or service and our ability toidentify new patients.

Part of our growth strategy involves conductingadditional clinical trials to support approval of expanded uses of some of ourproducts, pursuing marketing approval for our products in new jurisdictions anddeveloping next generation products such as Renvela and single-injection Synvisc.For example, we are conducting a phase 3 trial of Clolar in adult acutemyelogenous leukemia. The success of this component of our growth strategy willdepend on the outcome of these additional clinical trials, the content andtiming of our submissions to regulatory authorities and whether and when thoseauthorities determine to grant approvals.

Because the healthcareindustry is extremely competitive and regulatory requirements are rigorous, wespend substantial funds marketing our products and attempting to expandapproved uses for them. These expenditures depress near-term profitability,with no assurance that the expenditures will generate future profits thatjustify the expenditures.

**Our future success will depend on our ability toeffectively develop and market our products and services against those of ourcompetitors.**

The human healthcare products and services industry isextremely competitive. Other organizations, including pharmaceutical,biotechnology, device and diagnostic testing companies, have developed and are developingproducts and services to compete with our products, services, and productcandidates. If healthcare providers, patients or payors prefer thesecompetitive products or services or these competitive products or services havesuperior safety, efficacy, pricing or reimbursement characteristics, we willhave difficulty maintaining or increasing the sales of our products andservices.

Renagel competes with two other products approved inthe United States for the control of elevated phosphorus levels in patientswith chronic kidney failure on hemodialysis. Fresenius Medical Care marketsPhosLo®, acalcium-based phosphate binder. Shire Pharmaceuticals Group plc, orShire, markets 

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Fosrenol®, a non-calcium based phosphatebinder. Renagel also competes with over-the-counter calcium carbonate productssuch as TUMS® and metal-based options such as aluminum andmagnesium.

Both the oral and the intravenous formulations ofHectorol face competition. Abbott Laboratories markets intravenous Calcijex® and intravenous Zemplar® inthe United States and Europe. More recently it has begun marketing an oralformulation of Zemplar in the United States. Hectorol faces competition fromseveral other vitamin D hormone therapies used to treat hyperparathyroidism andhyperproliferative diseases as well.

UCB S.A. has developed Zavesca®, a small molecule drug for thetreatment of Gaucher disease, the disease addressed by Cerezyme. Zavesca hasbeen approved in the United States, European Union and Israel as an oraltherapy for use in patients with mild to moderate Type 1 Gaucher disease forwhom enzyme replacement therapy is unsuitable. In addition, Shire reportedtop-line data from a phase 1/2 clinical trial for its gene-activatedglucocerebrosidase program, also to treat Gaucher disease and announcedinitiation of a phase 3 study in 2007. We are also aware of other developmentefforts aimed at treating Gaucher disease.

Outside the United States, Shire is marketing ReplagalTM,a competitive enzyme replacement therapy for Fabry disease which is the diseaseaddressed by Fabrazyme. In addition, while Fabrazyme has received orphan drugdesignation, which provides us with seven years of market exclusivity for theproduct in the United States, other companies may seek to overcome our marketexclusivity and, if successful, compete with Fabrazyme in the United States. Weare aware of other development efforts aimed at treating Fabry disease.

Current competition for Synvisc includes Supartz®, a product manufactured bySeikagaku Kogyo that is sold in the United States by Smith & NephewOrthopaedics and in Japan by Kaken Pharmaceutical Co. under the name Artz®; Hyalgan®, produced by Fidia Farmaceutici S.p.A.and marketed in the United States by Sanofi-Aventis; Orthovisc®, produced by Anika Therapeutics, Inc.,and marketed in the United States by Johnson & Johnson and marketedoutside the United States through distributors; EuflexxaTM, a productmanufactured and sold by Ferring Pharmaceuticals and marketed in the UnitedStates and Europe; and Durolane®,manufactured by Q-Med AB and distributed outside the United States bySmith & Nephew Orthopedics. We are aware of variousviscosupplementation products on the market or in development, but are unawareof any products that have physical properties of viscosity, elasticity ormolecular weight comparable to those of Synvisc. Furthermore, several companiesmarket products that are not viscosupplementation products but which aredesigned to relieve the pain associated with osteoarthritis. Synvisc will havedifficulty competing with any of these products to the extent the competitiveproducts are considered more efficacious, less burdensome to administer or morecost-effective.

Several companies market products that, likeThymoglobulin and Lymphoglobuline, are used for the prevention and treatment ofacute rejection in renal transplant. These products include Novartis’ Simulect®, Pfizer Inc.’s ATGAM®, Ortho Biotech’s OrthocloneOKT®3, FreseniusBiotech GmbH’s ATG-Fresenius S® and the Roche Group’s Zenapax®. Competition in the acute transplantrejection market is driven largely by product efficacy due to the potentialdecreased long-term survival of transplanted organs as the result of an acuteorgan rejection episode.

The examples above areillustrative. Almost all of our products and services face competition.Furthermore, the field of biotechnology is characterized by significant andrapid technological change. Discoveries by others may make our products orservices obsolete. For example, competitors may develop approaches to treating LSDsthat are more effective, convenient or less expensive than our products andproduct candidates. Because a significant portion of our revenue is derivedfrom products that address this class of diseases and a substantial portion ofour expenditures is devoted to developing new therapies for 

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thisclass of diseases, such a development would have a material negative impact onour results of operations. Furthermore, we are committed to expanding ouroncology portfolio. Many pharmaceutical and biotechnology companies arepursuing programs in this area, and these organizations may develop approachesthat are superior to ours.

**If we fail to obtain adequate levels of reimbursementfor our products from third party payors, the commercial potential of ourproducts will be significantly limited.**

A substantial portion of our domestic andinternational revenue comes from payments by third party payors, includinggovernment health administration authorities and private health insurers.Governments and other third party payors may not provide adequate insurancecoverage or reimbursement for our products and services, which could impair ourfinancial results.

Third party payorsare increasingly scrutinizing pharmaceutical budgets and healthcare expensesand are attempting to contain healthcare costs by:

·       challengingthe prices charged for healthcare products and services;

·       limitingboth the coverage and the amount of reimbursement for new therapeutic products;

·       reducingexisting reimbursement rates for commercialized products and services;

·       limitingcoverage for the treatment of a particular patient to a maximum dollar amountor specified period of time;

·       denyingor limiting coverage for products that are approved by the FDA or othergovernmental regulatory bodies but are considered experimental orinvestigational by third party payors; and

·       refusingin some cases to provide coverage when an approved product is used for diseaseindications in a way that has not received FDA or other applicable marketingapproval.

Attempts by third party payors to reduce costs in anyof these ways could decrease demand for our products. In addition, in certaincountries, including countries in the European Union and Canada, the coverageof prescription drugs, the pricing, and the level of reimbursement are subjectto governmental control. Therefore, we may be unable to negotiate coverage,pricing and/or reimbursement on terms that are favorable to us. Governmenthealth administration authorities may also rely on analyses of thecost-effectiveness of certain therapeutic products in determining whether toprovide reimbursement for such products. Our ability to obtain satisfactorypricing and reimbursement may depend in part on whether our products, the costof some of which is high in comparison to other therapeutic products, areviewed as cost-effective.

Furthermore, governmentalregulatory bodies, such as the Centers for Medicare and Medicaid Services(CMS), may from time-to-time make unilateral changes to reimbursement rates forour products and services. These changes could reduce our revenues by causinghealthcare providers to be less willing to use our products and services.Although we actively seek to assure that any initiatives that are undertaken byregulatory agencies involving reimbursement for our products and services donot have an adverse impact on us, we may not always be successful in theseefforts. For example, in October 2006, the CMS announced a change to thebilling code for viscosupplementation products effective January 2007that, if unchanged, would have resulted in Medicare reimbursement for Synviscat a rate that is lower than the price healthcare providers are currentlypaying for the product. In December 2006, the CMS reversed its decision. If theCMS billing code decision had been left unchanged, our Synvisc revenues wouldhave been adversely affected because healthcare providers likely would havebeen less willing to use Synvisc. Although, the CMS ultimately reversed itsdecision and left the mechanism for calculating Synvisc reimbursement in 2007substantially similar to the reimbursement mechanism for 2006, we have no wayof 

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knowingwhether, at some point in the future, the CMS will change the method forreimbursing Synvisc or any of our other products and services in a way thatcould have an adverse effect on our revenues.

**The development of new biotechnology products involvesa lengthy and complex process, and we may be unable to commercialize any of theproducts we are currently developing.**

We have numerous products under development and devoteconsiderable resources to research and development, including clinical trials.

Before we cancommercialize our development-stage product candidates, we will need to:

·       conductsubstantial research and development;

·       undertakepreclinical and clinical testing;

·       developand scale-up manufacturing processes; and

·       pursueregulatory approvals and, in some jurisdictions, pricing approvals.

This processinvolves a high degree of risk and takes many years. Our product developmentefforts with respect to a product candidate may fail for many reasons,including:

·       failureof the product candidate in preclinical studies;

·       difficultyenrolling patients in clinical trials, particularly for disease indicationswith small populations;

·       patientsexhibiting adverse reactions to the product candidate or indications of othersafety concerns;

·       insufficientclinical trial data to support the effectiveness of the product candidate;

·       ourinability to manufacture sufficient quantities of the product candidate fordevelopment or commercialization activities in a timely and cost-efficientmanner;

·       ourfailure to obtain the required regulatory approvals for the product candidateor the facilities in which it is manufactured; or

·       changesin the regulatory environment, including pricing and reimbursement, that makedevelopment of a new product or indication no longer desirable.

Few research and development projects result incommercial products, and success in preclinical studies or early clinicaltrials often is not replicated in later studies. We may decide to abandondevelopment of a product or service candidate at any time or we may be requiredto expend considerable resources repeating clinical trials or conductingadditional trials, either of which would increase costs of development anddelay any revenue from those product candidates.

Our efforts to expand theapproved indications for our products and to gain marketing approval in newjurisdictions and to develop next generation products also may fail. Theseexpansion efforts are subject to many of the risks associated with completelynew products and accordingly, we may fail to recoup the investments we makepursuing these strategies.

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**Guidelines andrecommendations published by various organizations can reduce the use of ourproducts.**

Professional societies,practice management groups, private health/science foundations, andorganizations involved in various diseases may publish guidelines or recommendationsto the health care and patient communities from time to time. Recommendationsof government agencies or these other groups/organizations may relate to suchmatters as usage, dosage, route of administration, cost-effectiveness, and useof related therapies. Organizations like these have in the past maderecommendations about our products and products of our competitors.Recommendations or guidelines that are followed by patients and healthcareproviders could result in decreased use of our products. The perception by theinvestment community or shareholders that recommendations or guidelines willresult in decreased use of our products could adversely affect prevailingmarket price for our common stock. In addition, our success also depends on ourability to educate patients and healthcare providers about our products andtheir uses. If these education efforts are not effective, then we may not beable to increase the sales of our existing products or successfully introducenew products to the market.

**We may encountersubstantial difficulties managing our growth.**

Several risks are inherent to our plans to grow ourbusiness. Achieving our goals will require substantial investments in researchand development, sales and marketing, and facilities. For example, we havespent considerable resources building and seeking regulatory approvals for ourmanufacturing plants. We cannot assure you that acquiring these facilities willprove sufficient to meet demand for our products or that we will not have excesscapacity at these facilities. In addition, building our facilities isexpensive, and our ability to recover these costs will depend on increasedrevenue from the products produced at the facilities.

We produce relatively small amounts of material forresearch and development activities and pre-clinical trials. Even if a productcandidate receives all necessary approvals for commercialization, we may not beable to successfully scale up production of the product material at areasonable cost or at all.

If we are able to grow sales of our products, we mayhave difficulty managing inventory levels. Marketing new therapies is acomplicated process, and gauging future demand is difficult. With Renagel, forexample, we have encountered problems in the past managing inventory levels atwholesalers. Comparable problems may arise with our other products,particularly during market introduction.

Growth in ourbusiness may also contribute to fluctuations in our operating results, whichmay cause the price of our securities to decline. Our revenue may fluctuate dueto many factors, including changes in:

·       wholesalerbuying patterns;

·       reimbursementrates;

·       physicianprescribing habits;

·       theavailability or pricing of competitive products; and

·       currencyexchange rates.

We may also experiencefluctuations in our quarterly results due to price changes and salesincentives. For example, purchasers of our products, particularly wholesalers,may increase purchase orders in anticipation of a price increase and reduce orderlevels following the price increase. We occasionally offer sales incentives andpromotional discounts on some of our products and services that could have asimilar impact. In addition, some of our products, including Synvisc, aresubject to seasonal fluctuation in demand.

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**Our operating results and financial position may beimpacted when we attempt to grow through business combination transactions.**

We may encounter problemsassimilating operations acquired in business combination transactions. These transactionsoften entail the assumption of unknown liabilities, the loss of key employees,and the diversion of management attention. Furthermore, in any businesscombination, including our acquisitions of the Physician Services andAnalytical Services business units of IMPATH, Inc., ILEX Oncology, Inc.,Bone Care International, Inc., and AnorMED Inc., there is a substantialrisk that we will fail to realize the benefits we anticipate when we decide toundertake the transaction. We have in the past taken significant charges forimpaired goodwill and for impaired assets acquired in business combinationtransactions. We may be required to take similar charges in the future.

**Manufacturing problems may cause product launchdelays, inventory shortages, recalls and unanticipated costs.**

In order to generate revenue from our approvedproducts, we must be able to produce sufficient quantities of the products.Many of our products are difficult to manufacture. Our products that arebiologics, for example, require product characterization steps that are moreonerous than those required for most chemical pharmaceuticals. Accordingly, weemploy multiple steps to attempt to control the manufacturing processes. Minordeviations in these manufacturing processes could result in unacceptablechanges in the products that result in lot failures, product recalls, orproduct liability.

Certain of the raw materials required in thecommercial manufacturing and the formulation of our products are derived frombiological sources, including mammalian sources and human plasma. Such rawmaterials may be subject to contamination or recall. Also, some countries inwhich we market our products may restrict the use of certain biologicallyderived substances in the manufacture of drugs. A material shortage,contamination, recall, or restriction of the use of certain biologicallyderived substances in the manufacture of our products could adversely impact ordisrupt our commercial manufacturing of our products or could result in amandated withdrawal of our products from the market. This too, in turn, couldadversely affect our ability to satisfy demand for our products, which couldmaterially and adversely affect our operating results.

In addition, we may only be able to produce certain ofour products at a very limited number of facilities and, in some cases, we relyon third parties to formulate and manufacture our products. For example, wemanufacture all of our Cerezyme and a portion of our Fabrazyme and Myozymeproducts at our facility in Allston, Massachusetts. A number of factors couldcause production interruptions at our facilities or the facilities of our thirdparty providers, including equipment malfunctions, labor problems, naturaldisasters, power outages, terrorist activities, or disruptions in theoperations of our suppliers.

Manufacturing is alsosubject to extensive government regulation. Regulatory authorities must approvethe facilities in which human healthcare products are produced. Any third partywe use to manufacture, fill-finish or package our products to be sold must alsobe licensed by the applicable regulatory authorities. As a result, alternativethird party providers may not be readily available on a timely basis. Inaddition, facilities are subject to ongoing inspections and minor changes inmanufacturing processes may require additional regulatory approvals, either ofwhich could cause us to incur significant additional costs and lose revenue.

**We rely on third parties to provide us with materialsand services in connection with the manufacture of our products.**

Certain materials necessary for commercial productionof our products, including specialty chemicals and components necessary formanufacture, fill-finish and packaging, are provided by unaffiliated thirdparty suppliers. In some cases, such materials are specifically cited in ourmarketing application with 

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regulatory authorities sothat they must be obtained from that specific source unless and until theapplicable authority approved another supplier. In addition, there may only beone available source for a particular chemical or component. For example, weacquire polyalylamine (PAA), used in the manufacture of Renagel and WelChol,from Cambrex Charles City, Inc., the only source for this materialcurrently qualified in our FDA drug applications for these products. Oursuppliers also may be subject to FDA regulations or the regulations ofother governmental agencies outside the United States regarding manufacturingpractices. We may be unable to manufacture our products in a timely manner orat all if these third party suppliers were to cease or interrupt production orotherwise fail to supply these materials or products to us for any reason,including due to regulatory requirements or actions, adverse financial developmentsat or affecting the supplier, or labor shortages or disputes.

We also source some of ourmanufacturing, fill-finish, packaging and distribution operations to thirdparty contractors. The manufacture of products, fill-finish, packaging anddistribution of our products requires successful coordination among these thirdparty providers and Genzyme. Our inability to coordinate these efforts, thelack of capacity available at a third party contractor or any other problemswith the operations of these third party contractors could require us to delayshipment of saleable products, recall products previously shipped or couldimpair our ability to supply products at all. This could increase our costs,cause us to lose revenue or market share and damage our reputation.

**If our strategicalliances are unsuccessful, our operating results will be negatively impacted.**

Several of ourstrategic initiatives involve alliances with other biotechnology andpharmaceutical companies, including a joint venture with BioMarinPharmaceutical Inc. with respect to Aldurazyme. The success of these andsimilar arrangements is largely dependent on technology and other intellectualproperty contributed by our strategic partners or the resources, efforts, andskills of our partners. Disputes and difficulties in such relationships arecommon, often due to conflicting priorities or conflicts of interest. Mergerand acquisition activity may exacerbate these conflicts. The benefits of thesealliances are reduced or eliminated when strategic partners:

·       terminatethe agreements or limit our access to the underlying intellectual property;

·       failto devote financial or other resources to the alliances and thereby hinder ordelay development, manufacturing or commercialization activities;

·       failto successfully develop, manufacture or commercialize any products; or

·       failto maintain the financial resources necessary to continue financing theirportion of the development, manufacturing, or commercialization costs or theirown operations.

Furthermore, payments wemake under these arrangements may exacerbate fluctuations in our financialresults. In addition, under some of our strategic alliances, we make milestonepayments well in advance of commercialization of products with no assurance thatwe will ever recoup these payments. We also may make equity investments in ourstrategic partners, as we did with RenaMed Biologics, Inc., or RenaMed, inJune 2005. Our strategic equity investments are subject to marketfluctuations, access to capital and other business events, such as initialpublic offerings, the completion of clinical trials and regulatory approvals,which can impact the value of these investments. For example, in October 2006,RenaMed suspended clinical trials of its renal assist device which was being developedto treat patients with acute renal failure, causing us to write off our entireinvestment in RenaMed. If any of our other strategic equity investments declinein value and remain below cost for an extended duration, we may incur additionalfinancial statement charges.

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**Government regulation imposes significant costs andrestrictions on the development and commercialization of our products andservices.**

Our success will depend on our ability to satisfyregulatory requirements. We may not receive required regulatory approvals on atimely basis or at all. Government agencies heavily regulate the production andsale of healthcare products and the provision of healthcare services. Inparticular, the FDA and comparable regulatory agencies in foreign jurisdictionsmust approve human therapeutic and diagnostic products before they aremarketed, as well as the facilities in which they are made. This approvalprocess can involve lengthy and detailed laboratory and clinical testing, samplingactivities and other costly and time-consuming procedures. Severalbiotechnology companies have failed to obtain regulatory approvals becauseregulatory agencies were not satisfied with the structure or conduct ofclinical trials. Similar problems could delay or prevent us from obtainingapprovals. Furthermore, regulatory authorities, including the FDA, may notagree with our interpretations of our clinical trial data, which could delay,limit or prevent regulatory approvals.

Therapies that havereceived regulatory approval for commercial sale may continue to faceregulatory difficulties. If we fail to comply with applicable regulatoryrequirements, regulatory authorities could take actions against us, including:

·       issuingwarning letters;

·       issuingfines and other civil penalties;

·       suspendingregulatory approvals;

·       refusingto approve pending applications or supplements to approved applications;

·       suspendingproduct sales and/or exports;

·       mandatingproduct recalls; and

·       seizingproducts.

Furthermore, the FDA and comparable foreign regulatoryagencies may require post-marketing clinical trials or patient outcome studies.We have agreed with the FDA, for example, to a number of post-marketingcommitments as a condition to U.S. marketing approval for Fabrazyme, Aldurazymeand Myozyme. In addition, regulatory agencies subject a marketed therapy, itsmanufacturer and the manufacturer’s facilities to continual review and periodicinspections. The discovery of previously unknown problems with a therapy or thefacility used to produce the therapy could prompt a regulatory authority toimpose restrictions on us, or could cause us to voluntarily adopt suchrestrictions, including withdrawal of one or more of our products or services fromthe market.

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**Wemay incur substantial costs as a result of litigation or other proceedings.**

Athird party may sue us or one of our strategic collaborators for infringing thethird party’s patent or other intellectual property rights. Likewise, we or oneof our strategic collaborators may sue to enforce intellectual property rightsor to determine the scope and validity of third party proprietary rights. If wedo not prevail in this type of litigation, we or our strategic collaboratorsmay be required to:

·       paymonetary damages;

·       stopcommercial activities relating to the affected products or services;

·       obtaina license in order to continue manufacturing or marketing the affected productsor services; or

·       competein the market with a different product.

We are also currentlyinvolved in litigation matters and investigations that do not involveintellectual property claims and may be subject to additional actions in thefuture. For example, we are currently defending several lawsuits brought inconnection with the elimination of our tracking stock in June 2003, someof which claim considerable damages. Also, the federal government, stategovernments and private payors are investigating and have begun to file actionsagainst numerous pharmaceutical and biotechnology companies, including Genzyme,alleging that the companies have overstated prices in order to inflatereimbursement rates. Domestic and international enforcement authorities alsohave instituted actions under healthcare “fraud and abuse” laws, includinganti-kickback and false claims statutes. Moreover, individuals who use ourproducts or services, including our diagnostic products and genetic testingservices, sometimes bring product and professional liability claims against usor our subsidiaries.

We may also become subject to investigations bygovernment authorities in connection with our business activities. For example,we are currently cooperating with an investigation of Bone Care by the UnitedStates Attorney for the Eastern District of New York which was initiated in October 2004,when Bone Care received a subpoena requiring it to provide a wide range ofdocuments related to numerous aspects of its business. 

We believe some of our products are prescribed byphysicians for uses not approved by the FDA or comparable regulatory agenciesoutside the United States. Although physicians may lawfully prescribe ourproducts for off-label uses, any promotion by us of off-label uses would beunlawful. Some of our practices intended to make physicians aware of off-labeluses of our products without engaging in off-label promotion could nonethelessbe construed as off-label promotion. Although we have policies and proceduresin place designed to help assure ongoing compliance with regulatoryrequirements regarding off-label promotion, some non-compliant actions maynonetheless occur. Regulatory authorities could take enforcement action againstus if they believe we are promoting, or have promoted, our products foroff-label use.

We have only limitedamounts of insurance, which may not provide coverage to offset a negativejudgment or a settlement payment. We may be unable to obtain additionalinsurance in the future, or we may be unable to do so on acceptable terms. Anyadditional insurance we do obtain may not provide adequate coverage against anyasserted claims.

Regardlessof merit or eventual outcome, investigations and litigations can result in:

·       diversionof management’s time and attention;

·       expenditureof large amounts of cash on legal fees, expenses, and payment of damages;

·       limitationson our ability to continue some of our operations;

·       decreaseddemand for our products and services; and

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·       injury to our reputation.

**Ourinternational sales, clinical activities, manufacturing and other operationsare subject to the economic, political, legal and business environments of thecountries in which we do business, and our failure to operate successfully oradapt to changes in these environments could cause our international sales andoperations to be limited or disrupted.**

Our internationaloperations accounted for approximately 46% of our consolidated product andservice revenues in 2006. We expect that international product and servicesales will continue to account for a significant percentage of our revenues forthe foreseeable future. In addition, we have direct investments in a number ofsubsidiaries outside of the United States, primarily in the European Union,Latin America and Japan. Our international sales and operations could belimited or disrupted, and the value of our direct investments may bediminished, by any of the following:

·       economicproblems that disrupt foreign healthcare payment systems;

·       fluctuationsin currency exchange rates;

·       theimposition of governmental controls;

·       lessfavorable intellectual property or other applicable laws;

·       theinability to obtain any necessary foreign regulatory or pricing approvals ofproducts in a timely manner;

·       theinability to obtain third party reimbursement support for products;

·       productcounterfeiting and intellectual property piracy;

·       parallelimports;

·       anti-competitivetrade practices;

·       importand export license requirements;

·       politicalinstability;

·       terroristactivities, armed conflict, or outbreak of diseases such as severe acuterespiratory syndrome (SARS) or avian influenza;

·       restrictionson direct investments by foreign entities and trade restrictions;

·       changesin tax laws and tariffs;

·       difficultiesin staffing and managing international operations; and

·       longerpayment cycles.

Our operations and marketing practices are alsosubject to regulation and scrutiny by the governments of the other countries inwhich we operate. In addition, the United States Foreign Corrupt Practices Actprohibits U.S. companies and their representatives from offering, promising,authorizing or making payments to foreign officials for the purpose ofobtaining or retaining business abroad. Failure to comply with domestic orforeign laws could result in various adverse consequences, including possibledelay in approval or refusal to approve a product, recalls, seizures,withdrawal of an approved product from the market, and/or the imposition ofcivil or criminal sanctions.

A significant portion ofour business is conducted in currencies other than our reporting currency, theU.S. dollar. We recognize foreign currency gains or losses arising from ouroperations in the period in which we incur those gains or losses. As a result,currency fluctuations among the U.S. dollar and the 

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currenciesin which we do business have caused foreign currency transaction gains andlosses in the past and will likely do so in the future. Because of the numberof currencies involved, the variability of currency exposures and the potentialvolatility of currency exchange rates, we may suffer significant foreigncurrency transaction losses in the future due to the effect of exchange ratefluctuations.

**We may fail toadequately protect our proprietary technology, which would allow competitors orothers to take advantage of our research and development efforts.**

Our long-term success largely depends on our abilityto market technologically competitive products. If we fail to obtain ormaintain adequate intellectual property protection in the United States orabroad, we may not be able to prevent third parties from using our proprietarytechnologies. Our currently pending or future patent applications may notresult in issued patents. Patent applications are confidential for18 months following their filing, and because third parties may have filedpatent applications for technology covered by our pending patent applicationswithout us being aware of those applications, our patent applications may nothave priority over patent applications of others. In addition, our issuedpatents may not contain claims sufficiently broad to protect us against thirdparties with similar technologies or products, or provide us with anycompetitive advantage. If a third party initiates litigation regarding ourpatents, our collaborators’ patents, or those patents for which we have licenserights, and is successful, a court could declare our patents invalid orunenforceable or limit the scope of coverage of those patents. Governmentalpatent offices and courts have not consistently treated the breadth of claimsallowed in biotechnology patents. If patent offices or the courts begin toallow or interpret claims more broadly, the incidence and cost of patentinterference proceedings and the risk of infringement litigation will likelyincrease. On the other hand, if patent offices or the courts begin to allow orinterpret claims more narrowly, the value of our proprietary rights may bereduced. Any changes in, or unexpected interpretations of, the patent laws mayadversely affect our ability to enforce our patent position.

We also rely upon tradesecrets, proprietary know-how, and continuing technological innovation toremain competitive. We attempt to protect this information with securitymeasures, including the use of confidentiality agreements with employees,consultants, and corporate collaborators. These individuals may breach theseagreements and any remedies available to us may be insufficient to compensatefor our damages. Furthermore, our trade secrets, know-how and other technologymay otherwise become known or be independently discovered by our competitors.

**We may be requiredto license technology from competitors or others in order to develop andcommercialize some of our products and services, and it is uncertain whetherthese licenses would be available.**

Third party patents may cover some of the products orservices that we or our strategic partners are developing or producing. Apatent is entitled to a presumption of validity and accordingly, we facesignificant hurdles in any challenge to a patent. In addition, even if we aresuccessful in challenging the validity of a patent, the challenge itself may beexpensive and require significant management attention.

To the extent valid thirdparty patent rights cover our products or services, we or our strategiccollaborators would be required to seek licenses from the holders of thesepatents in order to manufacture, use, or sell these products and services, andpayments under them would reduce our profits from these products and services.We may not be able to obtain these licenses on acceptable terms, or at all. Ifwe fail to obtain a required license or are unable to alter the design of ourtechnology to fall outside the scope of a third party patent, we may be unableto market some of our products and services, which would limit ourprofitability.

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**Importation ofproducts from Canada and other countries into the United States may lower theprices we receive for our products.**

In the United States andabroad, many of our products are subject to competition from lower-pricedversions of our products and competing products from other countries wheregovernment price controls or other market dynamics result in lower prices forsuch products. Our products that require a prescription in the United Statesmay be available to consumers in markets such as Canada, Mexico, Taiwan and theMiddle East without a prescription, which may cause consumers to further seekout these products in these lower priced markets. The ability of patients andother customers to obtain these lower priced imports has grown significantly asa result of the Internet, an expansion of pharmacies in Canada and elsewherethat target American purchasers, the increase in U.S.-based businessesaffiliated with Canadian pharmacies marketing to American purchasers, and otherfactors. Most of these foreign imports are illegal under current United Stateslaw. However, the volume of imports continues to rise due to the limitedenforcement resources of the FDA and the United States Customs Service, andthere is increased political pressure to permit such imports as a mechanism forexpanding access to lower priced medicines. The importation of lower-pricedversions of our products into the United States and other markets adverselyaffects our profitability. This impact could become more significant in thefuture.

**Legislative orregulatory changes may adversely impact our business.**

The United Statesgovernment and other governments have shown significant interest in pursuinghealthcare reform. Any government-adopted reform measures could adverselyimpact:

·       thepricing of healthcare products in the United States or internationally; and

·       theamount of reimbursement available from governmental agencies or other thirdparty payors.

New laws, regulations andjudicial decisions, or new interpretations of existing laws, regulations anddecisions, that relate to healthcare availability, methods of delivery orpayment for products and services, or sales, marketing or pricing may cause ourrevenue to decline, and we may need to revise our research and developmentprograms.

**We may requiresignificant additional financing, which may not be available to us on favorableterms, if at all.**

As of December 31, 2006, we had $1.3 billionin cash, cash equivalents and short- and long-term investments, excludinginvestments in equity securities.

We intend to usesubstantial portions of our available cash for:

·       productdevelopment and marketing;

·       businesscombinations and other strategic business initiatives;

·       expandingexisting and constructing additional facilities;

·       expandingstaff; and

·       workingcapital, including satisfaction of our obligations under capital and operatingleases.

We may further reduce available cash reserves to payprincipal and interest on outstanding debt, including our $690.0 millionin principal of 1.25% convertible senior notes.

To satisfy our cashrequirements, we may have to obtain additional financing. We may be unable toobtain any additional financing or extend any existing financing arrangementsat all or on terms that we or our investors consider favorable.

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**Our level ofindebtedness may harm our financial condition and results of operations.**

At December 31,2006, we had $699.0 million of outstanding indebtedness, excluding capitalleases. We may incur additional indebtedness in the future. Our level ofindebtedness will have several important effects on our future operations,including:

·       increasingour vulnerability to adverse changes in general economic and industryconditions; and

·       limitingour ability to obtain additional financing for capital expenditures,acquisitions and general corporate and other purposes.

Our ability to makepayments and interest on our indebtedness depends upon our future operating andfinancial performance.

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**Management’s Report on Internal Control Over FinancialReporting**

Our management isresponsible for establishing and maintaining adequate internal control over ourfinancial reporting. Internal control over financial reporting refers to theprocess designed by, or under the supervision of, our chief executive officerand chief financial officer, and effected by our board of directors, managementand other personnel, to provide reasonable assurance regarding the reliabilityof our financial reporting and the preparation of our financial statements forexternal purposes in accordance with generally accepted accounting principles,and includes those policies and procedures that:

(1)         pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of assets;

(2)         provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures are being made only inaccordance with the authorizations of management and directors; and

(3)         provide reasonableassurance regarding the prevention or timely detection of unauthorizedacquisition, use or disposition of assets that could have a material effect on ourfinancial statements.

Under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework provided in *Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on this evaluation, our management concluded that our internal controlover financial reporting was effective as of December 31, 2006.

We have excluded the acquisition of AnorMED from ourassessment of internal controls over financial reporting as of December 31,2006, because we acquired AnorMED in a purchase business combination during2006. The AnorMED business is a component of our Transplant reporting segmentand the AnorMED business represents less than 1% of our consolidated assets asof December 31, 2006 and has no revenue for the year ended December 31,2006.

Our management’s assessment of the effectiveness ofour internal controls over financial reporting as of December 31, 2006 hasbeen audited by PricewaterhouseCoopers LLP, an independent registered publicaccounting firm, as stated in their report which is included below.

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**Reportof Independent Registered Public Accounting Firm**

To the Board of Directors and Shareholders of GenzymeCorporation:

We have completed integrated audits of GenzymeCorporation’s consolidated financial statements and of its internal controlover financial reporting as of December 31, 2006 in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Ouropinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of operations and comprehensiveincome, of cash flows and of stockholders’ equity present fairly, in allmaterial respects, the financial position of Genzyme Corporation and itssubsidiaries at December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2006 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

As discussed in Note M. to the consolidated financial statements,in 2006 the Company changed its method of accounting for stock-based compensationin accordance with Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment.”

Internal control over financial reporting

Also, in our opinion, management’s assessment,included in the accompanying “Management’s Report on Internal Control OverFinancial Reporting,” that the Company maintained effective internal controlover financial reporting as of December 31, 2006 based on criteriaestablished in *Internal Control-IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), is fairly stated, in all material respects, basedon those criteria. Furthermore, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2006, based on criteria established in *InternalControl-Integrated Framework* issued by the COSO. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express opinions onmanagement’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit. We conducted our audit ofinternal control over financial reporting in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

F-69

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A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositionsof the assets of the company; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Asdescribed in “Management’s Report on Internal Control Over Financial Reporting,”management has excluded the acquisition of AnorMED Inc. from its assessment ofinternal control over financial reporting as of December 31, 2006 becauseit was acquired by the Company in a purchase business combination during 2006.We have also excluded AnorMED Inc. from our audit of internal control overfinancial reporting. AnorMED Inc. is a component of the Company’s Transplantreporting segment whose total assets and total revenues represent less than 1% and0%, respectively, of the related consolidated financial statement amounts as ofand for the year ended December 31, 2006.
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|

PricewaterhouseCoopers LLPBoston, MassachusettsMarch 1, 2007

F-70

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**GENZYMECORPORATION AND SUBSIDIARIESConsolidated Statements of Operations and Comprehensive Income(Amounts in thousands, except per share amounts)**

| ** **                                                                                     | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                                      |       |                                                          |       |   |   |   |   |
| Net product sales                                                                              |       | $                                                             | 2,887,409  |   | $ | 2,453,303 |   | $ | 1,976,191 |   |
| Net service sales                                                                              |       | 282,118                                                       |       | 261,379 |   | 212,392 |   |
| Research and development  revenue                                                              |       | 17,486                                                        |       | 20,160 |   | 12,562 |   |
| Total revenues                                                                                 |       | 3,187,013                                                     |       | 2,734,842 |   | 2,201,145 |   |
| Operating costs and expenses:                                                                  |       |                                                          |       |   |   |   |   |
| Cost of products sold                                                                          |       | 536,388                                                       |       | 462,177 |   | 448,442 |   |
| Cost of services sold                                                                          |       | 199,283                                                       |       | 170,475 |   | 140,144 |   |
| Selling, general and  administrative                                                           |       | 1,010,400                                                     |       | 787,839 |   | 599,388 |   |
| Research and development                                                                       |       | 649,951                                                       |       | 502,657 |   | 391,802 |   |
| Amortization of  intangibles                                                                   |       | 209,355                                                       |       | 181,632 |   | 109,473 |   |
| Purchase of in-process  research and development                                               |       | 552,900                                                       |       | 29,200 |   | 254,520 |   |
| Charge for impaired  goodwill                                                                  |       | 219,245                                                       |       | — |   | — |   |
| Charge for impaired  assets                                                                    |       | —                                                        |       | — |   | 4,463 |   |
| Total operating costs and  expenses                                                            |       | 3,377,522                                                     |       | 2,133,980 |   | 1,948,232 |   |
| Operating income (loss)                                                                        |       | (190,509                                                      | )          | 600,862 |   | 252,913 |   |
| Other income (expenses):                                                                       |       |                                                          |       |   |   |   |   |
| Equity in income (loss)  of equity method investments                                          |       | 15,705                                                        |       | 151 |   | (15,624 | ) |
| Minority interest                                                                              |       | 10,418                                                        |       | 11,952 |   | 5,999 |   |
| Gains (losses) on  investments in equity securities, net                                       |       | 73,230                                                        |       | 5,698 |   | (1,252 | ) |
| Other                                                                                          |       | (2,045                                                        | )          | (1,535 | ) | (357 | ) |
| Investment income                                                                              |       | 56,001                                                        |       | 31,429 |   | 24,244 |   |
| Interest expense                                                                               |       | (15,478                                                       | )          | (19,638 | ) | (38,227 | ) |
| Total other income  (expenses)                                                                 |       | 137,831                                                       |       | 28,057 |   | (25,217 | ) |
| Income (loss)  before income taxes                                                             |       | (52,678                                                       | )          | 628,919 |   | 227,696 |   |
| (Provision for)  benefit from income taxes                                                     |       | 35,881                                                        |       | (187,430 | ) | (141,169 | ) |
| Net income (loss)                                                                              |       | $                                                             | (16,797    | ) | $ | 441,489 |   | $ | 86,527 |   |
| Net income (loss) per  share:                                                                  |       |                                                          |       |   |   |   |   |
| Basic                                                                                          |       | $                                                             | (0.06      | ) | $ | 1.73 |   | $ | 0.38 |   |
| Diluted                                                                                        |       | $                                                             | (0.06      | ) | $ | 1.65 |   | $ | 0.37 |   |
| Weighted average shares  outstanding:                                                          |       |                                                          |       |   |   |   |   |
| Basic                                                                                          |       | 261,624                                                       |       | 254,758 |   | 228,175 |   |
| Diluted                                                                                        |       | 261,624                                                       |       | 272,224 |   | 234,318 |   |
| Comprehensive income  (loss), net of tax:                                                      |       |                                                          |       |   |   |   |   |
| Net income (loss)                                                                              |       | $                                                             | (16,797    | ) | $ | 441,489 |   | $ | 86,527 |   |
| Other  comprehensive income (loss):                                                            |       |                                                          |       |   |   |   |   |
| Foreign currency  translation adjustments                                                      |       | 130,500                                                       |       | (122,568 | ) | 80,371 |   |
| Gain on affiliate sale of  stock, net of tax                                                   |       | 817                                                           |       | 996 |   | — |   |
| Additional minimum  pension liability, net of tax                                              |       | (8,564                                                        | )          | (4,627 | ) | — |   |
| Other, net of tax                                                                              |       | (680                                                          | )          | 561 |   | 959 |   |
| Unrealized gains (losses)  on securities, net of tax:                                          |       |                                                          |       |   |   |   |   |
| Unrealized gains (losses)  arising during the period, net of tax                               |       | 41,504                                                        |       | (15,182 | ) | 16,243 |   |
| Reclassification  adjustment for (gains) losses included in net income (loss), net of tax |       | (45,065                                                       | )          | (898 | ) | 201 |   |
| Unrealized gains (losses)  on securities, net of tax                                           |       | (3,561                                                        | )          | (16,080 | ) | 16,444 |   |
| Other comprehensive  income (loss)                                                             |       | 118,512                                                       |       | (141,718 | ) | 97,774 |   |
| Comprehensive income                                                                           |       | $                                                             | 101,715    |   | $ | 299,771 |   | $ | 184,301 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-71

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**GENZYMECORPORATION AND SUBSIDIARIESConsolidated Balance Sheets(Amounts in thousands, except par value amounts)**

| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                       |       |                  |       |   |   |
| Current assets:                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                       |       | $                     | 492,170    |   | $ | 291,960 |   |
| Short-term  investments                                          |       | 119,894               |       | 193,946 |   |
| Accounts receivable, net                                         |       | 746,746               |       | 608,326 |   |
| Inventories                                                      |       | 374,644               |       | 297,652 |   |
| Prepaid expenses and  other current assets                       |       | 119,122               |       | 100,256 |   |
| Notes receivable—related  party                             |       | —                |       | 2,416 |   |
| Deferred tax assets                                              |       | 136,925               |       | 170,443 |   |
| Total current assets                                             |       | 1,989,501             |       | 1,664,999 |   |
| Property, plant and  equipment, net                              |       | 1,610,593             |       | 1,320,813 |   |
| Long-term  investments                                           |       | 673,540               |       | 603,196 |   |
| Notes receivable—related  party                             |       | 7,290                 |       | 7,206 |   |
| Goodwill, net                                                    |       | 1,298,781             |       | 1,487,567 |   |
| Other intangible assets,  net                                    |       | 1,492,038             |       | 1,590,894 |   |
| Investments in equity  securities                                |       | 66,563                |       | 135,930 |   |
| Other noncurrent assets                                          |       | 52,882                |       | 68,260 |   |
| Total assets                                                     |       | $                     | 7,191,188  |   | $ | 6,878,865 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                   |       |                  |       |   |   |
| Current liabilities:                                             |       |                  |       |   |   |
| Accounts payable                                                 |       | $                     | 98,063     |   | $ | 96,835 |   |
| Accrued expenses                                                 |       | 477,442               |       | 431,223 |   |
| Income taxes payable                                             |       | 54,853                |       | 2,486 |   |
| Deferred revenue and  other income                               |       | 14,855                |       | 15,018 |   |
| Current portion of long-term  debt and capital lease obligations |       | 6,226                 |       | 4,461 |   |
| Total current  liabilities                                       |       | 651,439               |       | 550,023 |   |
| Long-term debt and  capital lease obligations                    |       | 119,803               |       | 125,652 |   |
| Convertible notes                                                |       | 690,000               |       | 690,000 |   |
| Deferred  revenue—noncurrent                                |       | 6,675                 |       | 4,663 |   |
| Deferred tax liabilities                                         |       | 10,909                |       | 335,612 |   |
| Other noncurrent  liabilities                                    |       | 51,651                |       | 23,048 |   |
| Total liabilities                                                |       | 1,530,477             |       | 1,728,998 |   |
| Commitments and contingencies                                    |       |                  |       |   |   |
| Stockholders’ equity:                                       |       |                  |       |   |   |
| Preferred stock, $0.01  par value                                |       | —                |       | — |   |
| Common stock, $0.01 par  value                                   |       | 2,630                 |       | 2,593 |   |
| Additional paid-in  capital                                      |       | 5,106,274             |       | 4,687,775 |   |
| Notes receivable from stockholders                               |       | (15,057               | )          | (14,445 | ) |
| Accumulated earnings                                             |       | 312,659               |       | 329,456 |   |
| Accumulated other comprehensive  income                          |       | 254,205               |       | 144,488 |   |
| Total stockholders’  equity                                 |       | 5,660,711             |       | 5,149,867 |   |
| Total liabilities and stockholders’ equity                  |       | $                     | 7,191,188  |   | $ | 6,878,865 |   |

 

The accompanying notes are an integral part of these consolidated financialstatements.

F-72

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**GENZYME CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows(Amounts in thousands)**

| ** **                                                                                                                | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Operating  Activities:**                                                                                |       |                                                          |       |   |   |   |   |
| Net income (loss)                                                                                                         |       | $                                                             | (16,797    | ) | $ | 441,489 |   | $ | 86,527 |   |
| Reconciliation of  net income (loss) to cash flows from operating activities:                                             |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                                                                             |       | 331,389                                                       |       | 284,620 |   | 205,114 |   |
| Stock-based compensation                                                                                                  |       | 208,614                                                       |       | 444 |   | 10 |   |
| Provision for bad debts                                                                                                   |       | 10,050                                                        |       | 9,444 |   | 12,249 |   |
| Purchase of in-process research and  development                                                                          |       | 552,900                                                       |       | 29,200 |   | 254,520 |   |
| Charge for impaired goodwill                                                                                              |       | 219,245                                                       |       | — |   | — |   |
| Charge for impaired assets                                                                                                |       | —                                                        |       | — |   | 4,463 |   |
| Equity in (income) loss of equity method investments                                                                      |       | (15,705                                                       | )          | (151 | ) | 15,624 |   |
| Minority interest                                                                                                         |       | (10,418                                                       | )          | (11,952 | ) | (5,999 | ) |
| (Gains) losses on investments in equity securities,  net                                                                  |       | (73,230                                                       | )          | (5,698 | ) | 1,252 |   |
| Write off of unamortized debt fees                                                                                        |       | —                                                        |       | — |   | 5,329 |   |
| Deferred income tax provision (benefit)                                                                                   |       | (279,795                                                      | )          | 15,300 |   | 45,047 |   |
| Tax benefit from employee stock-based compensation                                                                        |       | 46,174                                                        |       | 102,561 |   | 49,974 |   |
| Excess tax benefits from stock-based compensation                                                                         |       | (7,114                                                        | )          | — |   | — |   |
| Other                                                                                                                     |       | (3,433                                                        | )          | 3,867 |   | 3,958 |   |
| Increase  (decrease) in cash from working capital changes (excluding impact of acquired  assets and assumed liabilities): |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                                                                       |       | (120,505                                                      | )          | (93,931 | ) | (111,345 | ) |
| Inventories                                                                                                               |       | (37,632                                                       | )          | (17,241 | ) | 18,751 |   |
| Prepaid expenses and other current assets                                                                                 |       | (19,784                                                       | )          | (20,230 | ) | 5,920 |   |
| Income taxes payable                                                                                                      |       | 50,123                                                        |       | (28,650 | ) | (12,588 | ) |
| Accounts payable, accrued expenses and deferred  revenue                                                                  |       | 54,487                                                        |       | 22,705 |   | (1,294 | ) |
| Cash flows from operating activities                                                                                      |       | 888,569                                                       |       | 731,777 |   | 577,512 |   |
| **Cash Flows from Investing Activities:**                                                                                 |       |                                                          |       |   |   |   |   |
| Purchases of investments                                                                                                  |       | (913,159                                                      | )          | (1,094,576 | ) | (653,478 | ) |
| Sales and maturities of investments                                                                                       |       | 926,327                                                       |       | 962,948 |   | 976,085 |   |
| Purchases of equity securities                                                                                            |       | (7,577                                                        | )          | (7,477 | ) | (4,154 | ) |
| Proceeds from sales of investments in equity  securities                                                                  |       | 140,165                                                       |       | 7,067 |   | — |   |
| Purchases of property, plant and equipment                                                                                |       | (333,675                                                      | )          | (192,461 | ) | (187,400 | ) |
| Distributions from (investments in) equity method  investments                                                            |       | 19,800                                                        |       | 3,000 |   | (24,107 | ) |
| Purchases of other intangible assets                                                                                      |       | (105,348                                                      | )          | (172,092 | ) | (5,110 | ) |
| Acquisitions, net of acquired cash                                                                                        |       | (568,953                                                      | )          | (703,074 | ) | (152,377 | ) |
| Other                                                                                                                     |       | 6,008                                                         |       | 5,682 |   | 4,845 |   |
| Cash flows from  investing activities                                                                                     |       | (836,412                                                      | )          | (1,190,983 | ) | (45,696 | ) |
|                                                                                                                           |            |                                                               |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-73

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**GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) (Amounts in thousands)**

| ** **                                                 | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Financing  Activities:**                 |       |                                                          |       |   |   |   |   |
| Proceeds from issuance of common stock                     |       | 158,305                                                       |       | 354,708 |   | 140,311 |   |
| Excess tax benefits from stock-based compensation          |       | 7,114                                                         |       | — |   | — |   |
| Proceeds from draws on our 2003 revolving credit  facility |       | —                                                        |       | 350,000 |   | 135,000 |   |
| Payments of debt and capital lease obligations             |       | (4,501                                                        | )          | (478,770 | ) | (650,818 | ) |
| Increase (decrease) in bank overdrafts                     |       | (21,124                                                       | )          | 17,951 |   | 15,434 |   |
| Minority interest contributions                            |       | 11,153                                                        |       | 11,423 |   | 5,424 |   |
| Other                                                      |       | 1,210                                                         |       | 3,261 |   | 922 |   |
| Cash flows from financing activities                       |       | 152,157                                                       |       | 258,573 |   | (353,727 | ) |
| Effect of exchange rate changes on cash                    |       | (4,104                                                        | )          | 12,395 |   | 9,335 |   |
| Increase  (decrease) in cash and cash equivalents          |       | 200,210                                                       |       | (188,238 | ) | 187,424 |   |
| Cash and cash  equivalents at beginning of period          |       | 291,960                                                       |       | 480,198 |   | 292,774 |   |
| Cash and cash  equivalents at end of period                |       | $                                                             | 492,170    |   | $ | 291,960 |   | $ | 480,198 |   |
| Supplemental  disclosures of cash flows:                   |       |                                                          |       |   |   |   |   |
| Cash paid during  the year for:                            |       |                                                          |       |   |   |   |   |
| Interest, net of capitalized interest                      |       | $                                                             | 1,021      |   | $ | 5,081 |   | $ | 14,736 |   |
| Income taxes                                               |       | $                                                             | 154,729    |   | $ | 105,173 |   | $ | 73,734 |   |
| Supplemental  disclosures of non-cash transactions:        |       |                                                          |       |   |   |   |   |
| Mergers and  Acquisitions—Note C.                     |       |                                                          |       |   |   |   |   |
| Property, Plant  and Equipment—Note G.                |       |                                                          |       |   |   |   |   |
| Capital lease obligation for Genzyme Center—Note L.   |       |                                                          |       |   |   |   |   |

 

Inconjunction with acquisitions completed since January 1, 2004, asdescribed in Note C., “Mergers and Acquisitions,” we assumed the followingliabilities (amounts in thousands):

| ** **                                            | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash paid for  acquisitions and acquisition costs |       | $                                                             | (568,953   | ) | $ | (703,074 | ) | $ | (152,377 | ) |
| Issuance of common  stock and options                 |       | —                                                        |       | — |   | (1,069,925 | ) |
| Fair value of  assets acquired                        |       | 13,202                                                        |       | 640,297 |   | 350,623 |   |
| Net deferred tax  assets—current and noncurrent  |       | 3,355                                                         |       | 92,955 |   | 53,718 |   |
| Acquired in-process  research and development         |       | 552,900                                                       |       | 29,200 |   | 254,520 |   |
| Goodwill                                              |       | 30,177                                                        |       | 200,184 |   | 669,290 |   |
| Liabilities for  exit activities and integration      |       | (6,348                                                        | )          | (14,635 | ) | (10,813 | ) |
| Income taxes  payable                                 |       | —                                                        |       | (6,683 | ) | (40,852 | ) |
| Net deferred tax  liability assumed                   |       | (1,288                                                        | )          | (189,266 | ) | — |   |
| Net liabilities  assumed                              |       | $                                                             | 23,045     |   | $ | 48,978 |   | $ | 54,184 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-74

----

**GENZYMECORPORATION AND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity(Amounts in thousands)**

| ** **                                                              | ** ** | ** **            | ** ** | ** **         | ** **   | **Notes**      | ** ** | ** **       | ** ** | **Accumulated**   | ** **     | ** **             | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|--------------|----------------|------------|------------------|------------|-------------------|----------------|------------------------|------------|
| ** **                                                              | ** ** | ** **            | ** ** | **Additional**     | ** **   | **Receivable** | ** ** | **Accumulated**  | ** ** | **Other**         | ** **     | **Total**              | ** ** |
|                                                                         | ** ** | **Common Stock** | ** ** | **Paid-In**        | ** **   | **from**       | ** ** | **Earnings**     | ** ** | **Comprehensive** | ** **     | **Stockholder’s** | ** ** |
| ** **                                                              | ** ** | **Shares**            | ** ** | **Par Value** | ** **   | **Capital**    | ** ** | **Stockholders** | ** ** | **(Deficit)**     | ** **     | **Income**             | ** ** | **Equity** | ** ** |
| Balance,  January 1, 2004                                          |       | 224,610               |       |               | $ 2,246 |           |       | $ 2,957,579 |       |              | $ (13,285 | )                      |       |   | $ (198,560 | ) |   |   | $ 188,432 |   |   | $ 2,936,412 |   |
| Stock issued  through stock option and stock purchase plans        |       | 5,950                 |       |               | 59           |           |       | 140,251          |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 140,310 |   |
| Tax benefit from  stock option exercises                                |       | —                |       |               | —       |           |       | 49,974           |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 49,974 |   |
| Acquisition of  ILEX Oncology                                           |       | 18,458                |       |               | 185          |           |       | 1,069,732        |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 1,069,917 |   |
| Stock-based  compensation                                               |       | —                |       |               | —       |           |       | 10               |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 10 |   |
| Accrued interest  receivable on notes receivable from stockholders, net |       | —                |       |               | —       |           |       | —           |       |              | (580           | )                      |       |   | — |   |   |   | — |   |   | (580 | ) |
| Foreign currency  translation adjustments                               |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | 80,371 |   |   | 80,371 |   |
| Change in  unrealized gains and losses on investments, net of tax (1)   |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | 16,444 |   |   | 16,444 |   |
| Other                                                                   |       | —                |       |               | —       |           |       | (188             | )          |              | —         |                   |       |   | — |   |   |   | 959 |   |   | 771 |   |
| Net income                                                              |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | 86,527 |   |   |   | — |   |   | 86,527 |   |
| Balance,  December 31, 2004                                        |       | 249,018               |       |               | 2,490        |           |       | 4,217,358        |       |              | (13,865        | )                      |       |   | (112,033 | ) |   |   | 286,206 |   |   | 4,380,156 |   |
| Stock issued  through stock option and stock purchase plans        |       | 10,133                |       |               | 102          |           |       | 354,606          |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 354,708 |   |
| Tax benefit from  stock option exercises                                |       | —                |       |               | —       |           |       | 102,561          |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 102,561 |   |
| Stock-based  compensation                                               |       | —                |       |               | —       |           |       | 444              |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 444 |   |
| Accrued interest  receivable on notes receivable from stockholders, net |       | —                |       |               | —       |           |       | —           |       |              | (580           | )                      |       |   | — |   |   |   | — |   |   | (580 | ) |
| Foreign currency  translation adjustments                               |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | (122,568 | ) |   | (122,568 | ) |
| Change in  unrealized gains and losses on investments, net of tax (1)   |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | (16,080 | ) |   | (16,080 | ) |
| Gain on affiliate  sale of stock, net of tax (2)                        |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | 996 |   |   | 996 |   |
| Additional minimum  pension liability, net of tax (3)              |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | (4,627 | ) |   | (4,627 | ) |
| Other                                                                   |       | —                |       |               | —       |           |       | 12,807           |       |              | —         |                   |       |   | — |   |   |   | 561 |   |   | 13,368 |   |
| Net income                                                              |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | 441,489 |   |   |   | — |   |   | 441,489 |   |
| Balance,  December 31, 2005                                        |       | 259,151               |       |               | 2,592        |           |       | 4,687,776        |       |              | (14,445        | )                      |       |   | 329,456 |   |   |   | 144,488 |   |   | 5,149,867 |   |
| Stock issued  through stock option and stock purchase plans        |       | 3,875                 |       |               | 38           |           |       | 158,267          |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 158,305 |   |
| Tax benefit from  stock option exercises                                |       | —                |       |               | —       |           |       | 46,174           |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 46,174 |   |
| Stock-based  compensation                                               |       | —                |       |               | —       |           |       | 215,419          |       |              | —         |                   |       |   | — |   |   |   | — |   |   | 215,419 |   |
| Accrued interest  receivable on notes receivable from stockholders      |       | —                |       |               | —       |           |       | —           |       |              | (612           | )                      |       |   | — |   |   |   | — |   |   | (612 | ) |
| Foreign currency  translation adjustments                               |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | 130,500 |   |   | 130,500 |   |
| Change in unrealized  gains and losses on investments, net of tax (1)   |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | (3,561 | ) |   | (3,561 | ) |
| Gain on affiliate  sale of stock, net of tax (2)                        |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | 817 |   |   | 817 |   |
| Additional minimum  pension liability, net of tax (3)         |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | (8,564 | ) |   | (8,564 | ) |
| Adoption of FAS  158, net of tax (4)                                    |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | — |   |   |   | (8,795 | ) |   | (8,795 | ) |
| Other                                                                   |       | —                |       |               | —       |           |       | (1,362           | )          |              | —         |                   |       |   | — |   |   |   | (680 | ) |   | (2,042 | ) |
| Net loss                                                                |       | —                |       |               | —       |           |       | —           |       |              | —         |                   |       |   | (16,797 | ) |   |   | — |   |   | (16,797 | ) |
| Balance, December 31, 2006                                         |       | 263,026               |       |               | $ 2,630 |           |       | $ 5,106,274 |       |              | $ (15,057 | )                      |       |   | $ 312,659 |   |   |   | $ 254,205 |   |   | $ 5,660,711 |   |

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(1)             Net of $2.1 million of tax in 2006, $9.0million of tax in 2005 and $(10.4) million of tax in 2004.

(2)             Net of $(0.3) million of tax in 2006 and$(0.6) million of tax in 2005.

(3)             Net of $3.8 million of tax in 2006 and$1.9 million of tax in 2005.

(4)             Net of $3.7 million of tax in 2006.

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-75

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements**

**NOTE A.**   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

**Description ofBusiness**

We are a globalbiotechnology company dedicated to making a major impact on the lives of peoplewith serious diseases. Our broad product and service portfolio is focused onrare disorders, renal diseases, orthopaedics, organ transplant, and diagnosticand predictive testing. We are organized into five financial reporting units,which we also consider to be our reporting segments:

·       Renal,which develops, manufactures and distributes products that treat patientssuffering from renal diseases, including chronic renal failure. The unitderives substantially all of its revenue from sales of Renagel (including salesof bulk sevelamer) and Hectorol;

·       Therapeutics,which develops, manufactures and distributes therapeutic products, with anexpanding focus on products to treat patients suffering from genetic diseasesand other chronic debilitating diseases, including a family of diseases knownas LSDs and other specialty therapeutics, such as Thyrogen. The unit derivessubstantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme andThyrogen;

·       Transplant,which develops, manufactures and distributes therapeutic products that address thepre-transplantation, prevention and treatment of acute rejection in organtransplantation, as well as other auto-immune disorders. The unit derivessubstantially all of its revenue from sales of Thymoglobulin andLymphoglobuline;

·       Biosurgery,which develops, manufactures and distributes biotherapeutics and biomaterial-basedproducts, with an emphasis on products that meet medical needs in theorthopaedics and broader surgical areas. The unit derives substantially all ofits revenue from sales of Synvisc, the Sepra line of products, Carticel andMACI; and

·       Genetics,which provides testing services for the oncology, prenatal and reproductivemarkets.

We report the activities of our diagnostic products,oncology, bulk pharmaceuticals and cardiovascular business units under thecaption “Other.” We report our corporate, general and administrative operationsand corporate science activities under the caption “Corporate.”

Effective January 1, 2006, as a result of changesin how we review our business, certain general and administrative expenses, aswell as research and development expenses related to our preclinicaldevelopment programs, which were formerly allocated amongst our reportingsegments and Other, are now allocated to Corporate.

Our diagnostic products business unit was formerlyreported combined with our Genetics reporting unit under the caption“Diagnostics/Genetics.” Beginning with this report, we now include ourdiagnostic products business unit under the caption “Other.”

We have revised our 2005and 2004 segment disclosures to conform to our 2006 presentation.

F-76

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

**Risks andUncertainties**

We are subject torisks and uncertainties common to companies in the biotechnology industry.These risks and uncertainties may affect our future results, and include:

·       ourability to successfully complete preclinical and clinical development of ourproducts and services;

·       ourability to secure regulatory approvals for our products and services and to doso on the anticipated timeframes;

·       thecontent and timing of submissions to and decisions made by the FDA, the EMEA,and other regulatory agencies;

·       ourability to satisfy the post-marketing commitments made as a condition of themarketing approvals of Fabrazyme, Aldurazyme and Myozyme;

·       ourability to manufacture sufficient amounts of our products for development andcommercialization activities and to do so in a timely and cost-effective manner;

·       ourreliance on third parties to provide us with materials and services inconnection with the manufacture of our products;

·       ourability to obtain and maintain adequate patent and other proprietary rightsprotection for our products and services and successfully enforce ourproprietary rights;

·       thescope, validity and enforceability of patents and other proprietary rights heldby third parties and their impact on our ability to commercialize our productsand services;

·       theaccuracy of our estimates of the size and characteristics of the markets to beaddressed by our products and services, including growth projections;

·       marketacceptance of our products and services in expanded areas of use and newmarkets;

·       ourability to identify new patients for our products and services;

·       ourability to increase market penetration both outside and within the UnitedStates for our products and services;

·       theaccuracy of our information regarding the products and resources of ourcompetitors and potential competitors;

·       theavailability of reimbursement for our products and services from third partypayors, the extent of such coverage and the accuracy of our estimates of thepayor mix for our products;

·       ourability to effectively manage wholesaler inventories of our products and thelevels of compliance with our inventory management programs;

·       ourability to establish and maintain strategic license, collaboration anddistribution arrangements and to manage our relationships with licensors,collaborators, distributors and partners;

·       thecontinued funding and operation of our joint ventures by our partners;

F-77

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

·       ouruse of cash in business combinations or other strategic initiatives;

·       theresolution of litigation related to the consolidation of our tracking stocks;

·       theinitiation of legal proceedings by or against us;

·       theimpact of changes in the exchange rate for the Euro and other currencies on ourproduct and service revenues in future periods;

·       ourability to successfully integrate the business we acquired from AnorMED;

·       thenumber of diluted shares considered outstanding, which will depend on businesscombination activity, our stock price and any further changes in the accountingrules for the calculation of earnings per share;

·       theestimates and input variables used in accounting for stock options and therelated stock-based compensation expense;

·       theoutcome of our IRS and foreign tax audits; and

·       the possible disruption ofour operations due to terrorist activities, armed conflict, or outbreak ofdiseases such as SARS, or avian influenza, including as a result of thedisruption of operations of regulatory authorities, our subsidiaries, ourmanufacturing facilities and our customers, suppliers, distributors, couriers,collaborative partners, licensees and clinical trial sites.

**Basis ofPresentation and Principles of Consolidation**

Our consolidated financialstatements include the accounts of our wholly owned and majority ownedsubsidiaries. As a result of the adoption of FIN 46, “Consolidation of VariableInterest Entities,” we also consolidate certain variable interest entities forwhich we are the primary beneficiary. For consolidated subsidiaries in which weown less than 100% interest, we record minority interest in our statements ofoperations for the ownership interest of the minority owner. We use the equitymethod to account for investments in entities in which we have a substantialownership interest (20% to 50%) which do not fall in the scope of FIN 46, orover which we exercise significant influence. Our consolidated net incomeincludes our share of the earnings of these entities. All intercompany accountsand transactions have been eliminated in consolidation. We have reclassifiedcertain 2005 and 2004 data to conform to our 2006 presentation.

**Dividend Policy**

We have never paid a cashdividend on shares of our stock. We currently intend to retain our earnings tofinance future growth and do not anticipate paying any cash dividends on ourstock in the foreseeable future.

**Use of Estimates**

Under accountingprinciples generally accepted in the United States, we are required to makecertain estimates and assumptions that affect reported amounts of assets,liabilities, revenues, expenses, and 

F-78

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

disclosureof contingent assets and liabilities in our financial statements. Our actualresults could differ from these estimates.

**Cash and CashEquivalents**

We value our cash and cashequivalents at cost plus accrued interest, which we believe approximates theirmarket value. Our cash equivalents consist principally of money market funds,corporate notes and municipal notes with original maturities of three months orless. We generally invest our cash in investment-grade securities tomitigate risk.

**Investments**

We invest our excess cash balances in short-term andlong-term marketable debt securities. As part of our strategic relationships,we may also invest in equity securities of other biotechnology companies, someof which are currently, or have been in the past, considered related parties.Other investments are accounted for as described below.

We classify all of our marketable equity investmentsas available-for-sale. We classify our investments in marketable debtsecurities as either held-to-maturity or available-for-sale based on facts andcircumstances present at the time we purchase the securities. As of eachbalance sheet date presented, we classified all of our investments in debtsecurities as available-for-sale. We report available-for-sale investments atfair value as of each balance sheet date and include any unrealized holdinggains and losses (the adjustment to fair value) in stockholders’ equity.Realized gains and losses are determined on the specific identification methodand are included in investment income. If any adjustment to fair value reflectsa decline in the value of the investment, we consider all available evidence toevaluate the extent to which the decline is “other than temporary” and mark theinvestment to market through a charge to our statement of operations.Investments in equity securities for which fair value is not readilydeterminable are carried at cost, subject to review for impairment. We classifyour investments with remaining maturities of twelve months or less asshort-term investments exclusive of those categorized as cash equivalents. Weclassify our investments with remaining maturities of greater than twelvemonths as long-term investments, unless we expect to sell the investment inless than 1 year.

For additional informationon our investments, please read Note I., “Investments in MarketableSecurities and Strategic Equity Investments,” and Note J., “Equity MethodInvestments.”

**Inventories**

We value inventories at cost or, if lower, fair value.We determine cost using the first-in, first-out method.

We analyze ourinventory levels quarterly and write down to its net realizable value:

·       inventorythat has become obsolete;

·       inventorythat has a cost basis in excess of its expected net realizable value;

·       inventoryin excess of expected requirements; and

·       expiredinventory.

F-79

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

We capitalize inventoryproduced for commercial sale, which may result in the capitalization ofinventory prior to regulatory approval. In no event is inventory capitalizedprior to completion of a phase 3 clinical trial. If a product is not approvedfor sale, it would likely result in the write-off of the inventory and a chargeto earnings.

**Property, Plant andEquipment**

We record property, plant and equipment at cost. Whenwe dispose of these assets, we remove the related cost and accumulateddepreciation and amortization from the related accounts on our balance sheetand include any resulting gain or loss in our statement of operations.

We generallycompute depreciation using the straight-line method over the estimated usefullives of the assets. We compute economic lives as follows:

·       plantand equipment—three to fifteen years;

·       furnitureand fixtures—five to seven years; and

·       buildings—twentyto forty years.

We evaluate the remaining life and recoverability ofthis equipment periodically based on the appropriate facts and circumstances.

We amortize leasehold improvements and assets undercapital leases over their useful life or, if shorter, the term of theapplicable lease.

We capitalize certain computer software and softwaredevelopment costs incurred in connection with developing or obtaining computersoftware for internal use. Capitalized software costs are included in property,plant and equipment, net on our consolidated balance sheet and amortized on astraight-line basis over the estimated useful lives of the software,which generally do not exceed 5 years. Net capitalized software and developmentcosts were $14.2 million at December 31, 2006 and $19.1 millionat December 31, 2005.

For products we expect tocommercialize, we capitalize, to construction-in-progress, the costs we incurin validating facilities and equipment. We begin this capitalization when thevalidation process begins, provided that the product to be manufactured hasdemonstrated technological feasibility, and end this capitalization when theasset is substantially complete and ready for its intended use. Thesecapitalized costs include incremental labor and direct material, and incrementalfixed overhead and interest. We depreciate these costs using the straight-linemethod.

**Goodwill and OtherIntangible Assets**

Our intangibleassets consist of:

·       goodwill;

·       purchasedtechnology rights;

·       patents,trademarks and trade names;

·       distributionrights;

F-80

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)

·       customerlists; and

·       covenantsnot to compete.

We are required to perform impairment tests related toour goodwill under FAS 142 annually and whenever events or changes incircumstances suggest that the carrying value of an asset may not berecoverable. We completed the required annual impairment tests for our$1.5 billion of net goodwill in the third quarter of 2006 and determinedthat the $219.2 million of goodwill assigned to our Genetics reportingunit was impaired. We discuss our assessment of goodwill for potential impairmentin Note H., “Goodwill and Other Intangible Assets—Goodwill,’’ in this report.

We amortize intangible assets using the straight-linemethod over their estimated useful lives, which range between 1 and15 years or, using the economic use method if that method results insignificantly greater amortization than the straight-line method.

For certain acquiredintangible assets, we may be required to make additional payments contingentupon meeting certain sales targets. We record amortization expense for theseintangibles based on estimated future sales of the related products and includein the determination of amortization all contingent payments that we believeare probable of being made. We apply this amortization model to our Synviscdistribution rights (acquired from Wyeth), our license agreement with Synpacrelated to Myozyme patent and technology rights and our license to two productsacquired from Surgi.B. We review the sales forecasts of these products on aquarterly basis and assess the impact changes in the forecasts have on the rateof amortization and the likelihood that contingent payments will be made.Adjustments to amortization expense resulting from changes in estimated salesare reflected prospectively.

**Accounting for theImpairment of Long-Lived Assets**

We periodicallyevaluate our long-lived assets for potential impairment under FAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” We perform theseevaluations whenever events or changes in circumstances suggest that thecarrying amount of an asset or group of assets is not recoverable. Indicatorsof potential impairment include:

·       asignificant change in the manner in which an asset is used;

·       asignificant decrease in the market value of an asset;

·       asignificant adverse change in its business or the industry in which it is sold;and

·       acurrent period operating cash flow loss combined with a history of operating orcash flow losses or a projection or forecast that demonstrates continuinglosses associated with the asset.

If we believe an indicatorof potential impairment exists, we test to determine whether impairmentrecognition criteria in FAS 144 have been met. We charge impairments of thelong-lived assets to operations if our evaluations indicate that the carryingvalue of these assets is not recoverable.

F-81

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

**Translation ofForeign Currencies**

We translate thefinancial statements of our foreign subsidiaries from local currency into U.S.dollars using:

·       thecurrent exchange rate at each balance sheet date for assets and liabilities;

·       theaverage exchange rate prevailing during each period for revenues and expenses;and

·       thehistorical exchange rate for our investments in our foreign subsidiaries.

We consider the localcurrency for all of our foreign subsidiaries to be the functional currency forthat subsidiary. As a result, we include translation adjustments for thesesubsidiaries in stockholders’ equity. We also record in stockholders’ equity,exchange gains and losses on intercompany balances that are of a long-terminvestment nature. Our stockholders’ equity includes net cumulative foreigncurrency translation gains of $263.0 million at December 31, 2006 and$131.1 million at December 31, 2005. Gains and losses on all otherforeign currency transactions, including gains and losses attributable toforeign currency forward contracts, are included in SG&A in our results ofoperations and were a net gain of $7.8 at December 31, 2006, a net loss of$3.8 million at December 31, 2005 and a net gain of $7.1 millionat December 31, 2004.

**DerivativeInstruments**

FAS 133, “Accounting forDerivative Instruments and Hedging Activities,” establishes accounting andreporting standards for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities. Itrequires that we recognize all derivative instruments as either assets orliabilities in our consolidated balance sheets and measure those instruments atfair value. Subsequent changes in fair value are reflected in current earningsor other comprehensive income (loss), depending on whether a derivativeinstrument is designated as part of a hedge relationship and, if it is, thetype of hedge relationship.

**Defined PensionBenefit Plan Accounting**

In September 2006, the FASB issued FAS 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).” FAS 158requires us to recognize the overfunded or underfunded status of any pension orother postretirement plans we may have as a net asset or a net liability on ourstatement of financial position and to recognize changes in that funded statusin the year in which the changes occur as an adjustment to accumulated othercomprehensive income in stockholders’ equity. Currently, we have definedbenefit pension plans for certain of our foreign subsidiaries and a definedbenefit postretirement plan for one of our U.S. subsidiaries, which has beenfrozen since 1995 and is not significant. Under FAS 158, actuarial gains andlosses, prior service costs or credits, and any remaining transition assets orobligations that have not been recognized for our defined benefit pension plansunder previous accounting standards must be recognized in accumulated othercomprehensive income, net of tax effects, until they are amortized as acomponent of net periodic benefit cost. In addition, FAS 158 requires that themeasurement date, which is the date at which the benefit obligation and planassets are measured, be as of our fiscal year end, which is December 31.FAS 158 is effective for our current fiscal year ending December 31, 2006,except for the  measurement dateprovisions, which are effective for us for our fiscal year endingDecember 31, 2008. 

F-82

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accordingly, we haverecognized the underfunded status of our defined benefit pension plans in ourconsolidated balance sheets as of December 31, 2006, including $12.6 millionof additional minimum pension liabilities and $3.8 million of related deferredtax assets offset by an $8.8 million charge, net of tax, to accumulatedother comprehensive income in stockholders’ equity.

FAS 87 continues torequire management make certain assumptions relating to the following:

·       long-termrate of return on plan assets;

·       discountrates used to measure future obligations and interest expense;

·       salaryscale inflation rates; and

·       otherassumptions based on the terms of each individual plan.

We obtained actuarialreports to compute the amounts of liabilities and expenses relating to themajority of our plans subject to the assumptions that management selects as ofthe beginning of the plan year. Management reviews the long-term rate ofreturn, discount, and salary scale inflation on an annual basis and makesmodifications to the assumptions based on current rates and trends asappropriate. We have also provided the disclosures required under FAS 158 as ofDecember 31, 2006 and by FAS 87 as of December 31, 2006 and 2005, inNote P., “Benefit Plans.”

**Revenue Recognition**

We recognize revenue from product sales whenpersuasive evidence of an arrangement exists, the product has been shipped,title and risk of loss have passed to the customer and collection from thecustomer is reasonably assured. We recognize revenue from service sales, suchas Carticel services and genetic testing services, when we have finishedproviding the service. We recognize the revenue from the contracts to performresearch and development services and selling and marketing services over theterm of the applicable contract and as we complete our obligations under thatcontract. We recognize non-refundable, up-front license fees over the relatedperformance period or when we have no remaining performance obligations.

Revenue from milestone payments for which we have nocontinuing performance obligations is recognized upon achievement of therelated milestone. When we have continuing performance obligations, themilestone payments are deferred and recognized as revenue over the term of thearrangement as we complete our performance obligations.

We evaluate revenue from agreements that have multipleelements to determine whether the components of the arrangement representseparate units of accounting as defined in EITF Issue No. 00-21, “RevenueArrangements with Multiple Deliverables.” To recognize a delivered item in amultiple element arrangement, EITF Issue No. 00-21 requires that thedelivered items have value to the customer on a stand-alone basis, thatthere is objective and reliable evidence of fair value of the undelivered itemsand that delivery or performance is probable and within our control for anydelivered items that have a right of return.

We follow the guidance of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent” in thepresentation of revenues and direct costs of revenues. This guidance requiresus to assess whether we act as a principal in the transaction or as an agentacting on behalf of others. We record 

F-83

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)

revenue transactions grossin our statements of operations if we are deemed the principal in thetransaction, which includes being the primary obligor and having the risks andrewards of ownership.

We receive royalties related to the manufacture, saleor use of our products or technologies under license arrangements with thirdparties. For those arrangements where royalties are reasonably estimable, werecognize revenue based on estimates of royalties earned during the applicableperiod and adjust for differences between the estimated and actual royalties inthe following quarter. Historically, these adjustments have not been material.For those arrangements where royalties are not reasonably estimable, werecognize revenue upon receipt of royalty statements from the licensee.

We record allowances for product returns, rebatespayable to Medicaid, managed care organizations or customers, chargebacks andsales discounts. These allowances are recorded as a reduction to revenue at thetime product sales are recorded. These amounts are based on our historicalactivity, estimates of the amount of product in the distribution channel andthe percent of end-users covered by Medicaid or managed care organizations. Werecord consideration paid to a customer or reseller of our products as areduction of revenue unless we receive an identifiable and separable benefitfor the consideration, and we can reasonably estimate the fair value of thebenefit received. If both conditions are met, we record the consideration paidto the customer as an expense.

We maintain allowances fordoubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. If the financial condition of ourcustomers was to deteriorate and result in an impairment of their ability tomake payments, additional allowances may be required.

**Accounting forStock-Based Compensation**

Prior to January 1, 2006, we elected to:

·       accountfor share-based payment awards under Accounting Principles Board OpinionNo., or APB, 25, “Accounting for Stock Issued to Employees,” as amended byFAS 148, “Accounting for Stock-Based Compensation—Transition andDisclosures,” which we refer to collectively as APB 25; and

·       disclosethe pro forma impact of expensing the fair value of our employee and directorstock options and purchases made under our employee stock purchase plan, orESPP, only in the notes to our financial statements.

F-84

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (Continued)**

EffectiveJanuary 1, 2006, we adopted the provisions of:

·       FAS 123R,“Share-Based Payment, an amendment of FASB Statement Nos. 123 and 95,”which requires us to recognize stock-based compensation expense in ourfinancial statements for all share-based payment awards made to employeesand directors based upon the grant date fair value of those awards; and

·       SAB107, “Share-Based Payment,” which provides guidance to public companiesrelated to the adoption of FAS 123R.

FAS 123R applies to stock options granted underour employee and director stock option plans and purchases made under our ESPP,and would also apply to any restricted stock or restricted stock units we maygrant in the future.

We adoptedFAS 123R using the modified prospective transition method, which requiresus to apply the standard to new equity awards and to equity awards modified,repurchased or canceled after January 1, 2006, our adoption date.Additionally, compensation expense for the unvested portion of awards grantedprior to our adoption date shall be:

·       recognizedover the requisite service period, which is generally commensurate with thevesting term; and

·       basedon the original grant date fair value of those awards, as calculated in our proforma disclosures, prior to January 1, 2006, under FAS 123,“Accounting for Stock-Based Compensation,” as amended by FAS 148,“Accounting for Stock-Based Compensation—Transition and Disclosures,”which we refer to collectively as FAS 123. Changes to the grant date fairvalue of equity awards granted prior to our adoption date are not permittedunder FAS 123R.

The modified prospective transition method does notallow for the restatement of prior periods. Accordingly, our results of operationsfor 2006 and future periods will not be comparable to our results of operationsprior to January 1, 2006 because our historical results prior to that datedo not reflect the impact of expensing the fair value of share-basedpayment awards.

Prior to January 1, 2006, in the pro formadisclosures regarding stock-based compensation included in the notes toour financial statements, we recognized forfeitures of stock options only asthey occurred. Effective January 1, 2006, in accordance with theprovisions of FAS 123R, we are now required to estimate an expectedforfeiture rate for stock options, which is factored into the determination ofour monthly stock-based compensation expense. As a result of the adoptionof FAS 123R, we recorded pre-tax stock-based compensation expensetotaling $208.5 million, net of estimated forfeitures, in our consolidatedstatements of operations for 2006. Additional information regarding our stock-basedcompensation is included in Note M., “Stockholders’ Equity,” to ourconsolidated financial statements included in this report.

In connection with theadoption of FAS 123R, we were also required to change the classification,in our consolidated statements of cash flows, of any tax benefits realized uponthe exercise of stock options in excess of that which is associated with theexpense recognized for financial reporting purposes. These amounts arepresented as a financing cash inflow rather than as a reduction of income taxespaid in our consolidated statements of cash flows for 2006.

F-85

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

**Research andDevelopment**

We expense internal andexternal research and development costs, including costs of funded research anddevelopment arrangements, in the period incurred. We also expense the cost ofpurchased technology in the period of purchase if we believe that thetechnology has not demonstrated technological feasibility and that it does nothave an alternative future use.

**Issuance of Stockby a Subsidiary or an Affiliate**

We include gains on theissuance of stock by our subsidiaries and affiliates in net income unless thatsubsidiary or affiliate is a research and development, start-up or developmentstage company or an entity whose viability as a going concern is underconsideration. In those situations, we account for the change in our equityownership of that subsidiary or affiliate in other comprehensive income orloss. All such gains during the years ended December 31, 2006, 2005 and2004 have been recorded to other comprehensive income or loss.

**Income Taxes**

We use the asset and liability method of accountingfor deferred income taxes. Our provision for income taxes includes income taxescurrently payable and those deferred because of temporary differences betweenthe financial statement and tax bases of assets and liabilities. We recordliabilities for income tax contingencies based on our best estimate of theunderlying exposures.

We have not provided forpossible U.S. taxes on the undistributed earnings of foreign subsidiaries. Wedo not believe it is practicable to determine the tax liability associated withthe repatriation of our foreign earnings because it is our policy toindefinitely reinvest these earnings in non-U.S. operations. Theseundistributed foreign earnings totaled $273.7 million at December 31,2006 and $164.5 million at December 31, 2005.

**ComprehensiveIncome (Loss)**

Comprehensive income(loss) consists of net income or loss and all changes in equity fromnon-shareholder sources, including changes in unrealized gains and losses oninvestments and on derivative instruments designated as hedges, foreigncurrency translation adjustments and liabilities for pension obligations, netof taxes.

**Net Income (Loss)Per Share**

To calculate base earnings per share, we divide ourearnings by the weighted average number of outstanding shares during theapplicable period. To calculate diluted earnings per share, we also include inthe denominator all potentially dilutive securities outstanding during theapplicable period unless inclusion of such securities is anti-dilutive.

**Recent AccountingPronouncements**

*SAB 108,*“*Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements.*”   In September 2006,the SEC staff issued SAB 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year Financial 

F-86

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE A.**   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Statements,” to address the diversity in practiceregarding the quantification of financial statement misstatements under the twomethods most commonly used by preparers and auditors—the income statement, or “roll-over,”approach, and the balance sheet, or “iron curtain,” approach. Prior to SAB 108,companies could evaluate the materiality of financial statement misstatementsusing either the income statement approach which focuses on new misstatementsadded in the current year, or the balance sheet approach which focuses on thecumulative amount of misstatement present in a company’s balance sheet.Misstatements that would be material under one approach could be viewed asimmaterial under another approach, and subsequently not be corrected. The SECstaff believes that reliance on only one of these methods, to the exclusion ofthe other, does not appropriately quantify all misstatements that could bematerial to financial statement users. As a result, SAB 108 now requires thatcompanies utilize a dual approach to assessing the quantitative effects offinancial statement misstatements, which includes both an income statementfocused assessment and a balance sheet focused assessment. The guidance in SAB108 is effective for our current fiscal year ending December 31, 2006. Althoughrestatement of prior years’ financial statements is permitted, it is notrequired if we properly applied our previous approach (income statement orbalance sheet) and considered all relevant qualitative factors in ourassessment of previous errors. In lieu of the prior period restatement, we werepermitted to report the cumulative effect of adopting SAB 108 as an adjustmentto the opening balance of assets and liabilities, with an offsetting adjustmentto the opening balance of retained earnings as of January 1, 2006, theyear of adoption, and disclose the nature and amount of each individual errorbeing corrected in the cumulative effect adjustment, when and how each errorbeing corrected arose, and the fact that the errors had previously beenconsidered immaterial. We did not record any cumulative effect adjustmentsrelated to the adoption of SAB 108. The adoption of SAB 108 did not impactour financial position or results of operations.

*FIN 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109.”**  *InJuly 2006, the FASB issued FIN 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109,” which seeks to reducethe significant diversity in practice associated with certain aspects ofmeasurement and recognition in accounting for income taxes. FIN 48 prescribes arecognition threshold and measurement attribute for financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return, and also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 is effective for us as of January 1, 2007. Uponadoption, the cumulative effect of any changes in net assets resulting from theapplication of FIN 48 will be recorded as an adjustment to accumulatedearnings. Additional guidance from the FASB on FIN 48 is pending. As aresult, we are currently unable to finalize our estimate of the impact thatadopting this interpretation will have on our financial position or results ofoperations.

*FAS 157, “Fair Value Measurements.”**  *InSeptember 2006, the FASB issued FAS 157, “Fair Value Measurements,”which provides enhanced guidance for using fair value to measure assets andliabilities. FAS 157 establishes a common definition of fair value,provides a framework for measuring fair value under accounting principlesgenerally accepted in the United States and expands disclosure requirements regardingfair value measurements. FAS 157 is effective for us as of January 1,2008. We are currently evaluating the impact, if any, the adoption ofFAS 157 will have on our financial position and results of operations.

F-87

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE B.**   NETINCOME (LOSS) PER SHARE

Thefollowing table sets forth our computation of basic and diluted net income(loss) per share (amounts in thousands, except per share amounts):

| ** **                                                                                                  | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                                           |       | $                                                             | (16,797    | ) | $ | 441,489 |   | $ | 86,527 |   |
| Effect of  dilutive securities:                                                                             |       |                                                          |       |   |   |   |   |
| Interest expense and debt fee amortization, net of  tax, related to our 1.25% convertible senior notes |       | —                                                        |       | 7,496 |   | — |   |
| Net income  (loss)—diluted                                                                             |       | $                                                             | (16,797    | ) | $ | 448,985 |   | $ | 86,527 |   |
| Shares used in  computing net income (loss) per common  share—basic                                    |       | 261,124                                                       |       | 254,758 |   | 228,175 |   |
| Effect of  dilutive securities (1):                                                                         |       |                                                          |       |   |   |   |   |
| Shares issuable upon the assumed conversion of our  1.25% convertible senior notes (2)                      |       | —                                                        |       | 9,686 |   | — |   |
| Stock options (3)                                                                                           |       | —                                                        |       | 7,769 |   | 6,133 |   |
| Warrants and stock purchase rights                                                                          |       | —                                                        |       | 11 |   | 10 |   |
| Dilutive potential common shares                                                                            |       | —                                                        |       | 17,466 |   | 6,143 |   |
| Shares used in  computing net income (loss) per common share—diluted (1,2,3)                           |       | 261,124                                                       |       | 272,224 |   | 234,318 |   |
| Net income (loss)  per share: (1)                                                                           |       |                                                          |       |   |   |   |   |
| Basic                                                                                                       |       | $                                                             | (0.06      | ) | $ | 1.73 |   | $ | 0.38 |   |
| Diluted                                                                                                     |       | $                                                             | (0.06      | ) | $ | 1.65 |   | $ | 0.37 |   |

----

(1)          For the year ended December 31,2006, basic and diluted net loss per share are the same. We did not include thesecurities described in the following table in the computation of diluted netloss per share because these securities would have an anti-dilutive effect dueto our net loss for the period (amounts in thousands):

| ** **                                                                         | ** ** | **For the Year Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,  2006**           | ** ** |
| Shares issuable  upon the assumed conversion of our 1.25% convertible senior notes |       |                                  | 9,686      |   |   |
| Shares issuable  for options                                                       |       |                                  | 6,881      |   |   |
| Shares issuable  for warrants and stock purchase rights                            | * *   | * *                              | 11         |   |   |
| Total shares  excluded from the computation of diluted loss per share         |       |                                  | 16,578     |   |   |

 

(2)          Reflects the retroactiveapplication of the provisions of EITF Issue No. 04-8, “The Effect ofContingently Convertible Debt on Diluted Earnings Per Share.” The potentiallydilutive effect of the 9.7 million shares of Genzyme Stock issuable uponconversion of our $690.0 million in principal of 1.25% convertible seniornotes is excluded from the calculation of diluted earnings per share for theyears ended December 31, 2006 and 2004 because the effect would beanti-dilutive.

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE B.**   NET INCOME (LOSS) PER SHARE (Continued)

(3)          We did not include thesecurities described in the following table in the computation of dilutedearnings (loss) per share because these securities were anti-dilutive duringeach such period (amounts in thousands):

| ** **                                                             | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **   2006   **                  | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Shares of Genzyme  Stock issuable upon exercise of outstanding options |       |                                                          | 11,840     |   |   |   | 7,269 |   |   |   | 16,008 |   |   |
|                                                                        |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

**NOTE C.**   MERGERSAND ACQUISITIONS

***Acquisition of AnorMED***

In November 2006, we acquired AnorMED, apublicly-held chemical-based biopharmaceutical company based in Langley,British Columbia, Canada with a focus on the discovery, development andcommercialization of new therapeutic products in the area of hematology,oncology and HIV. We paid gross consideration of $589.2 million in cash,including $584.2 million for the shares of AnorMED’s common stockoutstanding on the date of acquisition and approximately $5 million foracquisition costs. Net consideration was $569.0 million as we acquiredAnorMED’s cash and cash equivalents totaling $20.2 million. We accounted forthe acquisition as a business combination and accordingly, included its resultsof operations in our consolidated statements of operations from November 7,2006, the date of acquisition.

Thepurchase price was allocated to the estimated fair value of the acquiredtangible and intangible assets and assumed liabilities as follows (amounts inthousands, except share data):

| Purchase of  43,272,085 shares of AnorMED common stock   |   | $       | 584,173 |   |
|----------------------------------------------------------|--------|---------|---------|--------|
| Acquisition costs                                        |   | 5,000   |    |
| Total purchase  price                                    |   | $       | 589,173 |   |
| Cash and cash equivalents                                |   | $       | 20,220  |   |
| Deferred tax  assets—current                        |   | 2,517   |    |
| Other current  assets                                    |   | 6,341   |    |
| Property, plant  and equipment                           |   | 2,788   |    |
| Goodwill                                                 |   | 29,080  |    |
| Other intangible  assets (to be amortized over 10 years) |   | 3,500   |    |
| In-process  research and development                     |   | 552,900 |    |
| Deferred tax  assets—noncurrent                     |   | 200     |    |
| Other noncurrent  assets                                 |   | 573     |    |
| Assumed liabilities:                                     |   |    |    |
| Deferred tax liability                                   |   | (1,288  | )       |
| Liabilities for exit activities                          |   | (6,478  | )       |
| Other                                                    |   | (21,180 | )       |
| Allocated purchase price                                 |   | $       | 589,173 |   |

 

F-89

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTEC.**   MERGERS AND ACQUISITIONS (Continued)

The purchase price was allocated to the tangible andintangible assets acquired and liabilities assumed based on their estimatedfair values at the date of acquisition. The excess of the purchase price overthe estimated fair value of the assets acquired and liabilities assumedamounted to $29.1 million, which was allocated to goodwill. We expect thatsubstantially all of the amount allocated to goodwill will be deductible fortax purposes.

The allocation of purchaseprice remains subject to potential adjustments, including adjustments forliabilities associated with certain exit activities and tax restructuringactivities.

***Acquisition ofSurgi.B***

In March 2006,through a series of transactions we acquired Surgi.B, a privately-held companybased in Beauzelle, France, which owned the exclusive rights to manufacture andsell GlucaMesh and GlucaTex, two beta glucan-coated mesh products for usein the surgical repair of inguinal hernias, for an aggregate up-front cashpayment of $5.5 million. We allocated the entire purchase price to licensefees, a component of other intangible assets on our consolidated balance sheet,based on their estimated fair values as of March 30, 2006, the date ofacquisition. In addition, we are obligated to make certain contingent milestonepayments totaling up to approximately $6 million and contingent royaltypayments based on future sales of GlucaMesh and GlucaTex. Currently, GlucaMeshis sold only in France.

***Acquisition of GeneTherapy Assets from Avigen***

In December 2005, weacquired certain gene therapy assets from Avigen, a publicly-traded,biopharmaceutical company based in Alameda, California with a focus on uniquesmall molecule therapeutics and biologics to treat serious neurologicaldisorders, in exchange for an up-front cash payment of $12.0 million. Weallocated the purchase price to the intangible assets acquired based on theirestimated fair values as of December 19, 2005, the date of acquisition. Weallocated $5.0 million of the up-front cash payment to technology inother intangible assets on our consolidated balance sheet and recorded a chargeof $7.0 million to IPR&D. In addition, we may be obligated to make upto approximately $38 million of potential milestone payments based on thedevelopment and approval of, and royalty payments based on the sale of,products developed between now and 2020 that rely on the intellectual propertypurchased from Avigen.

***Acquisition of Equal Diagnostics***

In July 2005, we acquired Equal Diagnostics, aprivately-held diagnostics company based in Exton, Pennsylvania, that formerlyserved as a distributor for our clinical chemistry reagents. We paid$5.0 million in initial cash payments and issued promissory notes to thethree former shareholders of Equal Diagnostics totaling $10.0 million inprincipal and interest. These notes bear interest at 3.86% and are payable overeight years in equal annual installments commencing on March 31, 2007. Inaddition to these guaranteed payments, we may be obligated to make additionalcash payments of up to an aggregate of approximately $8 million during theperiod commencing March 31, 2007 and ending March 31, 2014 based uponthe gross margin of the acquired business, as defined in the purchaseagreement. We accounted for the acquisition as a business combination and,accordingly, included its results of operations in our consolidated statementsof operations from July 15, 2005, the date of acquisition.

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

The purchase price wasallocated to the estimated fair value of the acquired tangible and intangibleassets and assumed liabilities as follows (amounts in thousands):

| Initial cash  payments                                       |   | $     | 5,000  |   |
|--------------------------------------------------------------|--------|-------|--------|--------|
| Present value of  notes payable                              |   | 8,586 |   |
| Acquisition costs                                            |   | 250   |   |
| Total purchase price                                         |   | $     | 13,836 |   |
| Cash and cash  equivalents                                   |   | $     | 500    |   |
| Other current  assets                                        |   | 3,119 |   |
| Property, plant  and equipment                               |   | 58    |   |
| Goodwill                                                     |   | 5,344 |   |
| Other intangible  assets (to be amortized over 7 years) |   | 4,850 |   |
| Other noncurrent  assets                                     |   | 14    |   |
| Assumed  liabilities                                         |   | (49   | )      |
| Allocated  purchase price                                    |   | $     | 13,836 |   |

 

The purchase price wasallocated to the tangible and intangible assets acquired and liabilitiesassumed based on their estimated fair values at the date of acquisition. Theexcess of the purchase price over the estimated fair value of the assetsacquired and liabilities assumed amounted to $5.3 million, which wasallocated to goodwill. We expect that substantially all of the amount allocatedto goodwill will be deductible for tax purposes.

***Acquisition of Bone Care***

In July 2005, we acquired Bone Care, a publicly-heldspecialty pharmaceutical company based in Middleton, Wisconsin with a focus onnephrology. We paid gross consideration of $712.3 million in cash,including $668.4 million for the outstanding shares of Bone Care’s commonstock, $39.9 million to buy out options to purchase shares of Bone Care’scommon stock and restricted stock outstanding on the date of acquisition andapproximately $4 million for acquisition costs. Net consideration was$604.3 million as we acquired Bone Care’s cash and short-term investmentstotaling $108.0 million. We accounted for the acquisition as a businesscombination and, accordingly, included its results of operations in ourconsolidated statements of operations from July 1, 2005, the date ofacquisition.

In October 2004, Bone Care was one of sevencompanies, all of which market treatments, therapies or diagnostics for kidneydisease patients, which received a subpoena from the office of the UnitedStates Attorney for the Eastern District of New York. The subpoena requiredBone Care to provide a wide range of documents related to numerous aspects ofits business and operations. The subpoena included specific requests fordocuments related to testing for parathyroid hormone levels and vitamin Dtherapies. Bone Care has cooperated, and we continue to cooperate, with thegovernment’s investigation. To our knowledge, no civil or criminal proceedingshave been initiated against Bone Care or Genzyme at this time, although wecannot predict when or if any proceedings might be initiated. As a result, wehave not recorded any contingent liabilities related to this investigation. Anysuch liabilities that may arise out of this investigation in the future will berecorded as a charge in our consolidated statement of operations in the periodin which such liabilities become probable and estimable.

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

The purchase price wasallocated to the estimated fair value of the acquired tangible and intangibleassets and assumed liabilities as follows (amounts in thousands, except sharedata):

| Purchase of  20,254,600 shares of Bone Care common stock                              |   | $        | 668,402 |   |
|---------------------------------------------------------------------------------------|--------|----------|---------|--------|
| Buy out of  options to purchase shares of Bone Care common stock and restricted stock |   | 39,943   |    |
| Acquisition costs                                                                     |   | 4,000    |    |
| Total purchase price                                                                  |   | $        | 712,345 |   |
| Cash and cash equivalents                                                             |   | $        | 41,012  |   |
| Short-term  investments                                                               |   | 67,015   |    |
| Accounts  receivable                                                                  |   | 10,499   |    |
| Inventories                                                                           |   | 17,500   |    |
| Deferred tax  assets—current                                                     |   | 29,262   |    |
| Other current  assets                                                                 |   | 2,278    |    |
| Property, plant  and equipment                                                        |   | 2,895    |    |
| Goodwill                                                                              |   | 228,836  |    |
| Other intangible  assets (to be amortized over 16 years)                         |   | 504,200  |    |
| In-process  research and development                                                  |   | 12,700   |    |
| Deferred tax  assets—noncurrent                                                  |   | 13,453   |    |
| Assumed liabilities:                                                                  |   |     |    |
| Deferred tax liability                                                                |   | (185,546 | )       |
| Liabilities for exit activities                                                       |   | (11,090  | )       |
| Other                                                                                 |   | (20,669  | )       |
| Allocated  purchase price                                                             |   | $        | 712,345 |   |

 

The allocation of the purchase price was corrected in June 2006to create a $3.6 million reserve for returns of short-dated product sold byBone Care prior to the date of acquisition, and to record adjustments totaling$2.5 million to revise the estimated liabilities related to exit activities anddeferred taxes.

The purchase price, asadjusted, was allocated to the tangible and intangible assets acquired andliabilities assumed based on their estimated fair values at the date ofacquisition. The excess of the purchase price over the estimated fair value ofthe assets acquired and liabilities assumed amounted to $228.8 million,which was allocated to goodwill. We expect that substantially all of the amountallocated to goodwill will be deductible for tax purposes.

***Acquisition of Verigen***

In February 2005, we acquired Verigen, a private companybased in Leverkusen, Germany with a proprietary cell therapy product forcartilage repair (referred to as MACI) that is currently sold in Europe andAustralia. We paid gross consideration of $12.7 million, including$0.9 million for acquisition costs, and may be obligated to makeadditional cash payments of up to an aggregate of approximately$38 million over the next six years, based upon the achievement ofdevelopment and commercial milestones relating to regulatory approval andcommercialization of MACI in the United States, as well as contingent payments 

F-92

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

on worldwide sales of thatproduct. Net consideration was $11.8 million as we acquired Verigen’s cashtotaling $0.9 million. We acquired approximately 96% of Verigen’soutstanding shares in February 2005 and acquired the remaining outstandingshares in August 2005. We accounted for the acquisition as a businesscombination and, accordingly, included its results of operations in ourconsolidated statements of operations from February 8, 2005, the date ofacquisition.

Thepurchase price was allocated to the estimated fair value of the acquiredtangible and intangible assets and assumed liabilities as follows (amounts inthousands):

| Initial cash  payments                                        |   | $      | 11,803 |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Contingent  purchase price liabilities                        |   | 5,660  |   |
| Acquisition costs                                             |   | 912    |   |
| Total purchase price                                          |   | $      | 18,375 |   |
| Cash and cash equivalents                                     |   | $      | 924    |   |
| Other current  assets                                         |   | 4,478  |   |
| Property, plant  and equipment                                |   | 2,673  |   |
| Other intangible  assets (to be amortized over 10 years) |   | 11,964 |   |
| In-process  research and development                          |   | 9,500  |   |
| Other noncurrent  assets                                      |   | 1,023  |   |
| Assumed liabilities:                                          |   |   |   |
| Deferred tax liabilities                                      |   | (4,641 | )      |
| Liabilities for exit activities                               |   | (2,475 | )      |
| Other                                                         |   | (5,071 | )      |
| Allocated  purchase price                                     |   | $      | 18,375 |   |

 

The purchase price was allocated to the tangible andintangible assets acquired and liabilities assumed based on their estimatedfair values at the date of acquisition. The estimated fair value of the assetsacquired and liabilities assumed exceeded the initial payments by$5.7 million resulting in negative goodwill. Pursuant to FAS 142, werecorded as a liability, contingent consideration up to the amount of thenegative goodwill. As contingent payments come due, we will apply the paymentsagainst the contingent liability. Contingent payments in excess of$5.7 million, if any, will be recorded as goodwill. As of December 31,2006 we have paid $1.4 million of contingent payments, and the remainingcontingent liability is $4.3 million.

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTEC.**   MERGERS AND ACQUISITIONS (Continued)

***Acquisition ofSynvisc Sales and Marketing Rights from Wyeth***

In January 2005, weconsummated an arrangement with Wyeth under which we reacquired the sales andmarketing rights to Synvisc in the United States, as well as Germany, Poland,Greece, Portugal and the Czech Republic. In exchange for the sales andmarketing rights, we paid initial payments totaling $121.0 million in cashto Wyeth and otherwise incurred $0.3 million of acquisition costs. We havealso accrued contingent royalty payments to Wyeth totaling $118.3 million,of which $110.0 million had been paid as of December 31, 2006.Distribution rights (a component of other intangible assets, net) in ourconsolidated balance sheet as of December 31, 2006 include a total of$239.6 million for the initial and contingent royalty payments (made oraccrued) as of that date. We will make a series of additional contingentroyalty and milestone payments to Wyeth based on the volume of Synvisc sales inthe covered territories. These contingent royalty and milestone payments couldextend out to June 2012, or could total a maximum of $293.7 million,whichever comes first.

In April 2006, weentered into an agreement with Wyeth to reacquire the sales and marketingrights to Synvisc in Turkey and made an initial payment of $6.0 million incash to Wyeth, which is included in distribution rights (a component of otherintangible assets, net) in our consolidated balance sheet as ofDecember 31, 2006. In addition, we could be obligated to make certaincontingent payments to Wyeth totaling up to $5.5 million between now andDecember 31, 2007

The reacquired Synviscdistribution rights qualify as an asset rather than an acquired business. As aresult, we do not provide pro forma results for our reacquisition of theSynvisc distribution rights.

***Acquisition of ILEX Oncology***

In December 2004, wecompleted our acquisition of ILEX Oncology, an oncology drug developmentcompany. The transaction had a total value of approximately $1 billion,based on the $55.88 per share value of the 18.5 million shares of ourcommon stock exchanged in the acquisition. We accounted for the acquisition asa business combination and, accordingly, included its results of operations inour consolidated statements of operations from December 20, 2004, the dateof acquisition.

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

The purchase price was allocated to the acquiredtangible and intangible assets and assumed liabilities based on their estimatedfair values at the date of acquisition as follows (amounts in thousands, exceptshare data):

| Issuance of 18,457,679  shares of Genzyme Stock                     |   | $       | 1,031,485 |   |
|---------------------------------------------------------------------|--------|---------|-----------|--------|
| Issuance of options to  purchase 1,736,654 shares of Genzyme Stock  |   | 38,440  |      |
| Acquisition costs                                                   |   | 10,349  |      |
| Total purchase price                                                |   | $       | 1,080,274 |   |
| Cash and cash  equivalents                                          |   | $       | 121,128   |   |
| Restricted cash                                                     |   | 604     |      |
| Accounts receivable                                                 |   | 12,501  |      |
| Inventories                                                         |   | 16,984  |      |
| Deferred tax  assets—current                                   |   | 36,766  |      |
| Other current assets                                                |   | 3,168   |      |
| Property, plant and  equipment                                      |   | 2,162   |      |
| Restricted long-term  investments                                   |   | 1,691   |      |
| Goodwill                                                            |   | 445,640 |      |
| Other intangible assets  (to be amortized over 11 to 12 years) |   | 228,627 |      |
| In-process research and  development                                |   | 254,520 |      |
| Deferred tax  assets—noncurrent                                |   | 66,402  |      |
| Other noncurrent assets                                             |   | 1,648   |      |
| Assumed liabilities:                                                |   |    |      |
| Notes payable—short-term                                       |   | (19,968 | )         |
| Unfavorable lease  liability                                        |   | (1,610  | )         |
| Liabilities for exit  activities                                    |   | (6,270  | )         |
| Income tax payable                                                  |   | (47,535 | )         |
| Other                                                               |   | (36,184 | )         |
| Allocated purchase price                                            |   | $       | 1,080,274 |   |

 

We also recorded anestimated tax liability of $47.5 million related to the integration ofILEX Oncology. The excess of the purchase price over the estimated fair valueof the assets acquired and liabilities assumed amounted to $445.6 million,which was allocated to goodwill. We expect that substantially all of the amountallocated to goodwill will not be deductible for tax purposes.

***Acquisition ofPhysician Services and Analytical Services Business Units of IMPATH***

In May 2004, weacquired substantially all of the pathology/oncology testing assets related tothe Physician Services and Analytical Services business units of IMPATH, anational medical testing provider, for total cash consideration of$215.3 million, including acquisition costs. At the time of the purchase,IMPATH operated these business units as “debtors-in-possession” under theUnited States Bankruptcy Code. The assets were sold by IMPATH by means of asale process conducted pursuant to Section 363 of the United States BankruptcyCode. We accounted for the acquisition as a business combination and,accordingly, included the results of operations related to the acquiredbusiness units in our consolidated statements of operations from May 1, 2004,the date of acquisition. The purchase price was subject to adjustment based 

F-95

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

upon thecompletion of a post-closing assessment of the working capital of theacquired business units as of April 30, 2004. Pursuant to a Settlement andRelease Agreement with IMPATH that was approved by the Bankruptcy Court on December 28,2006, the working capital dispute was resolved with no adjustment to thepurchase accounting.

***In-Process Research and Development***

In connection with five ofour acquisitions since 2004, we have acquired various IPR&D projects. Substantialadditional research and development will be required prior to any of ouracquired IPR&D programs and technology platforms reaching technologicalfeasibility. In addition, once research is completed, each product candidateacquired from AnorMED, Avigen, Bone Care, Verigen and ILEX Oncology will needto complete a series of clinical trials and receive FDA or other regulatoryapprovals prior to commercialization. Our current estimates of the time andinvestment required to develop these products and technologies may changedepending on the different applications that we may choose to pursue. We cannotgive assurances that these programs will ever reach technological feasibilityor develop into products that can be marketed profitably. In addition, wecannot guarantee that we will be able to develop and commercialize productsbefore our competitors develop and commercialize products for the sameindications. If products based on our acquired IPR&D programs andtechnology platforms do not become commercially viable, our results ofoperations could be materially adversely affected.

The following table setsforth IPR&D projects for companies and certain assets acquired since 2004 (amountsin millions, except percent data):
| Company/Assets Acquired | ** ** | ** ** | ** ** | **Purchase Price** | ** ** | **IPR&D(1)** | ** ** | **Programs Acquired** | ** ** | **Discount Rate  Used in  Estimating  Cash  Flows(1)** | ** **                      | **Year of  Expected  Launch** | ** ** | **Estimated  Cost to  Complete** | ** ** |
|------------------------------|------------|------------|------------|-------------------------|------------|------------------|------------|----------------------------|------------|------------------------------------------------------------------|---------------------------------|------------------------------------|------------|---------------------------------------|------------|
| AnorMED (2006)               |       |       | $          | 589.2                   |       |             |       | $526.8                     |       |                                                             | Mozobil (stem cell  transplant) |                               |       | 15                                    | %          |   | 2008-2013 |   |   | $125 |   |   |
|                              |       |       |       |                    |       |             | 26.1       |                       |       | AMD070 (HIV)(2)                                                  |                            |                               | 15         | %                                     |       |   |   |   |   |   |   |
|                              |       |       |       |                    |       |             | $          | 552.9                      |       |                                                             |                            |                               |       |                                  |       |   |   |   |   |   |   |   |
| Avigen (2005)                |       |       | $          | 12.0                    |       |             |       | $                          | 7.0        |                                                             |                            | AV201 (Parkinson’s  disease)  |       |                                  | N/A        |   |   | 2016 |   |   | $ | 74 |   |   |
| Bone Care (2005)             |       |       | $          | 712.3                   |       |             |       | $                          | 12.7       |                                                             |                            | LR-103 (secondary                  |       |                                  |       |   |   |   |   |   |   |   |   |
|                              |       |       |       |                    |       |             |       |                       |       | hyperparathyroidism)                                             |                            |                               | 25         | %                                     |       | 2012 |   |   | $ | 15 |   |   |
| Verigen (2005)               |       |       | $          | 12.7                    |       |             |       | $                          | 9.5        |                                                             |                            | MACI (cartilage repair)            |       |                                  | 24         | % |   | 2012-2014 |   |   | $ | 20-$35 |   |   |
| ILEX Oncology (2004)         |       |       | $          | 1,080.3                 |       |             |       | $                          | 96.9       |                                                             |                            | Campath (alemtuzumab)              |       |                                  | 11         | % |   | 2009-2011 |   |   | $ | 194 |   |   |
|                              |       |       |       |                    |       |             | 113.4      |                       |       | Clolar                                                           |                            |                               | 12         | %                                     |       | 2008-2011 |   |   | $ | 99 |   |   |
|                              |       |       |       |                    |       |             | 44.2       |                       |       | Tasidotin                                                        |                            |                               | 16         | %                                     |       | 2011-2014 |   |   | $ | 44 |   |   |
|                              |       |       |       |                    |       |             | $          | 254.5                      |       |                                                             |                            |                               |       |                                  |       |   |   |   |   |   |   |   |

----

(1)             Management assumes responsibility for determining thevaluation of the acquired IPR&D projects. The fair value assigned toIPR&D for each acquisition is estimated by discounting, to present value,the cash flows expected once the acquired projects have reached technologicalfeasibility. The cash flows are probability-adjusted to reflect the risks ofadvancement through the product approval process. In estimating the future cashflows, we also considered the tangible and intangible assets required forsuccessful exploitation of the technology resulting from the purchasedIPR&D projects and adjusted future cash flows for a charge reflecting thecontribution to value of these assets. 

(2)             Year of expected launch and estimated costto complete data is not provided for AMD070 at this time because we areassessing our future plans for this program.

F-96

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

*Exit Activities*

In connection with our acquisitions of SangStat in2003, ILEX Oncology in 2004, Verigen and Bone Care in 2005 and AnorMED in 2006,we initiated integration plans to consolidate and restructure certain functionsand operations, including the relocation and termination of certain personnelof these acquired entities and the closure of certain of the acquired entities’leased facilities. These costs have been recognized as liabilities assumed inconnection with the acquisition of these entities in accordance with EITF IssueNo. 95-3, “Recognition of Liabilities in Connection with a Purchaseor Business Combination,” and are subject to potential adjustments as certainexit activities are confirmed or refined. The following table summarizes theliabilities established for exit activities related to these acquisitions(amounts in thousands):

| ** **                            | ** ** | **Employee  Related  Benefits** | ** ** | **Closure of  Leased  Facilities** | ** ** | **Other  Exit  Activities** | ** ** | **Total  Exit  Activities** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Balance at December 31, 2003 (1) |       | $                               | 7,602      |                                    |       | $                           | 2,328      |                        |       | $ | 306 |   | $ | 10,236 |   |
| Acquisitions (2)                      |       | 4,900                           |       |                                    | 216        |                        |       | 214                         |       | 5,330 |   |
| Revision of estimates                 |       | (455                            | )          |                                    | (320       | )                           |       | (184                        | )          | (959 | ) |
| Payments                              |       | (5,454                          | )          |                                    | (1,548     | )                           |       | (127                        | )          | (7,129 | ) |
| Balance at December 31, 2004     |       | 6,593                           |       |                                    | 676        |                        |       | 209                         |       | 7,478 |   |
| Acquisitions (3)                      |       | 11,734                          |       |                                    | 1,327      |                        |       | 508                         |       | 13,569 |   |
| Revision of estimates (4)             |       | 382                             |       |                                    | (519       | )                           |       | 10,851                      |       | 10,714 |   |
| Payments                              |       | (16,460                         | )          |                                    | (1,285     | )                           |       | (3,451                      | )          | (21,196 | ) |
| Balance at December 31, 2005     |       | 2,249                           |       |                                    | 199        |                        |       | 8,117                       |       | 10,565 |   |
| Acquisitions (5)                      |       | 6,478                           |       |                                    | —     |                        |       | —                      |       | 6,478 |   |
| Revision of estimates                 |       | (165                            | )          |                                    | (132       | )                           |       | (750                        | )          | (1,047 | ) |
| Payments                              |       | (2,457                          | )          |                                    | (43        | )                           |       | (7,367                      | )          | (9,867 | ) |
| Balance at December 31, 2006     |       | $                               | 6,105      |                                    |       | $                           | 24         |                        |       | $ | — |   | $ | 6,129 |   |

----

(1)          Represents liabilitiesfor exit activities related to our acquisition of SangStat in September 2003.

(2)          Represents liabilitiesfor exit activities related to our acquisition of ILEX Oncology in December 2004.

(3)          Represents liabilitiesfor exit activities related to our acquisitions of Verigen in February 2005and Bone Care in July 2005. In 2006, we completed payment of the exitliabilities related to these acquisitions.

(4)          In June 2005, weaccrued a $9.8 million liability related to the termination of adevelopment contract we assumed in connection with the acquisition of ILEXOncology. The payment was recorded as a $6.9 million increase to goodwill,net of tax, and a $9.8 million increase to accrued expenses. In November 2005,we paid $2.1 million of this liability and in January 2006, we paidthe remaining $7.7 million.

(5)       Represents liabilitiesfor exit activities related to our acquisition of AnorMED in November 2006.We expect to pay employee related benefits related to this acquisition through2008.

 

F-97

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE C.**   MERGERS AND ACQUISITIONS (Continued)

***Pro Forma Financial Summary (Unaudited)***

Thefollowing pro forma financial summary is presented as if the acquisition ofAnorMED was completed as of the beginning of January 1, 2006 and 2005. Thepro forma combined results are not necessarily indicative of the actual resultsthat would have occurred had the acquisition been consummated on that date, orof the future operations of the combined entities. Material nonrecurringcharges related to the acquisition of AnorMED, such as IPR&D charges of$552.9 million, are included in the following pro forma financial summaryfor both periods (amounts in thousands, except per share amounts):

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Total revenues                        |       | $        | 3,201,754  |     | $          | 2,735,145 |   |
| Net income (loss)                     |       | $        | (49,739    | )        | $          | 19,035 |   |
| Net income (loss)  per share:         |       |     |       |     |       |
| Basic                                 |       | $        | (0.19      | )        | $          | 0.07 |   |
| Diluted                               |       | $        | (0.19      | )        | $          | 0.07 |   |
| Weighted average  shares outstanding: |       |     |       |     |       |
| Basic                                 |       | 261,124  |       | 254,758  |       |
| Diluted                               |       | 261,124  |       | 262,538  |       |

 

Pro forma results are notpresented for the acquisitions of Surgi B, Avigen, Equal Diagnostics, Bone Careor Verigen for the years ended December 31, 2006 or 2005 because thoseacquisitions individually, and in the aggregate, did not have a material effecton our results of operations in those periods.

**NOTE D.**   DERIVATIVEFINANCIAL INSTRUMENTS

We periodically enter intoforeign currency forward contracts, all of which have a maturity of less thanthree years. These contracts have not been designated as hedges andaccordingly, unrealized gains or losses on these contracts are reported incurrent earnings. The notional settlement value of foreign currency forwardcontracts outstanding at December 31, 2006 is $455.1 million. At December 31,2006, these contracts had a fair value of $(1.5) million, representing anunrealized loss, which has been recorded in SG&A in our consolidatedstatement of operations for the year ended December 31, 2006 and inaccrued expenses in our consolidated balance sheet as of December 31,2006. The notional settlement value of foreign currency forward contractsoutstanding at December 31, 2005 was $85.9 million. At December 31,2005, these contracts had a fair value of $0.9 million, representing anunrealized gain, which has been recorded in SG&A in our consolidatedstatement of operations for the year ended December 31, 2005 and inprepaid expenses and other current assets in our consolidated balance sheet asof December 31, 2005.

**NOTE E.   ACCOUNTSRECEIVABLE**

Our trade receivablesprimarily represent amounts due from distributors, healthcare serviceproviders, and companies and institutions engaged in research, development orproduction of pharmaceutical and biopharmaceutical products. We perform creditevaluations of our customers on an ongoing basis and generally do not requirecollateral. We state accounts receivable at fair value after reflecting certainallowances for bad debts, chargebacks and prompt pay discounts. The allowanceswere $52.6 million at December 31, 2006 and $46.1 million at December 31,2005.

F-98

----

**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTEF.   INVENTORIES**

| ** **      | ** ** | **December 31,**                | ** ** |
|-----------------|------------|--------------------------------------|------------|
| ** **      | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(Amounts in thousands)** | ** ** |
| Raw materials   |       | $                                    | 100,697    |   | $ | 76,466 |   |
| Work-in-process |       | 119,510                              |       | 90,629 |   |
| Finished goods  |       | 154,436                              |       | 130,557 |   |
| Total           |       | $                                    | 374,643    |   | $ | 297,652 |   |

 

In December 2005,we recorded charges of:

·       $16.9 millionto write off the cost of unsuccessful production runs of Cerezyme and Myozymethat occurred at our Allston, Massachusetts manufacturing plant; and

·       $11.2 million to write offexpiring Clolar inventory acquired in connection with our acquisition of ILEX Oncology.

**NOTE G.**   PROPERTY,PLANT AND EQUIPMENT

| ** **                          | ** ** | **December 31,**                | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Amounts in thousands)** | ** ** |
| Plant and  equipment                |       |                                 | $          | 734,669 |   |   | $ | 641,282 |   |
| Land and  buildings                 |       |                                 | 763,072    |   |   | 677,770 |   |
| Leasehold  improvements             |       |                                 | 239,268    |   |   | 206,243 |   |
| Furniture and  fixtures             |       |                                 | 53,689     |   |   | 41,503 |   |
| Construction-in-progress            |       |                                 | 515,307    |   |   | 308,411 |   |
|                                |       |                                 | 2,306,005  |   |   | 1,875,209 |   |
| Less accumulated  depreciation      |       |                                 | (695,412   | ) |   | (554,396 | ) |
| Property, plant and  equipment, net |       |                                 | $          | 1,610,593 |   |   | $ | 1,320,813 |   |

 

Our total depreciation expense was $122.0 millionin 2006, $103.0 million in 2005 and $95.6 million in 2004.

Ourproperty, plant and equipment includes the following amounts for assets subjectto capital leases (amounts in thousands):

| ** **                                                        | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|
| Building—Corporate  headquarters in Cambridge, Massachusetts |       |                            | $          | 130,689 |   |   |
| Less accumulated  depreciation                                    |       |                            | (28,363    | ) |   |
| Assets subject to  capital leases, net                            |       |                            | $          | 102,326 |   |   |

 

F-99

----

**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE G.**   PROPERTY, PLANT AND EQUIPMENT (Continued)

We capitalize costs we have incurred in validating manufacturingequipment and facilities for products which have reached technologicalfeasibility. As of December 31, 2006, capitalized validation costs, net ofaccumulated depreciation, were $17.2 million. 

Wehave capitalized the following amounts of interest costs incurred in financingthe construction of our manufacturing facilities (amounts in millions):

| **For the Years Ended December 31,** |
|---------------------------------------------------------------|
| **2006**                                                      | ** ** | **2005** | ** ** | **2004** |
| $9.2                                                          |   | $ | 8.9 |   | $ | 8.7 |
|                                                               |  |  |  |  |  |  |

 

The estimated cost ofcompletion for assets under construction as of December 31, 2006 is approximately$580 million.

**NOTE H.   GOODWILL ANDOTHER INTANGIBLE ASSETS**

***Goodwill***

Thefollowing tables contains the change in our goodwill during the years ended December 31,2006 and 2005 (amounts in thousands):

| ** **     | ** ** | **As of  December 31,  2005** | ** ** | **Acquisitions** | ** ** | **Adjustments** | ** ** | **Impairment** | ** ** | **As of  December 31,  2006** | ** ** |
|----------------|------------|-----------------------------------------|------------|------------------|------------|-----------------|------------|----------------|------------|-----------------------------------------|------------|
| Renal (1)      |       |                                    | $          | 304,492          |       |            |       | $              | —     |                                    |       |   | $ | 1,036 |   |   |   | $ | — |   |   |   | $ | 305,528 |   |   |
| Therapeutics   |       |                                    | 354,709    |             |       |            | —     |           |       |                                    | —     |   |   |   | — |   |   |   | 354,709 |   |   |
| Transplant (2) |       |                                    | 128,511    |             |       |            | 29,080     |           |       |                                    | —     |   |   |   | — |   |   |   | 157,591 |   |   |
| Biosurgery     |       |                                    | 7,585      |             |       |            | —     |           |       |                                    | —     |   |   |   | — |   |   |   | 7,585 |   |   |
| Genetics (3)   |       |                                    | 218,962    |             |       |            | —     |           |       |                                    | 283        |   |   |   | (219,245 | ) |   |   | — |   |   |
| Other (4)      |       |                                    | 473,308    |             |       |            | —     |           |       |                                    | 60         |   |   |   | — |   |   |   | 473,368 |   |   |
| Goodwill       |       |                                    | $          | 1,487,567        |       |            |       | $              | 29,080     |                                    |       |   | $ | 1,379 |   |   |   | $ | (219,245 | ) |   |   | $ | 1,298,781 |   |   |

 

| ** **     | ** ** | **As of  December 31,  2004** | ** ** | **Acquisitions** | ** ** | **Adjustments** | ** ** | **Impairment** | ** ** | **As of  December 31,  2005** | ** ** |
|----------------|------------|-----------------------------------------|------------|------------------|------------|-----------------|------------|----------------|------------|-----------------------------------------|------------|
| Renal          |       |                                    | $          | 76,753           |       |            |       | $              | 227,739    |                                    |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 304,492 |   |   |
| Therapeutics   |       |                                    | 354,709    |             |       |            | —     |           |       |                                    | —     |   |   |   | — |   |   |   | 354,709 |   |   |
| Transplant (5) |       |                                    | 132,111    |             |       |            | —     |           |       |                                    | (3,600     | ) |   |   | — |   |   |   | 128,511 |   |   |
| Biosurgery     |       |                                    | 7,585      |             |       |            | —     |           |       |                                    | —     |   |   |   | — |   |   |   | 7,585 |   |   |
| Genetics       |       |                                    | 218,962    |             |       |            | —     |           |       |                                    | —     |   |   |   | — |   |   |   | 218,962 |   |   |
| Other (4,6)    |       |                                    | 500,796    |             |       |            | 5,344      |           |       |                                    | (32,832    | ) |   |   | — |   |   |   | 473,308 |   |   |
| Goodwill       |       |                                    | $          | 1,290,916        |       |            |       | $              | 233,083    |                                    |       |   | $ | (36,432 | ) |   |   | $ | — |   |   |   | $ | 1,487,567 |   |   |

----

(1)          The adjustment togoodwill for Renal includes the recording of a $3.6 million reserve forreturns of short dated product sold by Bone Care prior to the date ofacquisition, offset by $2.5 million of revisions to the estimates ofliabilities related to exit activities and deferred taxes

(2)          Includes the goodwillresulting from the acquisition of AnorMED in November 2006.

F-100

----

**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE H.**   GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

(3)          Impairment for Geneticsrepresents the write off of the goodwill assigned to our Genetics reportingunit in accordance with FAS 142, “Goodwill and Other Intangible Assets.”

(4)          The adjustments to Othergoodwill primarily include foreign currency revaluation adjustments forgoodwill denominated in foreign currencies.

(5)          In 2005, includes$3.6 million of adjustments to SangStat’s goodwill related to the reversalof a tax accrual.

(6)          Includes the goodwillresulting from the acquisitions of Equal Diagnostics in July 2005 and ILEXOncology in December 2004. We recorded $32.9 million of adjustmentsto the ILEX Oncology goodwill in 2005, mainly consisting of a decrease of$40.9 million related to a revision of estimate of deferred taxes, offsetby an increase of $8.0 million primarily related to revisions of estimatesof liabilities related to exit activities, of which $6.9 million, net oftax, represents a charge to terminate a development contract.

We are required to perform impairment tests related toour goodwill under FAS 142 annually and whenever events or changes incircumstances suggest that the carrying value of an asset may not berecoverable. We completed the required annual impairment tests for our$1.5 billion of net goodwill in the third quarter of 2006 and determinedthat the $219.2 million of goodwill assigned to our Genetics reportingunit was impaired. Such goodwill was derived as a result of our acquisitions ofsubstantially all of the pathology/oncology testing assets related to thePhysician Services and Analytical Services business units of IMPATH in April 2004,Genetrix, Inc. in February 1996 and the minority share of IGLaboratories, Inc. in October 1995.

We determined the fair value of the net assets of ourGenetics reporting unit by discounting, to present value, its estimated futurecash flows. Due to the reduction of reimbursement rates for certain testofferings and increased infrastructure costs, the discounted future cash flowsof our Genetics reporting unit were negatively impacted causing the fair valueof the net assets of our Genetics reporting unit to be lower than the carryingvalue. We calculated the fair value and determined that the goodwill assignedto our Genetics reporting unit was fully impaired and we recorded a pre-taximpairment charge of $219.2 million and $69.8 million of related taxbenefits in September 2006. No additional impairment charges were requiredfor the remaining $1.3 billion of goodwill related to our other reportingunits.

In connection withrecording the charge for impairment of the goodwill assigned to our Genetics businessunit, we also tested the long-lived assets for our Genetics business unit todetermine whether any of the impairment recognition criteria in FAS 144 hadbeen met.  We determined that thelong-lived assets for our Genetics business unit were not impaired and,therefore, no impairment charge was required for those assets.

F-101

----

**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE H.**   GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

***Other Intangible Assets***

Thefollowing table contains information about our other intangible assets for theperiods presented (amounts in thousands):

| ** **               | ** ** | **As of December 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **Gross  Other  Intangible  Assets**            | ** ** | **Accumulated  Amortization**                   | ** ** | **Net  Other  Intangible  Assets** | ** ** | **Gross  Other  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Other  Intangible  Assets** | ** ** |
| Technology               |       | $                                               | 1,505,748  |                                            |       | $ | (424,650 | ) |   | $ | 1,081,098 |   | $ | 1,503,963 |   |   | $ | (307,503 | ) |   | $ | 1,196,460 |   |
| Patents (1)              |       | 194,560                                         |       |                                            | (87,063    | ) |   | 107,497 |   | 183,360 |   |   | (71,393 | ) |   | 111,967 |   |
| Trademarks               |       | 60,227                                          |       |                                            | (31,439    | ) |   | 28,788 |   | 60,227 |   |   | (26,080 | ) |   | 34,147 |   |
| License fees (2)         |       | 77,807                                          |       |                                            | (20,597    | ) |   | 57,210 |   | 44,777 |   |   | (16,206 | ) |   | 28,571 |   |
| Distribution  rights (3) |       | 260,073                                         |       |                                            | (85,543    | ) |   | 174,530 |   | 195,299 |   |   | (43,108 | ) |   | 152,191 |   |
| Customer lists (4)       |       | 90,783                                          |       |                                            | (48,760    | ) |   | 42,023 |   | 108,083 |   |   | (41,861 | ) |   | 66,222 |   |
| Other                    |       | 2,045                                           |       |                                            | (1,153     | ) |   | 892 |   | 2,078 |   |   | (742 | ) |   | 1,336 |   |
| Total                    |       | $                                               | 2,191,243  |                                            |       | $ | (699,205 | ) |   | $ | 1,492,038 |   | $ | 2,097,787 |   |   | $ | (506,893 | ) |   | $ | 1,590,894 |   |

----

(1)          Includes an additional$11.2 million of intangible assets resulting from obtaining an exclusivelicense to a Hectorol-related patent from Wisconsin Alumni ResearchFoundation in June 2006, which provides us with effective control of thepatent.

(2)          Includes additions in2006 to licenses valued at: $6.5 million resulting from our acquisition ofall of the rights to GlucaMesh and GlucaTex products used in the surgicalrepair of hernias from the former shareholders of Surgi.B in March 2006,$3.5 million resulting from our acquisition of AnorMED and $22.2 million formilestone payments for the development of Myozyme.

(3)          Includes an additional$58.7 million of intangible assets resulting from additional payments madeor accrued in 2006 in connection with the reacquisition of the Synvisc salesand marketing rights in several countries from Wyeth in January 2005.

(4)          Reflects the write offof $17.3 million of fully amortized customer lists, related to ouracquisition of SangStat in September 2003, during the first quarter of 2006.

All of our otherintangible assets are amortized over their estimated useful lives. Totalamortization expense for our other intangible assets was:

·       $209.4 millionfor the year ended December 31, 2006;

·       $181.6 millionfor the year ended December 31, 2005; and

·       $109.5 millionfor the year ended December 31, 2004.

F-102

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE H.**   GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

The estimated futureamortization expense for other intangible assets for the five succeeding fiscalyears and thereafter is as follows (amounts in thousands):

| **Year Ended December 31,** | ** ** | ** ** | ** ** | **Estimated  Amortization  Expense(1)** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| 2007                                       |       |       | $          | 199,854                                 |       |   |
| 2008                                       |       |       | 208,005    |                                    |       |
| 2009                                       |       |       | 215,373    |                                    |       |
| 2010                                       |       |       | 228,385    |                                    |       |
| 2011                                       |       |       | 236,822    |                                    |       |
| Thereafter                                 |       |       | 613,161    |                                    |       |

----

(1)          Includes estimatedfuture amortization expense for the Synvisc distribution rights based on theforecasted respective future sales of Synvisc and the resulting futurecontingent payments we will be required to make to Wyeth, and for the Myozyme patentand technology rights pursuant to a license agreement with Synpac based onforecasted future sales of Myozyme and the milestone payments we will berequired to make to Synpac related to regulatory approvals. These contingentpayments will be recorded as intangible assets when the payments are accrued.Estimated future amoritization expense also includes estimated amortization forother arrangements involving contingent payments.

F-103

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE I.   INVESTMENTS IN MARKETABLE SECURITIES ANDSTRATEGIC EQUITY INVESTMENTS**

**Marketable Securities (amounts in thousands):**

| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **Cost**              | ** ** | **Market  Value** | ** ** | **Cost** | ** ** | **Market  Value** | ** ** |
| Cash equivalents (1):                                     |       |                  |       |   |   |   |   |   |   |
| Corporate notes                                           |       | $                     | —     |   | $ | — |   | $ | 45,816 |   | $ | 45,816 |   |
| Money market funds                                        |       | 443,477               |       | 443,477 |   | 34,069 |   | 34,069 |   |
|                                                      |       | 443,477               |       | 443,477 |   | 79,885 |   | 79,885 |   |
| Short-term investments:                                   |       |                  |       |   |   |   |   |   |   |
| Corporate notes                                           |       | 65,932                |       | 65,607 |   | 108,539 |   | 108,121 |   |
| U.S. Government agencies                                  |       | 21,347                |       | 21,174 |   | 41,256 |   | 40,856 |   |
| Non U.S. Government agencies                              |       | —                |       | — |   | 8,011 |   | 7,864 |   |
| U.S. Treasury notes                                       |       | 33,287                |       | 33,113 |   | 37,519 |   | 37,105 |   |
|                                                      |       | 120,566               |       | 119,894 |   | 195,325 |   | 193,946 |   |
| Long-term investments:                                    |       |                  |       |   |   |   |   |   |   |
| Corporate notes                                           |       | 355,008               |       | 353,497 |   | 294,738 |   | 291,090 |   |
| U.S. Government agencies                                  |       | 189,372               |       | 188,148 |   | 187,713 |   | 185,256 |   |
| Fixed income fund                                         |       | 252                   |       | 250 |   | 254 |   | 244 |   |
| U.S. Treasury notes                                       |       | 132,192               |       | 131,645 |   | 127,569 |   | 126,606 |   |
|                                                      |       | 676,824               |       | 673,540 |   | 610,274 |   | 603,196 |   |
| Total cash  equivalents, short- and long-term investments |       | $                     | 1,240,867  |   | $ | 1,236,911 |   | $ | 885,484 |   | $ | 877,027 |   |
| Investments in  equity securities                         |       | $                     | 45,766     |   | $ | 66,563 |   | $ | 104,934 |   | $ | 135,930 |   |

----

(1)          Cash equivalents areincluded as part of cash and cash equivalents on our consolidated balancesheets.

Thefollowing table contains information regarding the range of contractualmaturities of our investments in debt securities (amounts in thousands):

| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **          | ** ** | **Cost**              | ** ** | **Market  Value** | ** ** | **Cost** | ** ** | **Market  Value** | ** ** |
| Within  1 year |       | $                     | 564,043    |   | $ | 563,371 |   | $ | 275,210 |   | $ | 273,831 |   |
| 1-2 years      |       | 157,682               |       | 156,944 |   | 211,832 |   | 209,918 |   |
| 2-10 years     |       | 519,142               |       | 516,596 |   | 398,442 |   | 393,278 |   |
|                |       | $                     | 1,240,867  |   | $ | 1,236,911 |   | $ | 885,484 |   | $ | 877,027 |   |

 

F-104

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE I.**   INVESTMENTS IN MARKETABLE SECURITIES AND STRATEGIC EQUITYINVESTMENTS (Continued)

**StrategicInvestments in Equity Securities**

Thefollowing table shows the strategic investments in equity securities ofunconsolidated entities as of December 31, 2006 and 2005 (amounts inthousands):

| ** **                            | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Adjusted  Cost**              | ** ** | **Market  Value**               | ** ** | **Unrealized  Gain/(Loss)** | ** ** | **Adjusted  Cost** | ** ** | **Market  Value** | ** ** | **Unrealized  Gain/(Loss)** | ** ** |
| **Publicily-held companies (1):**     |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ABIOMED, Inc.                    |       | $                               | 12,185     |                            | $          | 32,539 |   |   | $ | 20,354 |   |   | $ | 12,185 |   | $ | 21,323 |   |   | $ | 9,138 |   |   |
| GTC Biotherapeutics, Inc.        |       | 4,910                           |       | 4,618                           |       |   | (292 | ) |   | 5,811 |   | 8,077 |   |   | 2,266 |   |   |
| Dyax Corp.                            |       | 1,096                           |       | 1,727                           |       |   | 631 |   |   | 1,096 |   | 3,003 |   |   | 1,907 |   |   |
| BioMarin Pharmeceutical Inc. (2) |       | —                          |       | —                          |       |   | — |   |   | 18,000 |   | 22,666 |   |   | 4,666 |   |   |
| Cambridge Antibody Technology plc (3) |       | —                          |       | —                          |       |   | — |   |   | 41,012 |   | 55,519 |   |   | 14,507 |   |   |
| Other (4)                             |       | 2,455                           |       | 2,559                           |       |   | 104 |   |   | 5,000 |   | 3,512 |   |   | (1,488 | ) |   |
| Total publicly-held companies         |       | 20,646                          |       | 41,443                          |       |   | 20,797 |   |   | 83,104 |   | 114,100 |   |   | 30,996 |   |   |
| **Private  equity funds (5)**         |       | 16,732                          |       | 16,732                          |       |   | — |   |   | 13,020 |   | 13,020 |   |   | — |   |   |
| **Privately-held  companies (4,6,7)** |       | 8,388                           |       | 8,388                           |       |   | — |   |   | 8,810 |   | 8,810 |   |   | — |   |   |
| Total                                 |       | $                               | 45,766     |                            | $          | 66,563 |   |   | $ | 20,797 |   |   | $ | 104,934 |   | $ | 135,930 |   |   | $ | 30,996 |   |   |

----

(1)          Marketableequity securities that have readily determinable market values are stated atmarket value. We record temporary unrealized gains and losses related to theseinvestments in other comprehensive income (loss).

(2)   In January 2006, we recorded a $6.4 million gain inconnection with the sale of our entire investment of 2.1 million shares of thecommon stock of BioMarin.

(3)          Wehave a strategic alliance with CAT, a UK-based biotechnology company for thedevelopment and commercialization of human monoclonal antibodies directedagainst transforming growth factor (TGF)-beta. Prior to May 2006, we owneda total of 4.6 million ordinary shares of CAT. In May 2006, we recorded a$7.0 million gain on the sale of a portion of our investment in CAT. In June 2006,in connection with the acquisition of CAT by AstraZeneca, we recorded a$62.4 million gain on the tender of our remaining investment in CAT, whichbecame unconditional on June 21, 2006.

(4)          Wereview the carrying value of each of our strategic investments in equitysecurities on a quarterly basis for potential impairment. Gains (losses) oninvestments in equity securities, net includes charges for impaired investmentsof $5.4 million in 2006, including $2.5 million to write-off ourinvestment in RenaMed and $2.2 million to write down our investment inViaCell because we considered the decline in value of these investments to beother than temporary.

(5)          Ourinvestments in private equity funds are stated at adjusted  cost basis, which approximates market value.

(6)          Equitysecurities without readily determinable market values and for which we do notexercise significant influence are stated at cost and are periodically reviewedfor impairment.

F-105

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE I.**   INVESTMENTS IN MARKETABLE SECURITIES AND STRATEGIC EQUITYINVESTMENTS (Continued)

(7)          InApril 2005, we sold our entire investment in the common stock ofTheravance for $4.5 million in cash. Our investment in Theravance had azero cost basis and, as a result, we recorded a gain of $4.5 million in April 2005related to this sale.

**Unrealized Gainsand Losses on Marketable Securities and Investments in Equity Securities**

Werecord unrealized holding gains and losses, net of tax, related to ourinvestments in marketable securities and strategic investments, to the extentthey are determined to be temporary, in stockholders’ equity. The followingtable sets forth the gross amounts recorded:

| ** **                 | ** ** | **December 31,** | ** **   |
|----------------------------|------------|-----------------------|--------------|
| ** **                 | ** ** | **2006**              | ** **   | **2005** | ** ** |
| Unrealized  holding gains  |       | $                     | 21.9 million |   | $ | 32.7 million |   |
| Unrealized holding  losses |       | $                     | 5.1 million  |   | $ | 10.1 million |   |

 

We also collaborate withor provide services to certain of the companies in which we hold or have heldstrategic equity investments, including CAT, Dyax, GTC, RenaMed, BioMarin andMacroGenics. Our relationships with Dyax, GTC and RenaMed are described below.Our relationships with BioMarin and MacroGenics are described in Note J.,“Equity Method Investments.”

**Dyax Corp.**

***Agreements with Dyax Corp.***

In October 1998, we entered into a collaborationagreement with Dyax to develop and commercialize DX-88, one of Dyax’sproprietary compounds for the treatment of chronic inflammatory diseases. InMay 2002, we restructured our collaboration agreement with Dyax. In 2003, weacquired a 49.99% interest in Dyax-Genzyme LLC, formerly known as KallikreinLLC, a joint venture with Dyax for the development of DX-88 for hereditaryangioedema, or HAE, and other chronic inflammatory diseases.  Under the terms of the collaborationagreement and related manufacturing agreement, both companies shareddevelopment costs of DX-88, except for the first $14.5 million of manufacturingand validation costs for DX-88 active pharmaceutical ingredient, which were theresponsibility of Dyax.  As a result ofour application of FIN 46, we have consolidated the results of Dyax-GenzymeLLC. Our consolidated balance sheet as of December 31, 2006 includesassets related to Dyax-Genzyme LLC, which are not significant and substantiallyall of which are lab equipment net of their associated accumulateddepreciation. We have recorded Dyax’s portion of this joint venture’s losses asminority interest in our consolidated statements of operations.  

F-106

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE I.**   INVESTMENTS IN MARKETABLE SECURITIES AND STRATEGIC EQUITY INVESTMENTS (Continued)

In February 2007, we agreed with Dyax to terminate ourparticipation and interest in Dyax-Genzyme LLC effective February 20,2007.  In connection with thistermination, we made a capital contribution of approximately $17 million incash to Dyax-Genzyme LLC and Dyax purchased our interest in the joint venturefor 4.4 million shares of Dyax common stock, valued at $16.9 million,based on the closing price of Dyax common stock on February 23, 2007.  Dyax now owns all of the assets of the jointventure, including worldwide rights to develop and commercialize DX-88.  Pursuant to the termination agreement, weagreed to:

·       a5 year standstill period during which we will not acquire any additional sharesof Dyax;

·       notenter into any future licensing or collaboration arrangements for theprevention and or treatment of hereditary, acquired or drug-induced angioedemafor 2 years; and

·       negotiate in good faith atransitional services agreement for us to provide certain services to Dyax.

***Note Receivable from Dyax Corp.***

In May 2002, we extended to Dyax a $7.0 million lineof credit. Dyax issued a senior secured promissory note in the principal amountof $7.0 million to us under which it can request periodic advances of not lessthan $250,000 in principal, subject to certain conditions. Advances under thisnote were due, together with any accrued but unpaid interest, in May 2005. InMay 2005, Dyax exercised its right to extend the maturity of the note from May2005 to May 2007.

In August 2006, we amended our $7.0 million securedpromissory note receivable from Dyax to extend the maturity date from May 2007to May 2010, eliminate the existing financial covenants and replace theoriginal collateral on the note with a letter of credit from a major bank for$7.0 million plus 90 days of interest at the Prime Rate plus 2%. As of December31, 2006, $7.3 million of principal and accrued interest receivable remains dueto us from Dyax under this note, which we have recorded as a note receivable-relatedparty in our consolidated balance sheet. The termination of our participationand interest in the joint venture with Dyax has no effect on the notereceivable.

We considered Dyax to be a related party as ofDecember 31, 2006 because the chairman and chief executive officer of Dyax wasa member of our board of directors and Dyax-Genzyme LLC was operational duringthe periods presented. As of December 31, 2006, we held approximately 1% of theoutstanding shares of Dyax common stock and as of February 28, 2007, as aresult of the additional 4.4 million shares of Dyax common stock we received inconnection with the termination of our participation and interest in theDyax-Genzyme LLC, our ownership interest in Dyax increased to approximately 11%.

F-107

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE I.   INVESTMENTS IN MARKETABLE SECURITIES ANDSTRATEGIC EQUITY INVESTMENTS (Continued)**

**GTC Biotherapeutics**

As of December 31,2006, we hold approximately 6% of the outstanding shares of GTC common stock. Weprovide GTC with certain research and development services and sublease to GTClaboratory and research space. During 2006, amounts received from GTC or owedto us by GTC under these agreements were not significant.

**RenaMedCollaboration**

In June 2005, we madea $2.5 million equity investment in a private financing completed by RenaMed,formerly known as Nephros Therapeutics, Inc. In September 2005, weentered into a strategic collaboration with RenaMed to develop andcommercialize RenaMed’s Bio-Replacement TherapyTM for the treatment of acute renal failure. Thejoint development and commercialization agreement called for us to share costsand profits of the collaboration equally. Through the third quarter of 2006, wecontributed a total of $23.5 million of funding to support the next stageof clinical development. In the fourth quarter of 2006, RenaMed terminated itsphase 2 clinical trial evaluating the safety and efficacy of Bio-ReplacementTherapyTM for the treatment of acute renal failure afteran independent data monitoring committee recommended that the trial should behalted. As a result of the termination of this clinical trial, we recorded acharge of $2.5 million in December 2006 to write off our entire investmentin RenaMed because we consider the decline in this investment to be other thantemporary.****In February 2007,we terminated the Collaboration and License Agreement with RenaMed.

**NOTE J.   EQUITYMETHOD INVESTMENTS**

Our equity method investments are included in othernoncurrent assets in our consolidated balance sheet and totaled$34.4 million at December 31, 2006 and $39.2 million at December 31,2005.

The following tables describe:

·       ourportion of the net income (loss) of each equity method investment for theperiods presented, which we have recorded as income (charges) to equity inincome (loss) of equity method investments in our consolidated statements ofoperations; and

·       totalnet income (loss) of each equity method investment for the periods presented.

| ** **                             | ** ** | **Our Portion of the Net  Income (Loss) of Our  Equity Method  Investments** | ** ** | **Total Income (Loss) of  Our Equity Method  Investments** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **Equity Method Investment** | ** ** | ** **                                                                                                           | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(Amounts in millions)**                                                                                  | ** ** | **(Amounts in millions)**                                                 | ** ** |
| BioMarin/Genzyme  LLC                  |       | $                                                                                                                    | 18.5       |                                                                                | $          | 7.1 |   | $ | (9.7 | ) | $ | 37.1 |   | $ | 14.0 |   | $ | (19.3 | ) |
| MG  Biotherapeutics LLC                |       | (1.8                                                                                                                 | )          | (4.0                                                                                | )          | (2.5 | ) | (3.6 | ) | (7.9 | ) | (5.0 | ) |
| Other                                  |       | (1.0                                                                                                                 | )          | (2.9                                                                                | )          | (3.4 | ) | (13.6 | ) | (22.3 | ) | (18.7 | ) |
| Totals                                 |       | $                                                                                                                    | 15.7       |                                                                                | $          | 0.2 |   | $ | (15.6 | ) | $ | 19.9 |   | $ | (16.2 | ) | $ | (43.0 | ) |
|                                        |            |                                                                                                                      |            |                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-108

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE J.**   EQUITY METHOD INVESTMENTS (Continued)

Condensed financialinformation for our equity method investees is summarized below in aggregate:

| ** **          | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------|------------|---------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **          | ** ** | **(Amounts in thousands)**                          | ** ** |
| Revenue             |       | $                                                             | 97,060     |   | $ | 76,698 |   | $ | 42,583 |   |
| Gross profit        |       | 72,642                                                        |       | 52,185 |   | 27,630 |   |
| Operating  expenses |       | (53,931                                                       | )          | (62,361 | ) | (71,321 | ) |
| Net income (loss)   |       | 19,865                                                        |       | (16,251 | ) | (43,016 | ) |
|                     |            |                                                               |            |  |  |  |  |  |  |  |

 

 

| ** **             | ** ** | **December 31,**                | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(Amounts in thousands)** | ** ** |
| Current assets         |       | $                                    | 96,727     |   | $ | 103,793 |   |
| Noncurrent assets      |       | 2,297                                |       | 3,779 |   |
| Current  liabilities   |       | 16,245                               |       | 12,441 |   |
| Noncurrent liabilities |       | 7,878                                |       | 647 |   |
|                        |            |                                      |            |  |  |  |  |

 

The following describesour investments in BioMarin/Genzyme LLC and MG Biotherapeutics LLC. Ourinvestments in Peptimmune and THP are not significant.

**BioMarin/GenzymeLLC**

In September 1998, we and BioMarin formed a jointventure, BioMarin/Genzyme LLC, to develop and commercialize Aldurazyme, arecombinant form of the human enzyme alpha-L-iduronidase, used to treat an LSDknown as MPS I. BioMarin/Genzyme LLC is owned 50% by BioMarin and one of itswholly owned subsidiaries, which we refer to collectively as the BioMarinCompanies, and 50% by us. In connection with the formation of BioMarin/GenzymeLLC, we, the BioMarin Companies and BioMarin/Genzyme LLC entered into acollaboration agreement under which we and the BioMarin Companies granted toBioMarin/Genzyme LLC a worldwide, exclusive, irrevocable, royalty-free rightand license or sublicense to develop, manufacture and market Aldurazyme for thetreatment of MPS I and other alpha-L-iduronidase deficiencies. All program-relatedcosts for BioMarin/Genzyme LLC are equally funded by BioMarin, on behalf of theBioMarin Companies, and us. We and BioMarin are required to make monthlycapital contributions to BioMarin/Genzyme LLC to fund budgeted operating costs.If either BioMarin or Genzyme fails to make two or more of the monthly capitalcontributions, and the other party does not exercise its right to terminate thecollaboration agreement or compel performance of the funding obligation, thedefaulting party’s (or, in the case of default by BioMarin, the BioMarinCompanies’) percentage interest in BioMarin/Genzyme LLC and future fundingresponsibility will be adjusted proportionately. BioMarin and Genzyme did notmake any capital contributions to BioMarin/Genzyme LLC in 2006 and 2005 becauseBioMarin/Genzyme LLC had sufficient cash to meet its financial obligations.

On April 30, 2003, the FDA granted marketingapproval for Aldurazyme as an enzyme replacement therapy for patients with theHurler and Hurler-Scheie forms of MPS I, and Scheie patients withmoderate to severe symptoms. Aldurazyme has been granted orphan drug status inthe United States, which generally provides seven years of market exclusivity.On June 11, 2003, the European Commission granted 

F-109

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE J.**   EQUITY METHOD INVESTMENTS (Continued)

marketing approval forAldurazyme to treat the non-neurological manifestations of MPS I in patientswith a confirmed diagnosis of the disease. Aldurazyme has been granted orphandrug status in the European Union, which generally provides ten years of marketexclusivity. In October 2006, Japan’s Health, Labor and Welfare Ministrygranted marketing approval for Aldurazyme, the first specific treatmentapproved in Japan for patients with MPS I.

We are commercializing Aldurazyme on behalf ofBioMarin/Genzyme LLC in the United States, Canada, the European Union, LatinAmerica and the Asia Pacific regions. We continue to launch Aldurazyme in theseregions on a country-by-country basis as pricing and reimbursement approvalsare obtained. Aldurazyme is manufactured at BioMarin’s facility in Novato,California and is sent to either our manufacturing facility in Allston,Massachusetts or to a third-party facility for the final fill-finishprocess.

Our portion of the netincome (loss) of BioMarin/Genzyme LLC is included in equity in income (loss) ofequity method investments in our consolidated statements of operations.

**MG BiotherapeuticsLLC**

In June 2004, weentered into a collaboration with Medtronic for the development of newtreatments for heart disease. One aspect of this collaboration involved theformation of MG Biotherapeutics LLC. In June 2004, we made an initialcapital contribution of $10.0 million to MG Biotherapeutics LLC. Ourcurrent investment balance in MG Biotherapeutics LLC is included in othernoncurrent assets in our consolidated balance sheets as of December 31,2006 and 2005.

**NOTEK.   ACCRUED EXPENSES**

| ** **     | ** ** | **December 31,**                | ** ** |
|----------------|------------|--------------------------------------|------------|
| ** **     | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(Amounts in thousands)** | ** ** |
| Compensation   |       | $169,350                             |       | $ | 147,089 |   |
| Rebates        |       | 62,166                               |       | 50,304 |   |
| Bank overdraft |       | 25,966                               |       | 49,035 |   |
| Other          |       | 219,960                              |       | 183,604 |   |
| Total          |       | $477,442                             |       | $ | 430,032 |   |

 

F-110

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE L.   LONG-TERMDEBT AND LEASES**

**Long-Term Debt, Capital Lease Obligations and Convertible Debt**

Ourlong-term debt capital lease obligations and convertible debt consist of thefollowing (amounts in thousands):

| ** **                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| 1.25% convertible  senior notes due December 2023                                     |       | $                     | 690,000    |   | $ | 690,000 |   |
| Revolving credit  facility maturing in December 2006                                  |       | —                |       | — |   |
| Revolving credit  facility maturing in July 2011                                      |       | —                |       | — |   |
| Notes payable                                                                              |       | 8,958                 |       | 8,693 |   |
| Capital lease  obligations                                                                 |       | 117,071               |       | 121,420 |   |
| Long-term debt, capital  lease obligations and convertible debt, including current portion |       | 816,029               |       | 820,113 |   |
| Less current  portion                                                                      |       | (6,226                | )          | (4,461 | ) |
| Noncurrent portion                                                                         |       | $                     | 809,803    |   | $ | 815,652 |   |

 

Overthe next five years and thereafter, we will be required to repay the followingprincipal amounts of our long-term debt (excluding capital leases) (amounts inmillions):

| **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **After 2011** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------|------------|
| $1.0     |       | $        | 691.0      |     | $          | 1.1      |       | $        | 1.1        |                | $          | 1.1 |   |   | $ | 3.6 |   |   |
|          |            |          |            |          |            |          |            |          |            |                     |            |  |  |  |  |  |  |  |

 

**1.25% ConvertibleSenior Notes**

On December 9, 2003, we completed the privateplacement of $690.0 million in principal of 1.25% convertible senior notesdue December 1, 2023. After deducting offering costs of$17.0 million, net proceeds from the offering were approximately$673.0 million. We pay interest on these notes on June 1 and December 1each year.

The notes areconvertible into shares of Genzyme Stock at an initial conversion rate, subjectto adjustment, of 14.0366 shares per $1,000 principal amount of notes(representing an initial conversion price of approximately $71.24 per share) inthe following circumstances:

·       ifthe closing sale price of Genzyme Stock for at least 20 consecutive tradingdays in the 30 consecutive trading day period ending on the trading dayimmediately preceding the day the notes are surrendered for conversion exceeds120% of the conversion price in effect on that 30th trading day;

·       duringthe five consecutive trading day period immediately following any 10consecutive trading day period (the “Note Measurement Period”), if the tradingprice per $1,000 principal amount of notes on each trading day during the NoteMeasurement Period was less than 95% of the conversion value of the notes onsuch trading day, unless the notes are surrendered after December 1, 2018and the closing sale price of Genzyme Stock on the trading day immediatelypreceding the day the notes are surrendered is greater than 100% but equal to orless than 120% of the conversion price then in effect;

·       ifspecified corporate transactions have occurred, as provided in the indentureand terms of the note; or

F-111

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE L.**   LONG-TERM DEBT AND LEASES (Continued)

·       ifwe redeem the notes. We have the right to redeem the notes for cash, in wholeor in part, at our sole option on and after December 1, 2008.

Furthermore, on each of December 1, 2008,December 1, 2013 and December 1, 2018, holders of the notes mayrequire us to purchase all or a portion of their notes at a purchase priceequal to 100% of the principal amount of notes to be purchased, plus anyaccrued and unpaid interest to, but excluding, the purchase date. We may paythe purchase price, solely at our option, in cash, shares of Genzyme Stock or acombination of cash and shares of Genzyme Stock, provided that we will pay anyaccrued and unpaid interest in cash. The shares of Genzyme Stock will be valuedat 100% of the average closing sale price of Genzyme Stock for the 10 tradingdays immediately preceding, and including, the third business day immediatelypreceding the purchase date.

Interest expense relatedto these notes was $11.9 million in 2006 and 2005. These amounts include$3.2 million in 2006 and 2005 for amortization of debt offering costs. Thefair value of these notes was $716.8 million at December 31, 2006 and$781.0 million at December 31, 2005.

**Revolving CreditFacility**

InDecember 2003, we entered into our 2003 revolving credit facility. OnJuly 14, 2006, we terminated our 2003 revolving credit facility andreplaced it with our 2006 revolving credit facility. The proceeds of loansunder our 2006 revolving credit facility can be used to finance working capitalneeds and for general corporate purposes. Our 2006 revolving credit facilitymay be increased at any time by up to an additional $350.0 million in theaggregate, as long as no default or event of default has occurred or iscontinuing and certain other customary conditions are satisfied. Borrowingsunder our 2006 revolving credit facility will bear interest as follows:

·       revolvingloans denominated in U.S. dollars or a foreign currency (other than Euros) bearinterest at a variable rate equal to LIBOR for loans in U.S. dollars and acomparable index rate for foreign currency loans, plus an applicable margin;

·       revolvingloans denominated in Euros bear interest at a variable rate equal to theEURIBOR Rate plus an applicable margin;

·       atour option, U.S. dollar swingline loans (demand loans requiring only one day ofadvance notice, which grant us access to up to $20.0 million of our 2006revolving credit facility in order to cover possible working capitalshortfalls) bear interest at the greater of the Prime Rate and the FederalFunds Effective Rate plus one half of one percent; and

·       multicurrencyswingline loans bear interest at a rate equal to the average rate at whichovernight deposits in the currency in which such swingline loan is denominated,and approximately equal in principal amount to such swingline loan, areobtainable by the swingline lender for such swingline loan in the interbankmarket plus an applicable margin.

The applicable margins for LIBOR and multicurrencyrevolving loans range from 0.180% to 0.675% per annum, and for multicurrencyswingline loans from 0.430% to 0.925% per annum, in each case determined by ourcredit ratings. In addition, we are required to pay a facility fee of between 7to 20 basis points based on the aggregate commitments under our 2006 revolvingcredit facility, and in certain circumstances a utilization fee of 10 basis points.

F-112

----

**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE L.**   LONG-TERM DEBT AND LEASES (Continued)

The terms of our 2006 revolving credit facilityinclude various covenants, including financial covenants that require us tomeet minimum interest coverage ratios and maximum leverage ratios. As of December 31,2006 we were in compliance with these covenants.

As of December 31,2006, no amounts were outstanding under our 2006 revolving credit facility.

**Notes Payable**

We assumed a $10.0 millionnote payable in July 2005 in connection with our acquisition of Equal Diagnostics.This note bears interest at 3.86% and is payable to three former shareholdersof Equal Diagnostics over eight years in equal annual installments of $1.3million.

**Capital Leases**

We have non-cancelable capital lease obligationsrelated to certain machinery and equipment, administrative offices and ourcorporate headquarters.

We had a capital lease obligation related to ouradministrative offices in Waltham, Massachusetts that required us to makeinterest-only lease payments of approximately $2.0 million per yearthrough October 31, 2005, the end of the lease term. On October 31,2005, we exercised our option to purchase the building and improvements for apurchase price equal to the total amount funded by the lessor of$25.0 million, plus $0.5 million of accrued interest and aninsignificant amount of other closing costs.

Our capital lease obligation related to our corporateheadquarters in Cambridge, Massachusetts, which we began to occupy in November 2003,requires us to make monthly payments of $1.3 million, which will beadjusted to $1.6 million in August 2013. We have recorded the valueof the building and related obligations of $130.7 million in ourconsolidated balance sheet. The term of the lease is fifteen years and may beextended at our option for two successive ten-year periods.

Over the next five yearsand thereafter, we will be required to pay the following amounts under ournon-cancelable capital leases (amounts in millions):

| 2007                     |   | $     | 15.6   |   |
|--------------------------|--------|-------|--------|--------|
| 2008                     |   | 15.5  |   |
| 2009                     |   | 15.5  |   |
| 2010                     |   | 15.4  |   |
| 2011                     |   | 15.4  |   |
| Thereafter               |   | 118.3 |   |
| Total lease payments     |   | 195.7 |   |
| Less: interest           |   | (78.6 | )      |
| Total principal payments |   | 117.1 |   |
| Less current  portion    |   | (5.0  | )      |
| Total                    |   | $     | 112.1  |   |

 

F-113

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE L.**   LONG-TERM DEBT AND LEASES (Continued)

**Operating Leases**

Welease facilities and personal property under non-cancelable operating leaseswith terms in excess of one year. Our total expense under operating leases was(amounts in millions):

| **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|
| **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| $60.9                                                         |       | $ | 49.5 |   | $ | 49.0 |   |
|                                                               |            |  |  |  |  |  |  |

 

Over the next five yearsand thereafter, we will be required to pay the following amounts undernon-cancelable operating leases (amounts in millions):

| **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **After 2011** | ** ** | **Total** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------|------------|-----------|------------|
| $53.5    |       | $        | 45.5       |     | $          | 34.4     |       | $        | 26.0       |                | $          | 21.7      |       |   | $ | 127.5 |   |   | $ | 308.6 |   |
|          |            |          |            |          |            |          |            |          |            |                     |            |           |            |  |  |  |  |  |  |  |  |

 

**NOTE M.   STOCKHOLDERS’EQUITY**

***Preferred Stock***

| ** **                                                | ** ** | **At December 31, 2006** | ** ** | **At December 31, 2005** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Series**                                                | ** ** | ** **                              | ** ** | **Authorized**                          | ** ** | **Issued** | ** ** | **Outstanding** | ** ** | **Authorized** | ** ** | **Issued** | ** ** | **Outstanding** | ** ** |
| Series A  Junior Participating, $0.01 par value |       | 3,000,000                               |       |                                    | —     |   |   |   | — |   |   | 3,000,000 |   |   | — |   |   |   | — |   |   |
| Undesignated                                              |       | 7,000,000                               |       |                                    | —     |   |   |   | — |   |   | 7,000,000 |   |   | — |   |   |   | — |   |   |
|                                                      |       | 10,000,000                              |       |                                    | —     |   |   |   | — |   |   | 10,000,000 |   |   | — |   |   |   | — |   |   |
|                                                           |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our charter permits us toissue shares of preferred stock at any time in one or more series. Our board ofdirectors will establish the preferences, voting powers, qualifications, andspecial or relative rights or privileges of any series of preferred stockbefore it is issued.

***Common Stock***

Thefollowing table describes the number of authorized and outstanding shares ofour common stock at December 31, 2006 and 2005:

| ** **                      | ** ** | ** **  | ** ** | **Outstanding at  December 31,** | ** ** |
|---------------------------------|------------|-------------|------------|--------------------------------------------|------------|
| **Series**                      | ** ** | ** **  | ** ** | **Authorized**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Genzyme Stock,  $0.01 par value |       | 690,000,000 |       | 263,026,163                                |       | 259,151,461 |   |
|                                 |            |             |            |                                            |            |  |  |  |  |

 

***Stock Rights***

Under our shareholder rights plan, each outstandingshare of Genzyme Stock also represents one preferred stock purchase right. Whenthe stock purchase rights become exercisable, the holders of Genzyme Stock willbe entitled to purchase one two-hundredth of a newly issued share of Series APreferred Stock, $0.01 par value per share, for $150.00.

F-114

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY (Continued)

Each share of Series A Preferred Stock will beentitled to a minimum preferential quarterly dividend payment of $1 pershare, but will be entitled to an aggregate dividend of 100 times the cashdividend declared per share of Genzyme Stock. Each share of Series APreferred Stock will have 100 votes and will vote together with the GenzymeStock. In the event of any merger, consolidation or other transaction in whichGenzyme Stock is exchanged, each share of Series A Preferred Stock will beentitled to receive 100 times the amount received per share of GenzymeStock.

A stock purchase right becomes exercisable either:

·       tendays after our board of directors announces that a third party has become theowner of 15% or more of the total voting power of our outstanding common stockcombined; or

·       ten business days after athird party announces or initiates a tender or exchange offer that would resultin that party owning 15% or more of the total voting power of our outstandingcommon stock combined.

In either case, the boardof directors can extend the ten-day delay. These stock purchase rights expirein March 2009.

***Directors’ Deferred Compensation Plan***

Each member of our board of directors who is not alsoone of our employees may defer receipt of all or a portion of the cashcompensation payable to him or her as a director and receive either cash orstock in the future. Under this plan, the director may defer his or hercompensation until his or her services as a director cease or until anotherdate specified by the director.

Under a deferral agreement, a participant indicatesthe percentage of deferred compensation to allocate to cash and stock, uponwhich a cash deferral account and a stock deferral account are established. Thecash account bears interest at the rate paid on 90-day Treasury billswith interest payable quarterly. The stock account is for amounts invested inhypothetical shares of Genzyme Stock. These amounts are converted into sharesquarterly at the average closing price of the stock for all trading days duringthe quarter.

Distributions are paid ina lump sum or in annual installments for up to five years. Payments begin theyear following a director’s termination of service or, subject to certainrestrictions, in a year elected by the participant. As of December 31,2006, three of the eight eligible directors had established accounts under thisplan, and two of these three directors are currently deferring theircompensation, however, the amounts are not significant. We have reserved105,962 shares of Genzyme Stock to cover distributions credited to stockaccounts under the plan. We had not made any stock distributions under thisplan as of December 31, 2006. As of December 31, 2006, we have madecash distributions totaling $69,492 to one director under the terms of hisdeferral agreement.

F-115

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY(Continued)

***Stock-Based Compensation***

**Equity Plans**

The purpose of our equityplans is to attract, retain and motivate our key employees, consultants anddirectors. Options granted under these plans can be either incentive stockoptions (ISO) or nonstatutory stock options (NSO), as specified in theindividual plans. Shares issued as a result of stock option exercises arefunded through the issuance of new shares as opposed to treasury shares. Thefollowing table contains information about our equity plans:

|                                             | ** ** | ** **                                         | ** ** | ** **          | ** ** | **As of December 31, 2006** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|---------------------|------------|-------------------------------------------------|------------|
| **Plan Name**                          | ** ** | ** **                                         | ** ** | **Group  Eligible** | ** ** | **Type of  Option  Granted**               | ** ** | **Options  Reserved for  Issuance** | ** ** | **Options  Outstanding** | ** ** | **Options  Available  for Grant** | ** ** |
| 2004 Equity Incentive Plan (1,2)            |       | All key employees and consultants                  |       | ISO/NSO             |       | 23,351,348                                      |       | 13,335,858 |   | 10,015,490 |   |
| 2001 Equity Incentive  Plan (1)             |       | All key employees and consultants                  |       | ISO/NSO             |       | 10,253,769                                      |       | 10,134,222 |   | 119,547 |   |
| 1997 Equity Incentive Plan (1)              |       | All key employees and consultants, except officers |       | NSO                 |       | 12,293,073                                      |       | 11,868,151 |   | 424,922 |   |
| 1998 Director Stock  Option Plan (2,3) |       | Non-employee                                       |       |                |       |                                            |       |   |   |   |   |
|                                        |       | board members                                      |       | NSO                 |       | 960,291                                         |       | 598,931 |   | 361,360 |   |
| Assumed Options (4)                         |       |                                               |       |                |       | 386,101                                         |       | 386,101 |   | — |   |
|                                        |       |                                               |       |                |       | 47,244,582                                      |       | 36,323,263 |   | 10,921,319 |   |
|                                             |            |                                                    |            |                     |            |                                                 |            |  |  |  |  |  |  |

----

(1)          Theexercise price of option grants may not be less than the fair market value atthe date of grant. Option grants have a maximum term of ten years. Thecompensation committee of our board of directors, or its delegates asapplicable, determines the terms and conditions of each option grant, includingwho, among eligible persons, will receive option grants, the form of payment ofthe exercise price, the number of shares granted, the vesting schedule and theterms of exercise.

(2)          Atour annual meeting of shareholders in May 2006, shareholders authorized us toamend our 2004 Equity Incentive Plan to provide for the grant of restrictedstock and restricted stock units. As of December 31, 2006, no restricted stockor restricted stock units have been issued. We plan to seek shareholderapproval at our annual meeting of shareholders in May 2007 for the 2007 DirectorEquity Plan under which we also plan to provide for the grant of restrictedstock and restricted stock units and to begin issuing restricted stock units inconnection with our general grant to employees in May 2007.

(3)          Optionsare automatically granted on the date of our annual shareholders meeting or ata director’s initial appointment to the board, have an exercise price equal tothe fair market value of Genzyme Stock on the date of grant, expire ten yearsafter the initial grant date and vest on the date of the next annualshareholders meeting following the date of grant.

(4)          Consists of options weassumed through our acquisitions of Biomatrix, GelTex, Focal, Inc.,Novazyme and ILEX Oncology.

F-116

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY (Continued)

All stock-based awards to non-employees are accountedfor at their fair value in accordance with FAS 123R and EITF Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods or Services.”

In 2006, we accounted foroptions granted to our employees and directors under the fair value method ofaccounting using the Black-Scholes valuation model to measure stock optionexpense at the date of grant. All stock option grants have an exercise priceequal to the fair market value of Genzyme Stock on the date of grant andgenerally have a 10-year term and vest in increments, generally over fouryears from the date of grant, although we may grant options with differentvesting terms from time to time. Upon termination of employment other than bydeath, disability or change of control, unvested options are cancelled, and anyunexercised vested options will expire three months after the employee’stermination date. When a director leaves the board, unvested options arecancelled and any unexercised vested options will expire at the end of theirterm. Excluding our directors who are not employees, when an employee meets aretirement eligibility age of 60 with at least five years of service, upontermination (except for cause) the employee’s options automatically becomefully vested and will expire three years after the employee’s termination dateor on the original expiration date set at the time the options were granted,whichever is earlier. We recognize stock-based compensation expense for eachgrant on a straight-line basis over the employee’s or director’s requisiteservice period, generally the vesting period of the award. Additionally,stock-based compensation expense related to stock options includes an estimatefor pre-vesting forfeitures. Effective January 1, 2006, in connection withour adoption of FAS 123R, we now recognize stock-based compensationexpense immediately for awards granted to retirement eligible employees or overthe period from the grant date to the date retirement eligibility is achieved,if that is expected to occur during the nominal vesting period. For stock-basedcompensation expense recognition purposes only, grants to retirement eligibleemployees prior to January 1, 2006 are not subject to accelerated vestingand expense is recognized over the nominal vesting period.

**ESPP**

Our 1999 ESPP allowsemployees to purchase our stock at a discount. Under this plan, the purchaseprice per share of Genzyme Stock is 85% of the lower of the fair market valueof Genzyme Stock at the beginning of an enrollment period or on the purchasedate. Employees working at least 20 hours per week may elect toparticipate in our ESPP during specified open enrollment periods, which occurtwice each year shortly before the start of each new enrollment period. New enrollmentperiods begin on the first trading day of January and July and eachenrollment period lasts two years. Employee contributions for each enrollmentperiod are automatically used to purchase stock on behalf of each participatingemployee on eight pre-determined purchase dates during the two-year enrollmentperiod, which occur once every three months, in January, April, July andOctober. We place limitations on the total number of shares of stock thatemployees can purchase under the plan in a given year. As of December 31, 2006, 5,829,391 shares of Genzyme Stock wereauthorized for purchase under the ESPP, of which 813,725 remain available.

F-117

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY (Continued)

**Adoption ofFAS 123R**

As aresult of adopting FAS 123R, for the year ended December 31, 2006, werecorded pre-tax stock-based compensation expense, net of estimatedforfeitures, which were allocated based on the functional cost center of eachemployee as follows (amounts in thousands, except per share amount):

| ** **                                                                   | ** ** | **For the Year Ended  December 31, 2006** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Pre-tax stock-based  compensation expense, net of estimated forfeitures (1): |       |                                                               |       |   |   |
| Cost of products and services sold (2)                                       |       |                                                               | $          | (21,430 | ) |   |
| Selling, general and administrative                                          |       |                                                               | (121,822   | ) |   |
| Research and development                                                     |       |                                                               | (65,248    | ) |   |
| Total                                                                        |       |                                                               | (208,500   | ) |   |
| Less: tax benefit  of stock options                                          |       |                                                               | 66,331     |   |   |
| Stock-based compensation expense, net of tax                                 |       |                                                               | $          | (142,169 | ) |   |
| Per basic and diluted share                                                  |       |                                                               | $          | (0.54 | ) |   |

----

(1)          Inaddition, we capitalized $15.1 million of stock-based compensationexpense to inventory, all of which is attributable to participating employeesthat support our manufacturing operations.

(2)          We amortize stock-basedcompensation expense capitalized to inventory based on inventory turns. For theyear ended December 31, 2006, pre-tax stock-based compensationexpense, net of estimated forfeitures, charged to cost of products and servicessold includes the amortization of $8.3 million of pre-tax stock-basedcompensation expense previously capitalized to inventory in the first andsecond quarters of 2006.

At December 31, 2006,there was $269.3 million of pre-tax stock-based compensation expense, netof estimated forfeitures, related to unvested awards not yet recognized whichis expected to be recognized over a weighted average period of 2.4 years.

**Pro FormaInformation for the Period Prior to Adoption of FAS 123R**

Prior to the adoption of FAS 123R, we accountedfor stock options granted to employees in accordance with APB 25 and providedthe disclosures required under FAS 123 only in the notes to our financialstatements. As a result, no stock-based compensation expense related to ourESPP or stock options was reflected in our net income for the years ended December 31,2005 and 2004 since all options granted had an exercise price equal to themarket value of the underlying common stock on the date of grant.

F-118

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY(Continued)

The following table setsforth our historical disclosure of pro forma net income (loss) and net income(loss) per share data for the years ended December 31, 2005 and 2004, asif compensation expense for our stock-based compensation plans wasdetermined in accordance with FAS 123 based on the individual grant datefair value of the awards (amounts in thousands, except per share amounts):

| ** **                                                                       | ** ** | **For the Years Ended  December 31,**                                                                        | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **          2005          ** | ** ** | **          2004          ** | ** ** |
| Net income (loss)  (1):                                                          |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                      |       |                                                                                                                             | $          | 441,489 |   |   |   | $ | 86,527 |   |   |
| Add: employee stock-based compensation  included in as reported, net of tax |       |                                                                                                                             | 280        |   |   |   | 6 |   |   |
| Deduct: pro forma employee stock-based  compensation expense, net of tax         |       |                                                                                                                             | (112,808   | ) |   |   | (94,078 | ) |   |
| Pro forma                                                                        |       |                                                                                                                             | $          | 328,961 |   |   |   | $ | (7,545 | ) |   |
| Net income (loss) per share:                                                     |       |                                                                                                                             |       |   |   |   |   |   |   |
| Basic:                                                                           |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                      |       |                                                                                                                             | $          | 1.73 |   |   |   | $ | 0.38 |   |   |
| Pro forma                                                                        |       |                                                                                                                             | $          | 1.29 |   |   |   | $ | (0.03 | ) |   |
| Diluted:                                                                         |       |                                                                                                                             |       |   |   |   |   |   |   |
| As reported                                                                      |       |                                                                                                                             | $          | 1.65 |   |   |   | $ | 0.37 |   |   |
| Pro forma                                                                        |       |                                                                                                                             | $          | 1.24 |   |   |   | $ | (0.03 | ) |   |

----

(1)          UnderFAS 123 we did not capitalize any stock-based compensation expenses toinventory.

**ValuationAssumptions for Stock Option Plans and ESPP**

Theemployee stock-based compensation expense recognized under FAS 123Rand presented in the pro forma disclosure required under FAS 123 wasdetermined using the Black-Scholes option valuation model. Optionvaluation models require the input of subjective assumptions and theseassumptions can vary over time. The weighted average assumptions used are asfollows:

| ** **                                                | ** ** | **For the Years Ended  December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate                                  |       |                                                      | 5          | % |   |   | 4 | % |   |   | 3 | % |   |
| Dividend yield                                            |       |                                                      | 0          | % |   |   | 0 | % |   |   | 0 | % |   |
| Expected option  life (in years)—directors           |       |                                                      | 7          |   |   |   | 5 |   |   |   | 5 |   |   |
| Expected option  life (in years)—officers            |       |                                                      | 6          |   |   |   | 5 |   |   |   | 5 |   |   |
| Expected option  life (in years)—all other employees |       |                                                      | 4          |   |   |   | 5 |   |   |   | 5 |   |   |
| Volatility-stock  options                                 |       |                                                      | 39         | % |   |   | 46 | % |   |   | 54 | % |   |
| Volatility-ESPP                                           |       |                                                      | 27         | % |   |   | 28 | % |   |   | 54 | % |   |

 

F-119

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’EQUITY (Continued)

The risk-free interestrate is based on the U.S. Treasury yield curve in effect on the date of grant.The dividend yield percentage is zero because we do not currently pay dividendsnor intend to do so during the expected option life. We used historical data fromexercises of our stock options and other factors to estimate the expectedoption life (in years), or term, of the share-based payments granted. Wedetermined the volatility rate for our stock options based on the expected termof the equity award granted. We determine separate volatility rates for eachenrollment under our ESPP based on the period from the commencement date ofeach enrollment to each applicable purchase date. Stock option expense in futureperiods will be based upon the Black-Scholes values determined at the date ofeach grant or the date of each purchase under our ESPP.

**Stock Option PlanActivity**

Thefollowing tables contain information regarding stock option activity for theyears ended December 31, 2004, 2005 and 2006:

| ** **                             | ** ** | **Shares Under  Option** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2003 |       |                          | 30,733,628 |                                       |       |                    | $          | 37.95                                                                |       |                            | 17,779,047 |   |   |   |   |   |   |   |
| Granted (1)                            |       |                          | 9,051,690  |                                       |       |                    | 43.66      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Exercised                              |       |                          | (4,663,495 | )                                          |       |                    | 25.41      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Forfeited and  cancelled               |       |                          | (977,102   | )                                          |       |                    | 55.99      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Outstanding at December 31, 2004  |       |                          | 34,144,721 |                                       |       |                    | 40.66      |                                                                 |       | 20,616,197                      |       |   |   |   |   |   |   |
| Granted                                |       |                          | 8,213,024  |                                       |       |                    | 63.08      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Exercised                              |       |                          | (9,283,230 | )                                          |       |                    | 33.89      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Forfeited and  cancelled               |       |                          | (729,198   | )                                          |       |                    | 61.81      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Outstanding at December 31, 2005  |       |                          | 32,345,317 |                                       |       |                    | 47.71      |                                                                 |       | 17,842,706                      |       |   |   |   |   |   |   |
| Granted                                |       |                          | 7,821,546  |                                       |       |                    | 59.16      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Exercised                              |       |                          | (2,976,739 | )                                          |       |                    | 39.57      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Forfeited and  cancelled               |       |                          | (866,861   | )                                          |       |                    | 63.32      |                                                                 |       |                            |       |   |   |   |   |   |   |
| Outstanding at  December 31, 2006 |       |                          | 36,323,263 |                                       |       |                    | $          | 50.48                                                                |       |                            | 21,903,140 |   |   | 6.83 |   |   | $ | 460,604,912 |   |
|                                        |            |                               |            |                                            |            |                         |            |                                                                      |            |                                 |            |  |  |  |  |  |  |  |  |

----

(1)          Includes1,736,655 options assumed in connection with our acquisition of ILEX Oncologyin December 2004.

F-120

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY (Continued)

The following table contains information regarding therange of option prices for Genzyme Stock as of December 31, 2006:

| ** **                     | ** ** | ** **                   | ** ** | **Weighted**    | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **              | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------|------------|-------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | ** **                   | ** ** | **Average**     | ** ** | ** **              | ** ** | **Exercisable**              | ** ** |
| ** **                     | ** ** | **Number**                   | ** ** | **Remaining**   | ** ** | **Weighted**            | ** ** | **Number**                   | ** ** | **Weighted**            | ** ** |
| **Range Of**              | ** ** | **Outstanding**              | ** ** | **Contractual** | ** ** | **Average**             | ** ** | **Exercisable**              | ** ** | **Average**             | ** ** |
| **Exercise Prices**       | ** ** | **as of 12/31/06** | ** ** | **Life**        | ** ** | **Exercise Price** | ** ** | **as of 12/31/06** | ** ** | **Exercise Price** | ** ** |
| $1.75    - $29.44    |       |                         | 3,749,322  |            |       |                    | 2.50       |                         |       |                    | $          | 24.09 |   |   |   | 3,749,080 |   |   |   | $ | 24.09 |   |   |
| $29.49 - $41.86                |       |                         | 3,385,865  |            |       |                    | 5.37       |                         |       |                    | $          | 33.03 |   |   |   | 3,308,587 |   |   |   | $ | 32.95 |   |   |
| $41.97 - $43.90                |       |                         | 5,148,085  |            |       |                    | 7.33       |                         |       |                    | $          | 43.87 |   |   |   | 2,797,967 |   |   |   | $ | 43.85 |   |   |
| $43.91 - $46.24                |       |                         | 4,646,510  |            |       |                    | 6.39       |                         |       |                    | $          | 46.19 |   |   |   | 3,519,469 |   |   |   | $ | 46.19 |   |   |
| $46.25 - $53.47                |       |                         | 3,892,078  |            |       |                    | 4.70       |                         |       |                    | $          | 52.32 |   |   |   | 3,717,543 |   |   |   | $ | 52.49 |   |   |
| $53.57 - $56.42                |       |                         | 380,924    |            |       |                    | 7.25       |                         |       |                    | $          | 55.42 |   |   |   | 205,284 |   |   |   | $ | 55.25 |   |   |
| $56.48 - $58.50                |       |                         | 6,974,795  |            |       |                    | 9.31       |                         |       |                    | $          | 58.47 |   |   |   | 1,293,076 |   |   |   | $ | 58.43 |   |   |
| $58.62 - $62.24                |       |                         | 364,631    |            |       |                    | 8.48       |                         |       |                    | $          | 59.97 |   |   |   | 95,269 |   |   |   | $ | 59.82 |   |   |
| $62.28 - $62.98                |       |                         | 6,539,836  |            |       |                    | 8.37       |                         |       |                    | $          | 62.97 |   |   |   | 2,712,690 |   |   |   | $ | 62.97 |   |   |
| $63.05 - $2,356.12             |       |                         | 1,241,217  |            |       |                    | 7.37       |                         |       |                    | $          | 100.41 |   |   |   | 504,175 |   |   |   | $ | 142.84 |   |   |
| $1.75   -  $2,356.12 |       |                         | 36,323,263 |            |       |                    | 6.83       |                         |       |                    | $          | 50.48 |   |   |   | 21,903,140 |   |   |   | $ | 46.35 |   |   |

 

The following table contains information regarding thepre-tax intrinsic value of our stock options, the estimated fair value ofshares vested and the weighted average grant date fair value per share of stockgranted under our stock option plans for the periods presented (amounts inthousands, except per share amounts):

| ** **                                                                                           | ** ** | **For the Years Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                                  | ** ** | **  2005  ** | ** ** | **2004** | ** ** |
| Pre-tax intrinsic  value of options exercised                                                        |       | $                                                         | 81,928     |   | $ | 296,949 |   | $ | 128,214 |   |
| Weighted average grant  date fair value per share of stock granted under our stock option plans |       | $                                                         | 25.01      |   | $ | 29.73 |   | $ | 21.92 |   |

 

For the year ended December 31, 2006, we:

·       received a total of $158.3 millionof cash proceeds and recognized $27.5 million of tax deductions from theissuance of stock under our stock option plans and ESPP; and

·       classified $7.1 millionof excess tax benefits from stock-based compensation as a financing cashinflow in our consolidated statements of cash flows.

F-121

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE M.**   STOCKHOLDERS’ EQUITY (Continued)

**ESPP Activity**

Thefollowing table contains information regarding our ESPP activity for the yearsended December 31, 2004, 2005 and 2006:

| **Shares available and issued:**                     |   |       |   |
|------------------------------------------------------|--------|------------|--------|
| Available for  purchase as of December 31, 2003 |   | 1,353,617  |   |
| Additional shares  authorized                        |   | 1,500,000  |   |
| Shares purchased  by employees                       |   | (1,288,424 | )      |
| Available for  purchase as of December 31, 2004 |   | 1,565,193  |   |
| Additional shares  authorized                        |   | 1,000,000  |   |
| Shares purchased  by employees                       |   | (852,712   | )      |
| Available for  purchase as of December 31, 2005 |   | 1,712,481  |   |
| Shares purchased  by employees                       |   | (898,756   | )      |
| Available for purchase  as of December 31, 2006 |   | 813,725    |   |

 

***Notes Receivable from Stockholders***

In connection withour acquisition of Biomatrix, we assumed notes receivable from certain formeremployees, directors and consultants of Biomatrix. The notes are full-recoursepromissory notes that accrue interest at rates ranging from 5.30% to 7.18% andmature at various dates from May 2007 through September 2009, atwhich point the outstanding principal and accrued interest for each note willbecome payable. As of December 31, 2006, there is a total of$15.1 million of outstanding principal and accrued interest for thesenotes, which we recorded in stockholders’ equity because the notes wereoriginally received in exchange for the issuance of stock.

F-122

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE N.   COMMITMENTSAND CONTINGENCIES**

***Legal Proceedings***

We periodically become subject to legal proceedingsand claims arising in connection with our business.

Four lawsuits have been filed against us regarding theexchange of all of the outstanding shares of Biosurgery Stock for shares ofGenzyme Stock in connection with the elimination of our tracking stocks in July 2003.Each of the lawsuits is a purported class action on behalf of holders ofBiosurgery Stock. The first case, filed in Massachusetts Superior Court in May 2003,alleged a breach of the implied covenant of good faith and fair dealing in ourcharter and a breach of our board of directors’ fiduciary duties. The plaintiffin this case sought an injunction to adjust the exchange ratio for the trackingstock exchange. The Court dismissed the complaint in its entirety in November 2003.Upon appeal, the Massachusetts Appeals Court upheld the dismissal by theSuperior Court of the fiduciary duty claim, but reversed the earlier decisionto dismiss the implied covenant claim. The Massachusetts Supreme Judicial Court(SJC) has granted our petition for further appellate review of the AppealsCourt decision reversing the dismissal of the implied covenant claim. The SJCheard oral arguments on December 4, 2006. A ruling on the appeal isanticipated in the first half of 2007. Two substantially similar cases werefiled in Massachusetts Superior Court in August and October 2003.These cases were consolidated in January 2004, and in July 2004, theconsolidated case was stayed pending disposition of a fourth case, which wasfiled in the U.S. District Court for the Southern District of New York in June 2003.The complaint initially alleged violations of federal securities laws, commonlaw fraud, and a breach of the merger agreement with Biomatrix, in addition tothe state law claims contained in the other cases. The plaintiffs initiallysought an adjustment to the exchange ratio, the rescission of the acquisitionof Biomatrix, and unspecified compensatory damages. In December 2005, theplaintiffs in this case filed an amended complaint in which they dropped all ofthe claims alleged in the initial complaint relating to the initial issuance ofBiosurgery Stock and the acquisition of Biomatrix, and narrowed the putativeclass to include only those individuals who held Biosurgery Stock on May 8,2003. We filed a motion to dismiss the amended complaint and to oppose theclass certification. The Court denied our motion to dismiss the amendedcomplaint and certified this case as a class action on behalf of allshareholders who held Biosurgery Stock on May 8, 2003. We filed a petitionasking the U.S. Court of Appeals for the Second Circuit to review the classcertification decision, which has been denied. Discovery in this action iscurrently ongoing. We believe each of these cases is without merit and continueto defend against them vigorously.

On March 27, 2003, the Office of Fair Trading, orOFT, in the United Kingdom issued a decision against our wholly-ownedsubsidiary, Genzyme Limited, finding that Genzyme Limited held a dominantposition and abused that dominant position with no objective justification bypricing Cerezyme in a way that excludes other delivery/homecare serviceproviders from the market for the supply of home delivery and homecare servicesto Gaucher patients being treated with Cerezyme. In conjunction with thisdecision, the OFT imposed a fine on Genzyme Limited and required modificationto its list price for Cerezyme in the United Kingdom. Genzyme Limited appealedthis decision to the Competition Appeal Tribunal. On May 6, 2003, theTribunal issued an order that stayed the OFT’s decision, but required GenzymeLimited to provide a homecare distributor a discount of 3% per unit during theappeal process. The Tribunal issued its judgment on Genzyme Limited’s appeal onMarch 11, 2004, rejecting portions of the OFT’s decision and upholdingothers. The Tribunal found that the list price of Cerezyme should not bereduced, but that Genzyme Limited must negotiate a price for Cerezyme that willallow homecare distributors an appropriate margin. The Tribunal also reducedthe fine imposed by the OFT. In response to the 

F-123

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE N.**   COMMITMENTS AND CONTINGENCIES (Continued)

Tribunal’s decision,we recorded an initial liability of approximately $11 million in our 2003financial statements and additional liabilities totaling approximately$1 million during 2004 and 2005, of which approximately $6 millionwere paid in 2005. Genzyme Limited and the OFT were unable to negotiate a pricefor Cerezyme for homecare distributors and, as a result, on September 29,2005, the Tribunal issued a ruling establishing the discount to be provided byGenzyme Limited to homecare distributors at 7.2%, which approximates the figureused to calculate the initial liability of approximately $11 million werecorded in 2003, and the additional liabilities totaling approximately$1 million we recorded in 2004 and 2005. Genzyme Limited decided not toappeal this decision. Arising out of the OFT decision, on April 5, 2006, GenzymeLimited received a damage claim from Genzyme Limited’s former distributor,Healthcare at Home. In the fourth quarter of 2006, Genzyme Limited paidHealthcare at Home approximately $14 million, inclusive of interest andlegal costs in full and final settlement of all claims, of which approximately$6 million had been previously accrued for and approximately$8 million was recorded as a charge to SG&A in our consolidatedstatements of operations in December 2006.

We are not able to predictthe outcome of the pending legal proceeding listed here, or other legalproceedings, to which we may become subject in the normal course of business orestimate the amount or range of any reasonably possible loss we might incur ifwe do not prevail in the final, non-appealable determinations of such matters.Therefore, we have no current accruals for these potential contingencies. Wecannot provide you with assurance that the legal proceedings listed here, orother legal proceedings, will not have a material adverse impact on ourfinancial condition or results of operations.

**NOTE O.   INCOME TAXES**

Ourincome (loss) before income taxes and the related income tax provision(benefit) are as follows:

| ** **                                 | ** ** | **For the Years Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(Amounts in thousands)**                      | ** ** |
| Domestic                                   |       | $                                                         | 4,158      |   | $ | 558,434 |   | $ | 103,470 |   |
| Foreign                                    |       | (56,836                                                   | )          | 70,485 |   | 124,226 |   |
| Total                                      |       | $                                                         | (52,678    | ) | $ | 628,919 |   | $ | 227,696 |   |
| Currently payable:                         |       |                                                      |       |   |   |   |   |
| Federal                                    |       | $                                                         | 119,037    |   | $ | 105,542 |   | $ | 51,742 |   |
| State                                      |       | 27,194                                                    |       | 33,804 |   | 11,769 |   |
| Foreign                                    |       | 97,684                                                    |       | 32,784 |   | 32,611 |   |
| Total                                      |       | 243,915                                                   |       | 172,130 |   | 96,122 |   |
| Deferred:                                  |       |                                                      |       |   |   |   |   |
| Federal                                    |       | (219,383                                                  | )          | 32,591 |   | 44,423 |   |
| State                                      |       | (29,048                                                   | )          | (19,282 | ) | (2,255 | ) |
| Foreign                                    |       | (31,365                                                   | )          | 1,991 |   | 2,879 |   |
| Total                                      |       | (279,796                                                  | )          | 15,300 |   | 45,047 |   |
| Provision for (benefit  from) income taxes |       | $                                                         | (35,881    | ) | $ | 187,430 |   | $ | 141,169 |   |

 

F-124

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE O.**   INCOME TAXES (Continued)

Our provisions for incometaxes were at rates other than the U.S. federal statutory tax rate for thefollowing reasons:

| ** **                            | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax provision at  U.S. statutory rate |       | (35.0                                                     | )%         | 35.0 | % | 35.0 | % |
| State taxes, net                      |       | (1.7                                                      | )          | 1.6 |   | 2.8 |   |
| Export sales  benefits                |       | (37.2                                                     | )          | (2.8 | ) | (7.1 | ) |
| Domestic  manufacturing deduction     |       | (15.5                                                     | )          | (1.2 | ) | — |   |
| Tax credits                           |       | (30.5                                                     | )          | (4.1 | ) | (4.7 | ) |
| Foreign rate  differential            |       | 76.0                                                      |       | 0.1 |   | (4.4 | ) |
| Charges for IPR&D                 |       | —                                                    |       | 1.2 |   | 39.1 |   |
| Stock  compensation                   |       | 15.8                                                      |       | — |   | — |   |
| Goodwill  impairment                  |       | 19.6                                                      |       | — |   | — |   |
| Audit settlements                     |       | (62.9                                                     | )          | — |   | — |   |
| Other                                 |       | 3.3                                                       |       | — |   | 1.3 |   |
| Effective tax rate                    |       | (68.1                                                     | )%         | 29.8 | % | 62.0 | % |

 

Our effective taxrate for all periods varies from the U.S. statutory tax rate as a result of:

·       ourprovision for state income taxes;

·       thetax benefits from export sales;

·       thetax benefits from domestic production activities;

·       benefitsrelated to tax credits, primarily orphan drug credits; and

·       incomeand expenses taxed at rates other than the U.S. statutory tax rate.

Our effective taxrate for 2006 was also impacted by:

·       thedeductible charge for IPR&D of $552.9 million recorded inNovember 2006 in connection with our acquisition of AnorMED, of which $195.7million was taxed at rates other than the U.S. statutory tax rate;

·       $33.2million of non-deductible stock compensation expenses;

·       acharge for impaired goodwill of $219.2 million recorded inSeptember 2006, of which $29.5 million was not deductible for taxpurposes; and

·       thesettlement of the 1996 to 1999 IRS audit and various state and foreign incometax audits. We recorded a $33.2 million tax benefit to our income tax provisionprimarily related to export sales benefits, tax credits and deductible intangiblesfrom a prior period acquisition. In conjunction with those settlements, wereduced our tax reserves by approximately $13.1 million and recorded currentand deferred tax benefits for the remaining portion of the settlement amounts.

F-125

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE O.**   INCOME TAXES (Continued)

Our effective tax rates for 2005 and 2004 were alsoimpacted by non-deductible charges for IPR&D of:

·       $22.2 millionin 2005, of which $9.5 million was recorded in the first quarter of 2005in connection with our acquisition of Verigen and $12.7 million wasrecorded in the third quarter of 2005 related to our acquisition of Bone Care;and

·       $254.5 millionin 2004, all of which was recorded in December 2004 in connection with ouracquisition of ILEX Oncology.

In addition, our overall tax rate has changedsignificantly due to fluctuations in our income (loss) before taxes, which was$(52.7) million in 2006, $628.9 million in 2005 and$227.7 million in 2004.

We record liabilities for income tax contingenciesbased on our best estimate of the underlying exposures. We are currently underIRS audits for tax years 2002 to 2003, 2004 to 2005, and in certain state andforeign jurisdictions. We believe that we have provided sufficiently for allaudit exposures and assessments. Settlement of these audits or the expirationof the statute of limitations on the assessment of income taxes for any taxyear may result in an increase or reduction of future tax provisions. Any suchtax or tax benefit would be recorded upon final resolution of the audits orexpiration of the applicable statute of limitations.

Thecomponents of net deferred tax assets (liabilities) are described in thefollowing table:

| ** **                             | ** ** | **December 31,**                | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(Amounts in thousands)** | ** ** |
| Deferred tax assets:                   |       |                                 |       |   |   |
| Net operating loss carryforwards       |       | $                                    | 22,772     |   | $ | 94,774 |   |
| Tax credits                            |       | 14,770                               |       | 12,665 |   |
| Realized and unrealized capital losses |       | —                               |       | 4,984 |   |
| Inventory                              |       | 76,004                               |       | 68,717 |   |
| Depreciable assets                     |       | 10,154                               |       | 1,600 |   |
| Stock compensation                     |       | 65,459                               |       | — |   |
| Reserves, accruals and other           |       | 43,759                               |       | 36,595 |   |
| Total deferred tax assets              |       | 232,918                              |       | 219,335 |   |
| Deferred tax  liabilities:             |       |                                 |       |   |   |
| Realized and unrealized capital gains  |       | (914                                 | )          | — |   |
| Intangible assets                      |       | (105,988                             | )          | (384,504 | ) |
| Net deferred tax  assets (liabilities) |       | $                                    | 126,016    |   | $ | (165,169 | ) |

 

Our ability to realize the benefit of net deferred taxassets is dependent on our generating sufficient taxable income and tax creditcarryforwards expire. While it is not assured, we believe that it is morelikely than not that we will be able to realize all of our net deferred taxassets. The amount we can realize, however, could be reduced in the near termif estimates of future taxable income during the carryforward period arereduced.

F-126

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE O.**   INCOME TAXES (Continued)

At December 31, 2006,we had, for U.S. income tax purposes, net operating loss carryforwards of $6.4 millionand tax credit carryforwards of $23.4 million. Our net operating losscarryforwards expire between 2011 and 2020 and the tax credits begin expiringafter 2017. Ownership changes, as defined under the Internal Revenue Code, may limitthe amount of net operating loss carryforwards which may be utilized annuallyto offset future taxable income. For foreign purposes, we had net operatingloss carryforwards of $104.1 million as of December 31, 2006, which beginexpiring after 2013.

**NOTE P.**   BENEFITPLANS

**DefinedContribution Plans**

We have four defined contribution plans:

·       theGenzyme Corporation 401(k) Plan, which we refer to as the 401(k) Plan;

·       theGenzyme Surgical Products Corporation Savings and Investment Plan, which werefer to as the GSP Plan;

·       theSangStat Medical Corporation 401(k) Plan, which we refer to as theSangStat Plan; and

·       theBiomatrix, Inc. Retirement Plan, which we refer to as the Biomatrix Plan.

The401(k) Plan was established effective January 1, 1988 to provide along-range program of systematic savings for eligible employees. Employees ofGenzyme Corporation as well as our wholly-owned subsidiaries in theUnited States are eligible to participate in the 401(k) Plan, includingemployees of the former Deknatel Snowden Pencer, Inc., which we acquiredin 1996, who also participate in the GSP Plan, employees of the formerBiomatrix, which we acquired in December 2000, who also participate in theBiomatrix Plan and employees of the former SangStat, which we acquired in 2003,who also participate in the SangStat Plan. For 2006, eligible employees couldelect, through salary reduction agreements, to have up to 18% or a maximum of$15,000 of their eligible compensation contributed on a pre-tax basis to the401(k) Plan. We made bi-weekly matching contributions to the 401(k) Planequal to:

·       100%of the elective contributions made to the 401(k) Plan by each participantto the extent that such elective contributions do not exceed 4% of theparticipant’s eligible compensation for such pay period; and

·       50%of the amount of elective contributions made to the 401(k) Plan by theparticipant to the extent such elective contributions exceed 4% but do notexceed 6% of the participant’s eligible compensation for such pay period.

SG&Aincludes the following charges related to the 401(k) Plan, representingour matching contributions incurred in each year:

·       $23.9 millionin 2006;

·       $16.0 millionin 2005; and

·       $13.7 millionin 2004.

F-127

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTEP.**   BENEFIT PLANS (Continued)

Effective December 31, 2000, the GSP Plan and theBiomatrix Plan were frozen. As of that date, no new contributions fromparticipants or contributions from us have been accepted by either plan and nonew participants have been allowed to enter these two plans. Existingparticipants continue to have full access to their account balances in the GSPPlan and Biomatrix Plan, including the ability to initiate fund transfers amongthe available investment options, loans and hardship distributions. EffectiveDecember 31, 2000, participants in both the GSP Plan and Biomatrix Planbecame eligible to participate in the 401(k) Plan.

In September 2003, inconnection with the acquisition of SangStat, we terminated the SangStat Plan.In November 2004, we received approval for the termination from the IRS,at which time all participants in the SangStat Plan became fully vested intheir account balances and had the option of receiving a distribution, lessapplicable taxes and penalties, or transferring their balance to anotherqualified fund. As of December 31, 2006, the SangStat Plan had not beenfully liquidated.

**Defined BenefitPlans**

We have defined benefit pension plans for certainemployees in countries outside the U.S. and a defined benefit post-retirementplan for one of our U.S. subsidiaries, which has been frozen since 1995 and isnot significant. These plans are funded in accordance with requirements of theappropriate regulatory bodies governing each plan.

Thefollowing table sets forth the funded status and the amounts recognized for ourdefined benefit pension plans outside the U.S. (amounts in thousands):

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Change in benefit obligation:**                |       |                  |       |   |   |
| Projected benefit  obligation, beginning of year |       | $                     | 64,785     |   | $ | 53,889 |   |
| Service cost                                     |       | 4,751                 |       | 2,983 |   |
| Interest cost                                    |       | 3,487                 |       | 2,761 |   |
| Plan  participants’ contributions           |       | 1,417                 |       | 1,209 |   |
| Actuarial loss                                   |       | 12,037                |       | 11,707 |   |
| Foreign currency  exchange rate changes          |       | 10,265                |       | (6,477 | ) |
| Benefits paid                                    |       | (1,357                | )          | (1,287 | ) |
| Projected benefit  obligation, end of year       |       | $                     | 95,385     |   | $ | 64,785 |   |
| **Change  in plan assets:**                      |       |                  |       |   |   |
| Fair value of  plan assets, beginning of year    |       | $                     | 46,752     |   | $ | 40,573 |   |
| Return on plan  assets                           |       | 6,269                 |       | 8,148 |   |
| Employer  contribution                           |       | 3,302                 |       | 2,659 |   |
| Plan  participants’ contributions           |       | 1,416                 |       | 1,209 |   |
| Foreign currency  exchange rate changes          |       | 7,097                 |       | (4,667 | ) |
| Benefits paid                                    |       | (1,233                | )          | (1,170 | ) |
| Fair value of  plan assets, end of year          |       | $                     | 63,603     |   | $ | 46,752 |   |
| Funded status at end of  year                    |       | $                     | (31,782    | ) | $ | (18,033 | ) |

 

F-128

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE P.**   BENEFIT PLANS (Continued)

Amounts recognized in ourconsolidated balance sheets consist of (amounts in thousands):

| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Noncurrent assets             |       | $                     | —     |   | $ | 7,809 |   |
| Accrued expenses              |       | (1,297                | )          | — |   |
| Other noncurrent  liabilities |       | (30,485               | )          | (10,265 | ) |
| Net amount recognized         |       | $                     | (31,782    | ) | $ | (2,456 | ) |

 

Theincremental effect of applying FAS 158 on individual line items in ourconsolidated balance sheets as of December 31, 2006, was as follows (amounts inthousands):

| ** **                                       | ** ** | **December 31, 2006**               | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **Before  Application  of FAS 158** | ** ** | **FAS 158  Adjustments** | ** ** | **After  Application  of FAS 158** | ** ** |
| Accrued expenses                                 |       | $                                             | 476,145    |   |   | $ | 1,297 |   |   | $ | 477,442 |   |
| Deferred tax  liabilities                        |       | 14,730                                        |       |   | (3,821 | ) |   | 10,909 |   |
| Other noncurrent  liabilities                    |       | 40,332                                        |       |   | 11,319 |   |   | 51,651 |   |
| Total liabilities                                |       | 1,521,682                                     |       |   | 8,795 |   |   | 1,530,477 |   |
| Accumulated other  comprehensive income          |       | 263,000                                       |       |   | (8,795 | ) |   | 254,205 |   |
| Total  stockholders’ equity                 |       | 5,669,506                                     |       |   | (8,795 | ) |   | 5,660,711 |   |
| Total liabilities and  stockholders’ equity |       | $                                             | 7,191,188  |   |   | — |   |   | $ | 7,191,188 |   |

 

Amounts recognized inother comprehensive income (loss) consist of (amounts in thousands):

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Additional  minimum pension liability, net of tax |       | $                     | (8,564     | ) | $ | (4,627 | ) |
|                                                   |            |                       |            |  |  |  |  |

 

Theweighted average assumptions used in determining related obligations of pensionbenefit plans are shown below:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Weighted average  assumptions: |       |                  |       |   |   |
| Discount rate                  |       | 5.07                  | %          | 4.74 | % |
| Rate of  compensation increase |       | 4.42                  | %          | 3.94 | % |

 

For the year ended December 31, 2006, thediscount rate used to determine the benefit obligations for our plans was basedon highly rated long-term bond indices and yield curves that match the durationof each plan’s benefit obligations. The bond indices and yield curve analysesinclude only bonds rated Aa or higher from reputable rating agencies. Thediscount rate represents the average of the discount rates for each planweighted by plan liabilities as of December 31, 2006. The discount ratereflects the rate at which the pension benefits could be effectively settled.

F-129

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE P.**   BENEFIT PLANS (Continued)

The weighted average assumptionsused to determine the net pension expense are shown below:

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  assumptions: |       |                  |       |   |   |   |   |
| Discount rate                  |       | 4.73                  | %          | 5.23 | % | 5.56 | % |
| Rate of return on assets       |       | 7.47                  | %          | 7.32 | % | 7.09 | % |
| Rate of  compensation increase |       | 3.93                  | %          | 3.92 | % | 3.89 | % |

 

Thecomponents of net pension expense are as follows (amounts in thousands):

| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                 |       | $                     | 4,751      |   | $ | 2,983 |   | $ | 2,477 |   |
| Interest cost                                |       | 3,488                 |       | 2,761 |   | 2,316 |   |
| Expected return  on plan assets              |       | (6,269                | )          | (8,149 | ) | (3,010 | ) |
| Amortization and  deferral of actuarial loss |       | 3,334                 |       | 5,793 |   | 876 |   |
| Net pension expense                          |       | $                     | 5,304      |   | $ | 3,388 |   | $ | 2,659 |   |

 

Theprojected benefit obligation, accumulated benefit obligation, and fair value ofplan assets for pension plans with accumulated benefit obligations in excess ofplan assets are as follows (amounts in thousands):

| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Projected benefit  obligation   |       | $                     | 95,385     |   | $ | 64,785 |   |
| Accumulated  benefit obligation |       | 82,762                |       | 56,715 |   |
| Fair value of  plan assets      |       | 63,603                |       | 46,752 |   |
|                                 |            |                       |            |  |  |  |  |

 

At December 31, 2006 and 2005, plan assets forour foreign defined pension benefit plans consist primarily of the assets ofour U.K. Pension Plan. Defined pension benefit plan assets for our other foreignsubsidiaries as of December 31, 2006 and 2005 were not significant.

F-130

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE P.**   BENEFIT PLANS (Continued)

The investment objectiveof our U.K. Pension Plan is to maximize the overall return from investmentincome and capital appreciation without resorting to a high risk investmentstrategy. The plan has no employer-related investments. Our U.K. PensionPlan retains professional investment managers that invest plan assets primarilyin equity securities, bonds, property, and cash and other investments, which isconsistent with the plan’s liability profile. The weighted average asset allocationsfor our U.K. Pension Plan are as follows:

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| U.K. equity securities            |       |                  | 55         | % |   |   | 55 | % |   |
| Other overseas equity  securities |       |                  | 27         |   |   |   | 25 |   |   |
| Bonds                             |       |                  | 8          |   |   |   | 11 |   |   |
| Real estate                       |       |                  | 6          |   |   |   | 5 |   |   |
| Other                             |       |                  | 4          |   |   |   | 4 |   |   |
| Total                             |       |                  | 100        | % |   |   | 100 | % |   |

 

The assumption made forthe expected return on assets is based on the benchmark allocation strategy forour U.K. Pension Plan. Returns for individual asset categories are derived frommarket yields at the effective date, together with, in the case of equity-typeassets, allowance for the additional future return expected from such assetscompared to fixed interest investments.

**Contributions**

We expect to contribute approximately $4 millionto our U.K. Pension Plan in 2007.

F-131

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE P.**   BENEFITPLANS (Continued)

**Estimated FutureBenefit Payments**

Weexpect to pay the following benefit payments for our defined pension benefitplans outside the United States, which reflect expected future service, asappropriate (amounts in thousands):

| ** ** | ** ** | **Estimated  Future  Benefit  Payments** | ** ** |
|------------|------------|------------------------------------------|------------|
| 2007       |       |                                     | $          | 1,284 |   |   |
| 2008       |       |                                     | 1,265      |   |   |
| 2009       |       |                                     | 1,496      |   |   |
| 2010       |       |                                     | 1,449      |   |   |
| 2011       |       |                                     | 1,588      |   |   |
| 2012-2016  |       |                                     | 11,283     |   |   |

 

**NOTE Q.**   SEGMENTINFORMATION

In accordance with FAS 131, “Disclosures aboutSegments of an Enterprise and Related Information,” we present segmentinformation in a manner consistent with the method we use to report thisinformation to our management. Applying FAS 131, we have five reportingsegments as described in Note A., under the heading “Summary ofSignificant Accounting Policies—Business,” to these financial statements. Asdescribed in Note A., above, effective January 1,2006, as a result of changes in how we review our business, certain general andadministrative expenses, as well as research and development expenses relatedto our preclinical development programs, which were formerly allocated amongstour reporting segments and Other, are now allocated to Corporate. Additionally,our diagnostic products business unit, which was formerly reported combinedwith our Genetics business unit under the caption “Diagnostics/Genetics,” isnow included under the caption “Other.” We have revised our 2005 and 2004segment presentations to conform to our 2006 presentation.

F-132

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE Q.**   SEGMENT INFORMATION (Continued)

We have providedinformation concerning the operations of these reportable segments in thefollowing tables (amounts in thousands):

| ** **                                             | ** ** | **For the Years Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                              |       |                                                      |       |   |   |   |   |
| Renal (1)                                              |       | $                                                         | 608,479    |   | $ | 452,000 |   | $ | 363,720 |   |
| Therapeutics (1)                                       |       | 1,520,713                                                 |       | 1,322,034 |   | 1,114,919 |   |
| Transplant (1,2)                                       |       | 155,966                                                   |       | 145,912 |   | 151,363 |   |
| Biosurgery (1)                                         |       | 387,569                                                   |       | 353,176 |   | 209,516 |   |
| Genetics (1)                                           |       | 240,857                                                   |       | 222,328 |   | 188,166 |   |
| Other (1)                                              |       | 273,056                                                   |       | 237,673 |   | 170,492 |   |
| Corporate (1)                                          |       | 373                                                       |       | 1,719 |   | 2,969 |   |
| Total                                                  |       | $                                                         | 3,187,013  |   | $ | 2,734,842 |   | $ | 2,201,145 |   |
| Depreciation and amortization expense:                 |       |                                                      |       |   |   |   |   |
| Renal (1)                                              |       | $                                                         | 94,809     |   | $ | 66,626 |   | $ | 28,547 |   |
| Therapeutics (1)                                       |       | 19,112                                                    |       | 14,602 |   | 12,394 |   |
| Transplant (1)                                         |       | 24,709                                                    |       | 30,199 |   | 36,199 |   |
| Biosurgery (1)                                         |       | 73,788                                                    |       | 69,200 |   | 32,785 |   |
| Genetics (1)                                           |       | 20,287                                                    |       | 15,879 |   | 12,515 |   |
| Other (1)                                              |       | 36,813                                                    |       | 34,563 |   | 13,212 |   |
| Corporate (1)                                          |       | 61,871                                                    |       | 53,551 |   | 69,462 |   |
| Total                                                  |       | $                                                         | 331,389    |   | $ | 284,620 |   | $ | 205,114 |   |
| Equity in income (loss) of equity method  investments: |       |                                                      |       |   |   |   |   |
| Renal                                                  |       | $                                                         | —     |   | $ | — |   | $ | — |   |
| Therapeutics                                           |       | 18,508                                                    |       | 7,076 |   | (9,853 | ) |
| Transplant                                             |       | —                                                    |       | (893 | ) | (1,486 | ) |
| Biosurgery                                             |       | —                                                    |       | — |   | — |   |
| Genetics                                               |       | —                                                    |       | — |   | — |   |
| Other                                                  |       | (1,814                                                    | )          | (3,988 | ) | (2,485 | ) |
| Corporate (3)                                          |       | (989                                                      | )          | (2,044 | ) | (1,800 | ) |
| Total                                                  |       | $                                                         | 15,705     |   | $ | 151 |   | $ | (15,624 | ) |
| Income (loss) before income taxes:                     |       |                                                      |       |   |   |   |   |
| Renal (1)                                              |       | $                                                         | 175,486    |   | $ | 102,739 |   | $ | 131,849 |   |
| Therapeutics (1)                                       |       | 1,015,375                                                 |       | 820,921 |   | 680,328 |   |
| Transplant (1)                                         |       | (542,789                                                  | )          | 15,495 |   | (27,093 | ) |
| Biosurgery (1)                                         |       | 40,734                                                    |       | 35,468 |   | 19,515 |   |
| Genetics (1,3,4)                                       |       | (227,796                                                  | )          | (3,039 | ) | (3,690 | ) |
| Other (1)                                              |       | (40,148                                                   | )          | (50,068 | ) | (260,809 | ) |
| Corporate (1,5)                                        |       | (473,540                                                  | )          | (292,597 | ) | (312,404 | ) |
| Total                                                  |       | $                                                         | (52,678    | ) | $ | 628,919 |   | $ | 227,696 |   |

----

(1)          Theresults of operations of acquired companies and assets and the amortizationexpense related to acquired intangible assets are included in segment resultsbeginning on the date of acquisition. 

F-133

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE Q.**   SEGMENT INFORMATION (Continued)

Charges forIPR&D related to these acquisitions are included in segment results in theyear of acquisition. Acquisitions completed since January 1, 2004 are:

| **Acquisition**                               | ** ** | ** **             | ** ** | **Date Acquired**    | ** ** | **Business Segment(s)** | ** ** | **IPR&D Charge** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|----------------------|
| AnorMED                                       |       | November 7, 2006  |       | Transplant           |       | $552.9 million     |
| Hernia repair assets of Surgi.B               |       | March 29, 2006    |       | Biosurgery           |       | None                    |
| Gene therapy assets of Avigen                 |       | December 19, 2005 |       | Therapeutics         |       | $7.0 million       |
| Equal Diagnostics                             |       | July 15, 2005     |       | Other                |       | None                    |
| Bone Care                                     |       | July 1, 2005      |       | Renal/Corporate      |       | $12.7 million      |
| Verigen                                       |       | February 8, 2005  |       | Biosurgery/Corporate |       | $9.5 million       |
| Synvisc sales and marketing rights from Wyeth |       | January 6, 2005   |       | Biosurgery           |       | None                    |
| ILEX Oncology                                 |       | December 20, 2004 |       | Other                |       | $254.5 million     |
| Pathology/oncology testing assets of IMPATH   |       | May 1, 2004       |       | Genetics             |       | None                    |
| Alfigen                                       |       | February 21, 2004 |       | Genetics             |       | None                    |

 

(2)          Transplant revenue for2005 includes $9.0 million of previously deferred license revenue relatedto an upfront license fee received from PGP.

(3)          In all periodspresented, represents our portion of the losses of Peptimmune, an equity methodinvestment, effective April 1, 2003.

(4)          Loss before income taxesfor Genetics for 2006 includes a $219.2 million charge for impaired goodwillrecorded in September 2006. In the third quarter of 2006, in connectionwith our required annual test of goodwill for potential impairment, wedetermined that the goodwill assigned to our Genetics business unit wasimpaired.

(5)          Lossbefore income taxes for Corporate includes our corporate, general andadministrative and corporate science activities, all of the stock-basedcompensation expenses we recorded as a result of our adoption of FAS 123R,as well as, interest income, interest expense and other income and expenseitems that we do not specifically allocate to a particular reporting segment.

F-134

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE Q.**   SEGMENT INFORMATION (Continued)

***Segment Assets***

We provide informationconcerning the assets of our reportable segments in the following table (amountsin thousands):

| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segment Assets (1): |       |                  |       |   |   |   |   |
| Renal (2)           |       | $                     | 1,380,003  |   | $ | 1,344,117 |   | $ | 616,979 |   |
| Therapeutics        |       | 1,094,520             |       | 972,504 |   | 949,168 |   |
| Transplant (3)      |       | 410,436               |       | 369,366 |   | 408,090 |   |
| Biosurgery (4)      |       | 477,334               |       | 456,634 |   | 294,715 |   |
| Genetics (5)        |       | 133,839               |       | 364,469 |   | 363,935 |   |
| Other (6,7)         |       | 851,343               |       | 839,055 |   | 898,287 |   |
| Corporate (2,3,5,7) |       | 2,843,713             |       | 2,532,720 |   | 2,538,247 |   |
| Total               |       | $                     | 7,191,188  |   | $ | 6,878,865 |   | $ | 6,069,421 |   |

----

(1)          Assets for our fivereporting segments and Other include primarily accounts receivable, inventoryand certain fixed and intangible assets, including goodwill.

(2)          InJuly 2005, we acquired Bone Care for net consideration paid of$604.3 million. Total assets for this acquisition as of July 1, 2005 include(amounts in millions):

| ** **                      | ** ** | **Amount** | ** ** | **Business  Segment** | ** ** |
|---------------------------------|------------|------------|------------|-----------------------|------------|
| Cash and  marketable securities |       |       | $          | 108.0                 |       |   | Corporate |   |
| Accounts  receivable            |       |       | 10.5       |                  |       | Renal |   |
| Inventory                       |       |       | 17.5       |                  |       | Renal |   |
| Property, plant  and equipment  |       |       | 2.9        |                  |       | Renal |   |
| Goodwill                        |       |       | 228.8      |                  |       | Renal |   |
| Other intangible  assets        |       |       | 504.2      |                  |       | Renal |   |
| Other assets                    |       |       | 45.0       |                  |       | Renal |   |
| Total                           |       |       | $          | 916.9                 |       |   |   |   |

 

F-135

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE Q.**   SEGMENT INFORMATION(Continued)

(3)          In November 2006,we acquired AnorMED for net consideration of $569.0 million. Total assetsfor AnorMED as of November 7, 2006, the date of acquisition, include(amounts in millions):

| ** **                     | ** ** | **Amount** | ** ** | **Business  Segment** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------|------------|
| Cash and cash  equivalents     |       |       | $          | 20.2                  |       |   | Corporate |   |
| Deferred tax  assets-current   |       |       | 2.5        |                  |       | Corporate |   |
| Other current  assets          |       |       | 6.3        |                  |       | Transplant |   |
| Property, plant  and equipment |       |       | 2.8        |                  |       | Transplant |   |
| Goodwill                       |       |       | 29.1       |                  |       | Transplant |   |
| Other intangible  assets       |       |       | 3.5        |                  |       | Transplant |   |
| Other assets                   |       |       | 0.8        |                  |       | Transplant |   |
| Total                          |       |       | $          | 65.2                  |       |   |   |   |

 

(4)          In January 2005, weconsummated an arrangement with Wyeth under which we reacquired the sales andmarketing rights to Synvisc in in the United States, as well as Germany,Poland, Greece, Portugal and the Czech Republic. In exchange for the sales andmarketing rights, we paid initial payments totaling $121.0 million in cashto Wyeth and otherwise incurred $0.3 million of acquisition costs. We havealso accrued contingent royalty payments to Wyeth totaling $118.3 million,of which $110.0 million had been paid as of December 31, 2006.Distribution rights (a component of other intangible assets, net) in ourconsolidated balance sheet as of December 31, 2006 include a total of$239.6 million for the initial and contingent royalty payments (made oraccrued) as of that date.

(5)          In February 2004,we acquired substantially all of the assets of Alfigen for net consideration of$47.5 million. In May 2004, we acquired substantially all of thepathology/oncology testing assets of IMPATH for net consideration of $215.3 million.Total assets for these acquisitions as of their dates of acquisition include(amounts in millions):

| ** **                     | ** ** | **Alfigen** | ** ** | **IMPATH** | ** ** | **Total** | ** ** | **Business  Segment** | ** ** |
|--------------------------------|------------|-------------|------------|------------|------------|-----------|------------|-----------------------|------------|
| Accounts  receivable           |       |        | $          | —     |       |      |       | $                     | 14.5       |   |   | $ | 14.5 |   | Genetics/Other |   |
| Inventories                    |       |        | —     |       |       |      | 2.0        |                  |       | 2.0 |   | Genetics/Other |   |
| Property, plant  and equipment |       |        | 1.2        |       |       |      | 15.0       |                  |       | 16.2 |   | Genetics/Other |   |
| Goodwill                       |       |        | 33.2       |       |       |      | 157.5      |                  |       | 190.7 |   | Genetics/Other |   |
| Other intangible  assets       |       |        | 13.0       |       |       |      | 34.8       |                  |       | 47.8 |   | Genetics/Other |   |
| Other assets                   |       |        | 0.1        |       |       |      | 4.0        |                  |       | 4.1 |   | Genetics/Other |   |
| Total                          |       |        | $          | 47.5       |       |      |       | $                     | 227.8      |   |   | $ | 275.3 |   |   |   |

 

F-136

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE Q.**   SEGMENT INFORMATION (Continued)

(6)          In July 2005, weacquired Equal Diagnostics for net consideration of $13.3 million. Totalassets for this acquisition as of the date of acquisition include (amounts inmillions):

| ** **                     | ** ** | **Amount** | ** ** | **Business  Segment** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------|------------|
| Cash and cash  equivalents     |       |       | $          | 0.5                   |       |   |   | Other |   |   |
| Accounts  receivable           |       |       | 1.5        |                  |       |   | Other |   |   |
| Inventories                    |       |       | 1.5        |                  |       |   | Other |   |   |
| Property, plant  and equipment |       |       | 0.1        |                  |       |   | Other |   |   |
| Goodwill                       |       |       | 5.3        |                  |       |   | Other |   |   |
| Other intangible  assets       |       |       | 4.9        |                  |       |   | Other |   |   |
| Other assets                   |       |       | 0.1        |                  |       |   | Other |   |   |
| Total                          |       |       | $          | 13.9                  |       |   |   |   |   |   |

 

(7)          Includes the assetsrelated to our corporate, general and administrative operations, and corporatescience activities that we do not allocate to a particular segment, includingcash, cash equivalents, short- and long-term investments, net property,plant and equipment and deferred tax assets.

Segment assets forCorporate consist of the following (amounts in thousands):

| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash, cash equivalents,  short- and long-term investments |       | $                     | 1,285,604  |   | $ | 1,089,102 |   | $ | 1,081,749 |   |
| Deferred tax  assets-current                              |       | 136,925               |       | 170,443 |   | 160,438 |   |
| Property,  plant & equipment, net                |       | 1,036,182             |       | 826,221 |   | 838,516 |   |
| Investments in  equity securities                         |       | 66,563                |       | 135,930 |   | 150,253 |   |
| Other                                                     |       | 318,439               |       | 311,024 |   | 307,291 |   |
| Total                                                     |       | $                     | 2,843,713  |   | $ | 2,532,720 |   | $ | 2,538,247 |   |

 

F-137

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTE Q.**   SEGMENT INFORMATION (Continued)

***Geographic Segments***

Weoperate in the healthcare industry and we manufacture and market our productsprimarily in the United States and Europe. Our principal manufacturingfacilities are located in the United States, United Kingdom, Switzerland,Republic of Ireland, France, Belgium and Germany. We purchase products from oursubsidiaries in the United Kingdom and Switzerland for sale to customers in theUnited States. We set transfer prices from our foreign subsidiaries to allow usto produce profit margins commensurate with our sales and marketing effort. Thefollowing tables contain certain financial information by geographic area(amounts in thousands):

| ** **    | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:     |       |                                                          |       |   |   |   |   |
| United States |       | $1,728,497                                                    |       | $ | 1,517,000 |   | $ | 1,208,184 |   |
| Europe        |       | 990,745                                                       |       | 858,913 |   | 723,102 |   |
| Other         |       | 467,771                                                       |       | 358,929 |   | 269,859 |   |
| Total         |       | $                                                             | 3,187,013  |   | $ | 2,734,842 |   | $ | 2,201,145 |   |
|               |            |                                                               |            |  |  |  |  |  |  |  |

 

| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Long-lived assets: |       |                  |       |   |   |   |   |
| United States      |       | $                     | 928,547    |   | $ | 915,107 |   | $ | 768,540 |   |
| Europe             |       | 801,767               |       | 611,657 |   | 621,951 |   |
| Other              |       | 7,014                 |       | 5,444 |   | 4,780 |   |
| Total              |       | $                     | 1,737,328  |   | $ | 1,532,208 |   | $ | 1,395,271 |   |

 

Our results of operations are highly dependent onsales of Cerezyme. Sales of this product represented approximately 35% of ourproduct revenue in 2006, approximately 38% of our product revenue in 2005 andapproximately 42% of our product revenue in 2004. We manufacture Cerezyme at asingle manufacturing facility in Allston, Massachusetts. We sell this productdirectly to physicians, hospitals and treatment centers as well as through anunaffiliated distributor. Distributor sales of Cerezyme represented 21% ofCerezyme revenue in 2006, 23% in 2005 and 25% in 2004. We believe that ourcredit risk associated with trade receivables is mitigated as a result of thefact that this product is sold to a large number of customers over a broadgeographic area.

Sales of Renagel,including sales of bulk sevelamer, represented 18% of our product revenue in2006, 17% of our product revenue in 2005 and 18% of our product revenue in2004. A substantial majority of the sales of Renagel are to wholesaledistributors.

F-138

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**GENZYME CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued)**

**NOTER.   QUARTERLY RESULTS**

| ** **                    | ** ** | **1st Quarter  2006**                                                         | ** ** | **2nd Quarter  2006** | ** ** | **3rd Quarter  2006** | ** ** | **4th Quarter  2006** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| Total revenues                |       |                                                                               | $          | 730,842                    |       |                       |       | $                          | 793,356    |   |   |   | $ | 808,574 |   |   | $ | 854,241 |   |
| Operating income  (loss)(1)   |       |                                                                               | 128,208    |                       |       |                       | 112,719    |                       |       |   | (47,882 | ) |   | (383,554 | ) |
| Net income (loss)(1)          |       |                                                                               | 100,974    |                       |       |                       | 134,497    |                       |       |   | 15,966 |   |   | (268,234 | ) |
| Net income (loss) per  share: |       |                                                                               |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Basic                         |       |                                                                               | $          | 0.39                       |       |                       |       | $                          | 0.52       |   |   |   | $ | 0.06 |   |   | $ | (1.02 | ) |
| Diluted                       |       |                                                                               | $          | 0.37                       |       |                       |       | $                          | 0.49       |   |   |   | $ | 0.06 |   |   | $ | (1.02 | ) |

 

| ** **            | ** ** | **1st Quarter  2005**                                                         | ** ** | **2nd Quarter  2005** | ** ** | **3rd Quarter  2005** | ** ** | **4th Quarter  2005** | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| Total revenues        |       |                                                                               | $          | 629,949                    |       |                       |       | $                          | 668,139    |   |   |   | $ | 708,063 |   |   |   | $ | 728,691 |   |   |
| Operating income  (2) |       |                                                                               | 136,586    |                       |       |                       | 164,673    |                       |       |   | 161,806 |   |   |   | 137,797 |   |   |
| Net income (2)        |       |                                                                               | 95,558     |                       |       |                       | 123,631    |                       |       |   | 115,654 |   |   |   | 106,646 |   |   |
| Net income per share: |       |                                                                               |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Basic                 |       |                                                                               | $          | 0.38                       |       |                       |       | $                          | 0.49       |   |   |   | $ | 0.45 |   |   |   | $ | 0.41 |   |   |
| Diluted               |       |                                                                               | $          | 0.36                       |       |                       |       | $                          | 0.46       |   |   |   | $ | 0.43 |   |   |   | $ | 0.39 |   |   |

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(1)          For the three monthsended December 31, 2006, includes: a $552.9 million pre-tax chargefor IPR&D ($404.3 million after tax) related to our acquisition of AnorMEDin November 2006 and a $7.9 million pre-tax charge for the settlement of acase before the Competition Appeal Tribunal in the United Kingdom relating toour homecare business in the United Kingdom.

(2)          For the three monthsended December 31, 2005, includes: $16.9 million of pre-taxcharges to write off the cost of unsuccessful production runs of Cerezyme andMyozyme that occurred at our Allston, Massachusetts manufacturing plant;$11.2 million to write off expiring Clolar inventory; and a$7.0 million charge for IPR&D related to the acquisition of certaingene therapy assets from Avigen in December 2005.

F-139

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**Reportof Independent Registered Public Accounting Firm onFinancial Statement Schedule**

To the Board of Directors and Shareholdersof Genzyme Corporation:

Ouraudits of the consolidated financial statements, of management’s assessment ofthe effectiveness of internal control over financial reporting and of theeffectiveness of internal control over financial reporting referred to in ourreport dated March 1, 2007 appearing in the 2006 Annual Report of GenzymeCorporation (which report, consolidated financial statements and assessment areincorporated by reference in this Annual Report on Form 10-K) alsoincluded an audit of the financial statement schedule listed in Item 15(a)(2) ofthis Form 10-K. In our opinion, this financial statement schedulepresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements.
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
| PricewaterhouseCoopers  LLP    |
| Boston, Massachusetts          |
| March 1, 2007             |

 

F-140

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**GENZYME CORPORATION**

**SCHEDULE II—VALUATION ANDQUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

| **Column A**                   | ** ** | **Column B**                              | ** ** | **Column C**                             | ** ** | **Column D**                    | ** ** | **Column E** | ** **  |
|-------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|-------------------|-------------|
| ** **                          | ** ** | ** **                                     | ** ** | **Additions**                                 | ** ** | ** **                           | ** ** | ** **        | ** **  |
| **Description**                     | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions**    | ** **  | **Balance at  End of  Period** | ** ** |
| Year ended  December 31, 2006: |       |                                           |       |                                          |       |                                 |       |              |        |   |   |
| Accounts receivable allowances      |       | $                                              | 46,127,000 |                                          | $          | 10,050,000                           |       | $                 | 13,627,000  |   | $ | 17,241,000 |   | $ | 52,563,000 |   |
| Rebates                             |       | $                                              | 50,304,000 |                                          | $          | —                               |       | $                 | 115,500,000 |   | $ | 103,638,000 |   | $ | 62,166,000 |   |
| Year ended  December 31, 2005: |       |                                           |       |                                          |       |                                 |       |              |        |   |   |
| Accounts receivable allowances      |       | $                                              | 42,397,000 |                                          | $          | 9,444,000                            |       | $                 | 6,702,000   |   | $ | 12,416,000 |   | $ | 46,127,000 |   |
| Rebates                             |       | $                                              | 33,464,000 |                                          | $          | —                               |       | $                 | 89,713,000  |   | $ | 72,873,000 |   | $ | 50,304,000 |   |
| Year ended  December 31, 2004: |       |                                           |       |                                          |       |                                 |       |              |        |   |   |
| Accounts receivable allowances      |       | $                                              | 26,638,000 |                                          | $          | 12,616,000                           |       | $                 | 34,393,000  |   | $ | 31,250,000 |   | $ | 42,397,000 |   |
| Rebates                             |       | $                                              | 20,187,000 |                                          | $          | —                               |       | $                 | 52,640,000  |   | $ | 39,363,000 |   | $ | 33,464,000 |   |

 

 

F-141

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