**UNITED
        STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**________________________**





**FORM
      10-Q**


________________________





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





**For
                the quarterly period ended June 30, 2007**or





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





**For
      the transition period
      from    to    .**





**Commission
      File Number: 1-9813**





**GENENTECH,
      INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
              (State
                or other jurisdiction of incorporation or organization)
            **94-2347624**
              (I.R.S.
                Employer Identification Number)





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


(Address
      of principal executive offices and Zip Code)





**(650) 225-1000**


(Registrant’s
      telephone number, including area code)





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





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





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





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





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


**Class**
            **Number
                of Shares Outstanding**Common
                Stock $0.02 par value
            1,053,031,880 Outstanding
                at July 26, 2007




















**GENENTECH,
      INC.**


**TABLE
      OF CONTENTS**








Page
                No.PART
                I—FINANCIAL INFORMATIONItem
                1.
            Financial
                Statements
            3Condensed
                Consolidated Statements
                of Income—
              for
                the three months and six months ended June
                30, 2007 and 2006
            3Condensed
                Consolidated Statements of Cash
                Flows—
              for
                the six months ended June 30, 2007 and
                2006
            4Condensed
                Consolidated Balance
                Sheets—
              June
                30, 2007 and December 31,
                2006
            5Notes
                to Condensed Consolidated Financial
                Statements
            6-14Report
                of Independent Registered
                Public Accounting Firm
            15Item
                2.
            Management’s
                Discussion and Analysis of
                Financial Condition and Results of Operations
            16-39Item
                3.
            Quantitative and Qualitative
                Disclosures
                About Market Risk
            40Item
                4.
            Controls
                and Procedures
            40PART
                II—OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            41Item
                1A.
            Risk
                Factors
            41-53Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            53Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            54Item
                6.
            Exhibits
            54SIGNATURES
            55








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





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





-2-





**PART
      I—FINANCIAL INFORMATION**


**Item
      1. Financial Statements**





**GENENTECH,
      INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF
      INCOME**


*(In
      millions, except per share amounts)*


*(Unaudited)*





**Three
                Months**
              **Ended
                  June 30,**
            
            
            **Six
                Months**
              **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Revenue**Product
                sales (including amounts from related parties:
              three
                months—2007–$256; 2006–$75;
              six
                months—2007–$522; 2006–$133)
            
            $
            2,443
            
            
            $
            1,810
            
            
            $
            4,773
            
            
            $
            3,454Royalties
                (including amounts from related parties:
              three
                months—2007–$296; 2006–$207;
              six
                months—2007–$557; 2006–$373)
            
            
            484
            
            
            
            316
            
            
            
            903
            
            
            
            602Contract
                revenue (including amounts from related parties:
              three
                months—2007–$34; 2006–$34;
              six
                months—2007–$104; 2006–$63)
            
            
            77
            
            
            
            73
            
            
            
            171
            
            
            
            129**Total
                operating revenue**
            
            
            3,004
            
            
            
            2,199
            
            
            
            5,847
            
            
            
            4,185**Costs
                and expenses**Cost
                of sales (including amounts for related parties:
              three
                months—2007–$140; 2006–$65;
              six
                months—2007–$265; 2006–$115)
            
            
            429
            
            
            
            284
            
            
            
            821
            
            
            
            546Research
                and development (including amounts for related parties:
              three
                months—2007–$79; 2006–$65;
              six
                months—2007–$147; 2006–$117)
              (including
                amounts in contract revenue:
              three
                months—2007–$60; 2006–$51;
              six
                months—2007–$106; 2006–$87)
            
            
            603
            
            
            
            390
            
            
            
            1,213
            
            
            
            764Marketing,
                general and administrative
            
            
            532
            
            
            
            471
            
            
            
            1,023
            
            
            
            912Collaboration
                profit sharing (including amounts for a related party:
              three
                months—2007–$49; 2006–$48;
              six
                months—2007–$96; 2006–$91)
            
            
            277
            
            
            
            259
            
            
            
            529
            
            
            
            485Recurring
                charges related to redemption
            
            
            26
            
            
            
            26
            
            
            
            52
            
            
            
            52Special
                items: litigation related
            
            
            13
            
            
            
            14
            
            
            
            26
            
            
            
            27**Total
                costs and expenses**
            
            
            1,880
            
            
            
            1,444
            
            
            
            3,664
            
            
            
            2,786Operating
                income
            
            
            1,124
            
            
            
            755
            
            
            
            2,183
            
            
            
            1,399Other
                income (expense):Interest
                and other income (expense), net
            
            
            75
            
            
            
            121
            
            
            
            149
            
            
            
            174Interest
                expense
            
            
            (17
            )
            
            
            (18
            )
            
            
            (35
            )
            
            
            (37
            )Total
                other income, net
            
            
            58
            
            
            
            103
            
            
            
            114
            
            
            
            137Income
                before taxes
            
            
            1,182
            
            
            
            858
            
            
            
            2,297
            
            
            
            1,536Income
                tax provision
            
            
            435
            
            
            
            327
            
            
            
            844
            
            
            
            584**Net
                income**
            
            $
            747
            
            
            $
            531
            
            
            $
            1,453
            
            
            $
            952**Earnings
                per share**Basic
            
            $
            0.71
            
            
            $
            0.50
            
            
            $
            1.38
            
            
            $
            0.90Diluted
            
            $
            0.70
            
            
            $
            0.49
            
            
            $
            1.36
            
            
            $
            0.89Shares
                used to compute basic earnings per share
            
            
            1,053
            
            
            
            1,053
            
            
            
            1,053
            
            
            
            1,054Shares
                used to compute diluted earnings per share
            
            
            1,070
            
            
            
            1,073
            
            
            
            1,071
            
            
            
            1,074





*See
      Notes to Condensed Consolidated Financial Statements.*





-3-








**GENENTECH,
      INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS**


*(In
      millions)*


*(Unaudited)*





**Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006****Cash
                flows from operating activities**Net
                income
            
            $
            1,453
            
            
            $
            952Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            215
            
            
            
            199Employee
                stock-based compensation
            
            
            203
            
            
            
            149Deferred
                income taxes
            
            
            (103
            )
            
            
            (85
            )Deferred
                revenue
            
            
            (29
            )
            
            
            2Litigation-related
                liabilities
            
            
            26
            
            
            
            26Excess
                tax benefit from stock-based compensation arrangements
            
            
            (127
            )
            
            
            (90
            )Gain
                on sales of securities available-for-sale and other, net
            
            
            (12
            )
            
            
            (69
            )Write-down
                of securities available-for-sale and other
            
            
            4
            
            
            
            –Loss
                on property and equipment dispositions
            
            
            30
            
            
            
            –Changes
                in assets and liabilities:Receivables
                and other current assets
            
            
            (115
            )
            
            
            (184
            )Inventories
            
            
            (180
            )
            
            
            (174
            )Investments
                in trading securities
            
            
            (72
            )
            
            
            (15
            )Accounts
                payable, other accrued liabilities, and other long-term
                liabilities
            
            
            132
            
            
            
            205**Net
                cash provided by operating activities**
            
            
            1,425
            
            
            
            916**Cash
                flows from investing activities**Purchases
                of securities available-for-sale
            
            
            (465
            )
            
            
            (898
            )Proceeds
                from sales of securities available-for-sale
            
            
            335
            
            
            
            419Proceeds
                from maturities of securities available-for-sale
            
            
            261
            
            
            
            126Capital
                expenditures
            
            
            (475
            )
            
            
            (538
            )Change
                in other intangible and long-term assets
            
            
            (8
            )
            
            
            17**Net
                cash used in investing activities**
            
            
            (352
            )
            
            
            (874
            )**Cash
                flows from financing activities**Stock
                issuances
            
            
            276
            
            
            
            187Stock
                repurchases
            
            
            (666
            )
            
            
            (540
            )Excess
                tax benefit from stock-based compensation arrangements
            
            
            127
            
            
            
            90**Net
                cash used in financing activities**
            
            
            (263
            )
            
            
            (263
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            810
            
            
            
            (221
            )Cash
                and cash equivalents at beginning of period
            
            
            1,250
            
            
            
            1,225**Cash
                and cash equivalents at end of period**
            
            $
            2,060
            
            
            $
            1,004**Supplemental
                cash flow data**Cash
                paid during the period for:Interest
            
            $
            31
            
            
            $
            35Income
                taxes
            
            
            806
            
            
            
            498Non-cash
                investing and financing activitiesCapitalization
                of construction in progress related to financing lease
                transactions
            
            
            101
            
            
            
            61





*See
      Notes to Condensed Consolidated Financial Statements.*





-4-








**GENENTECH,
      INC.**


**CONDENSED
      CONSOLIDATED BALANCE
      SHEETS**


*(In
      millions)*


*(Unaudited)*





**June
                  30,**
                **2007**
            
            
            **December
                  31,**
                **2006****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            2,060
            
            
            $
            1,250Short-term
                investments
            
            
            1,135
            
            
            
            1,243Accounts
                receivable—product sales (net of allowances:
              2007–$105;
                2006–$92; including amounts from related parties:
              2007–$68;
                2006–$57)
            
            
            1,068
            
            
            
            965Accounts
                receivable—royalties (including amounts from related
                parties:
              2007–$379;
                2006–$316)
            
            
            514
            
            
            
            453Accounts
                receivable—other (including amounts from related parties:
              2007–$103;
                2006–$150)
            
            
            177
            
            
            
            248Inventories
            
            
            1,365
            
            
            
            1,178Deferred
                tax assets
            
            
            272
            
            
            
            278Prepaid
                expenses and other current assets
            
            
            108
            
            
            
            89Total
                current assets
            
            
            6,699
            
            
            
            5,704Long-term
                marketable debt and equity securities
            
            
            1,883
            
            
            
            1,832Property,
                plant and equipment, net
            
            
            4,563
            
            
            
            4,173Goodwill
            
            
            1,315
            
            
            
            1,315Other
                intangible assets
            
            
            427
            
            
            
            476Restricted
                cash and investments
            
            
            788
            
            
            
            788Other
                long-term assets
            
            
            684
            
            
            
            554**Total
                assets**
            
            $
            16,359
            
            
            $
            14,842**Liabilities
                and stockholders’ equity**Current
                liabilitiesAccounts
                payable (including amounts to related parties:
              2007
                and 2006–$7)
            
            $
            361
            
            
            $
            346Deferred
                revenue
            
            
            52
            
            
            
            62Taxes
                payable
            
            
            124
            
            
            
            111Other
                accrued liabilities (including amounts to related
                parties:
              2007–$164;
                2006–$136)
            
            
            1,452
            
            
            
            1,491Total
                current liabilities
            
            
            1,989
            
            
            
            2,010Long-term
                debt
            
            
            2,307
            
            
            
            2,204Deferred
                revenue
            
            
            180
            
            
            
            199Litigation-related
                and other long-term liabilities
            
            
            1,032
            
            
            
            951Total
                liabilities
            
            
            5,508
            
            
            
            5,364Commitments
                and contingenciesStockholders’
                equityCommon
                stock
            
            
            21
            
            
            
            21Additional
                paid-in capital
            
            
            10,624
            
            
            
            10,091Accumulated
                other comprehensive income
            
            
            205
            
            
            
            204Retained
                earnings (accumulated deficit), since June 30, 1999
            
            
            1
            
            
            
            (838
            )Total
                stockholders’ equity
            
            
            10,851
            
            
            
            9,478**Total
                liabilities and stockholders’ equity**
            
            $
            16,359
            
            
            $
            14,842





*See
      Notes to Condensed Consolidated Financial Statements.*





-5-








**GENENTECH,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**


***(Unaudited)***








**Note
                1.**
            **Summary
                of Significant Accounting
                Policies**





***Basis
      of Presentation***





We
      prepared the Condensed Consolidated Financial Statements following the
      requirements of the United States (U.S.) Securities and Exchange Commission
      for
      interim reporting. As permitted under those rules, certain footnotes or other
      financial information that are normally required by U.S. generally accepted
      accounting principles (GAAP) can be condensed or omitted. The information
      included in this Quarterly Report on Form 10-Q should be read in conjunction
      with the Consolidated Financial Statements and accompanying notes included
      in
      our Annual Report on Form 10-K for the year ended December 31, 2006. In the
      opinion of management, the financial statements include all adjustments,
      consisting only of normal and recurring adjustments, considered necessary for
      the fair presentation of our financial position and operating
      results.





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





***Principles
      of Consolidation***





The
      consolidated financial statements include the accounts of Genentech and all
      wholly owned subsidiaries. Material intercompany accounts and transactions
      have
      been eliminated.





***Use
      of Estimates and Reclassifications***





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





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





***Recent
      Accounting Pronouncements***





On
      January 1, 2007, we adopted Emerging Issues Task Force (EITF) Issue No. 06-2,
      *“**Accounting for Sabbatical Leave and Other Similar Benefits
      Pursuant to FASB Statement No. 43, Accounting for Compensated
      Absences**”* (EITF 06-2). Prior to the adoption of EITF 06-2, we
      recorded a liability for a sabbatical leave when the employee vested in the
      benefit, which was only at the end of a six-year service period. Under EITF
      06-2, we accrue an estimated liability for a sabbatical leave over the requisite
      six-year service period, as the employee’s services are rendered. Upon our
      adoption of EITF 06-2, we recorded an adjustment to retained earnings
      (accumulated deficit) of $26 million, net of tax, as a cumulative effect of
      a
      change in accounting principle.





We
      adopted the provisions of Financial Accounting Standards Board (FASB)
      Interpretation No. 48, *“**Accounting for Uncertainty in Income
      Taxes**”* (FIN 48), on January 1, 2007. Implementation of FIN 48 did
      not result in a cumulative adjustment to retained earnings (accumulated
      deficit). The total amount of unrecognized tax benefits as of the date of
      adoption was $147 million. Of this total, $112 million represents the
      amount of unrecognized tax benefits that, if recognized, would favorably affect
      our effective income tax rate in any future period. As a result of the
      implementation of FIN 48, we reclassified $147 million of unrecognized tax
      benefits from current liabilities to long-term liabilities as of December 31,
      2006 in the accompanying Condensed Consolidated Balance Sheets.








-6-





We
      file income tax returns in the U.S. federal jurisdiction and various state
      and
      international jurisdictions. The Internal Revenue Service (IRS) is examining
      our
      U.S. federal income tax returns for 2002 through 2004. As of June 30, 2007,
      the
      IRS has****not proposed any adjustments. We are also under
      examination by several state jurisdictions. As of June 30, 2007, no material
      adjustments related to these audits have been proposed.





We
      accrue tax-related interest and penalties and include such expenses with income
      tax expense in the Condensed Consolidated Statements of Income. We recognized
      approximately $2 million and $4 million in tax-related interest expense during
      the second quarter and first six months of 2007, respectively, and had
      approximately $10 million of tax-related interest accrued at January 1, 2007.
      Interest amounts are net of tax benefit. No penalties have been
      accrued.





***Revenue
      Recognition***





We
      recognize revenue from the sale of our products, royalties earned, and contract
      arrangements. Our revenue arrangements that contain multiple elements are
      divided into separate units of accounting if certain criteria are met, including
      whether the delivered element has stand-alone value to the customer and whether
      there is objective and reliable evidence of the fair value of the undelivered
      items. The consideration we receive is allocated among the separate units based
      on their respective fair values, and the applicable revenue recognition criteria
      are applied to each of the separate units. Advance payments received in excess
      of amounts earned are classified as deferred revenue until earned.





The
      Avastin Patient Assistance Program is a voluntary program that enables eligible
      patients who have received 10,000 milligrams of Avastin in a 12-month period
      to
      receive free Avastin in excess of the 10,000 milligrams during the remainder
      of
      the 12-month period. Based on the current wholesale acquisition cost, 10,000
      milligrams is valued at $55,000 in gross revenue. We defer a portion of our
      gross Avastin product sales revenue to reflect our estimate of the commitment
      to
      supply free Avastin to patients who elect to enroll in the program. To calculate
      our deferred revenue, we estimate the number of patients who will receive free
      Avastin and the amount of free Avastin that we expect them to receive. Based
      on
      those estimates, we defer a portion of Avastin revenue on product vials sold
      through normal commercial channels. The deferred revenue is recognized as free
      Avastin vials are delivered.





***Earnings
      Per Share***





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





The
      following is a reconciliation of the numerators and denominators of the basic
      and diluted earnings per share computations *(in millions)*:





**Three
                Months**
              **Ended
                June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Numerator:**Net
                income
            
            $
            747
            
            
            $
            531
            
            
            $
            1,453
            
            
            $
            952**Denominator:**Weighted-average
                shares outstanding used to compute basic earnings per
                share
            
            
            1,053
            
            
            
            1,053
            
            
            
            1,053
            
            
            
            1,054Effect
                of dilutive stock options
            
            
            17
            
            
            
            20
            
            
            
            18
            
            
            
            20Weighted-average
                shares outstanding and dilutive securities used to compute diluted
                earnings per share
            
            
            1,070
            
            
            
            1,073
            
            
            
            1,071
            
            
            
            1,074








-7-





Outstanding
      employee stock options to purchase approximately 35 million and 34 million
      shares of our Common Stock were excluded from the computation of diluted EPS
      for
      the second quarter and first six months of 2007, respectively, because the
      effect would have been anti-dilutive.





***Comprehensive
      Income***





Comprehensive
      income comprises net income and other comprehensive income (OCI). OCI includes
      certain changes in stockholders’ equity that are excluded from net income.
      Specifically, we include in OCI changes in the estimated fair value of
      derivatives designated as effective cash flow hedges, and unrealized gains
      and
      losses on our securities available-for-sale. In accordance with our adoption
      of
      Statement of Financial Accounting Standards (FAS) No. 158,
*“**Employers**’**Accounting for Defined Benefit
      Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87,
      88, 106, and 132(R)**,**”* in 2006, the gains or losses and
      prior service costs or credits that arise during the period, but are not
      recognized as components of net periodic benefit cost, have been recognized
      in
      other comprehensive income.





The
      components of accumulated other comprehensive income, net of taxes, were as
      follows *(in millions)*:





**June
                  30, 2007**
            
            
            **December
                  31, 2006**Net
                unrealized gains on securities available-for-sale
            
            $
            204
            
            
            $
            214Net
                unrealized gains (losses) on cash flow hedges
            
            
            7
            
            
            
            (4
            )Post-retirement
                benefit obligation
            
            
            (6
            )
            
            
            (6
            )Accumulated
                other comprehensive income
            
            $
            205
            
            
            $
            204





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





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                income
            
            $
            747
            
            
            $
            531
            
            
            $
            1,453
            
            
            $
            952Decrease
                in unrealized gains on securities available-for-sale
            
            
            (14
            )
            
            
            (43
            )
            
            
            (10
            )
            
            
            (40
            )Increase
                (decrease) in unrealized gains on cash flow hedges
            
            
            8
            
            
            
            (19
            )
            
            
            11
            
            
            
            (20
            )Comprehensive
                income, net of income taxes
            
            $
            741
            
            
            $
            469
            
            
            $
            1,454
            
            
            $
            892





***Derivative
      Instruments***





Our
      derivative instruments, designated as cash flow hedges, consist of foreign
      currency exchange options and marketable equity collars. At June 30, 2007,
      estimated net gains expected to be reclassified from accumulated OCI to “other
      income, net” during the next year are $8 million.








**Note
                2.**
            **Employee
                Stock-Based Compensation**





***Stock-Based
      Compensation Expense under FAS 123R***





Employee
      stock-based compensation expense was calculated based on awards ultimately
      expected to vest and has been reduced for estimated forfeitures. FAS No. 123(R),
      *“**Share-Based Paymen**t**”* (FAS 123R), requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those
      estimates.








-8-





Employee
      stock-based compensation expense recognized under FAS 123R was as follows
*(in millions):*





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Cost
                of sales
            
            $
            16
            
            
            $
            –
            
            
            $
            33
            
            
            $
            –Research
                and development
            
            
            39
            
            
            
            34
            
            
            
            77
            
            
            
            67Marketing,
                general and administrative
            
            
            47
            
            
            
            41
            
            
            
            93
            
            
            
            82Total
                employee stock-based compensation expense
            
            $
            102
            
            
            $
            75
            
            
            $
            203
            
            
            $
            149





As
      of June 30, 2007, total compensation cost related to unvested stock options
      not
      yet recognized was****$667 million, which is expected to be
      allocated to expense and production costs over a weighted-average period of
      30****months.





The
      carrying value of inventory on our Condensed Consolidated Balance Sheets as
      of
      June 30, 2007 and 2006 includes employee stock-based compensation costs of
      $75
      million and $33 million, respectively. During the second quarter and first
      six
      months of 2007, $16 million and $33 million, respectively, of previously
      capitalized employee stock-based compensation costs were recognized in cost
      of
      sales. Substantially all of the products sold during the first six months of
      2006 were manufactured in previous periods when we did not include employee
      stock-based compensation expense in our production costs.





***Valuation
      Assumptions***





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





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Risk-free
                interest rate
            
            
            4.8
            %
            
            
            4.9
            %
            
            
            4.7
            %
            
            
            4.8
            %Dividend
                yield
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %Expected
                volatility
            
            
            27.0
            %
            
            
            29.0
            %
            
            
            27.0
            %
            
            
            29.0
            %Expected
                term (years)
            
            
            4.6
            
            
            
            4.2
            
            
            
            4.6
            
            
            
            4.2





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








**Note
                3.**
            **Condensed
                Consolidated Financial Statement
                Detail**





***Inventories***





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





**June
                  30, 2007**
            
            
            **December
                  31, 2006**Raw
                materials and supplies
            
            $
            123
            
            
            $
            116Work
                in process
            
            
            883
            
            
            
            818Finished
                goods
            
            
            359
            
            
            
            244Total
            
            $
            1,365
            
            
            $
            1,178





-9-








**Note
                4.**
            **Contingencies**





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





On
      October 4, 2004, we received a subpoena from the U.S. Department of Justice,
      requesting documents related to the promotion of Rituxan, a prescription
      treatment now approved for five indications. We are cooperating with the
      associated investigation, which is both civil and criminal in nature, and
      through counsel we are having discussions with government representatives about
      the status of their investigation and Genentech’s views on this matter. The
      government has called, and may continue to call, former and current Genentech
      employees to appear before a grand jury in connection with this investigation.
      The outcome of this matter cannot be determined at this time.





On
      July 29, 2005, a former Genentech employee, whose employment ended in April
      2005, filed a qui tam complaint under seal in the United States District Court
      for the District of Maine against Genentech and Biogen Idec Inc., alleging
      violations of the False Claims Act and retaliatory discharge of employment.
      On
      December 20, 2005, the United States filed notice of its election to decline
      intervention in the lawsuit. The complaint was subsequently unsealed and we
      were
      served on January 5, 2006. Genentech filed a motion to dismiss the complaint
      and
      on December 14, 2006, the Magistrate Judge assigned to the case issued a
      Recommended Decision on that motion, which is subject to review by the District
      Court Judge. The Magistrate Judge recommended that the False Claims Act portion
      of the complaint be dismissed, leaving as the only remaining claim against
      Genentech the plaintiff’s retaliatory discharge claim. Plaintiff, Biogen Idec,
      and Genentech each subsequently filed objections with the District Court Judge
      concerning certain aspects of the Magistrate Judge’s Recommended Decision. On
      July 24, 2007, the District Court Judge affirmed the dismissal of both claims
      relating to the False Claims Act but denied Genentech’s motion to dismiss
      plaintiff’s federal retaliatory discharge claim and granted plaintiff’s motion
      for leave to file a Second Amended Complaint asserting an additional state
      law
      employment claim. The outcome of this matter cannot be determined at this
      time.





We
      and the City of Hope National Medical Center (COH) are parties to a 1976
      agreement related to work conducted by two COH employees, Arthur Riggs and
      Keiichi Itakura, and patents that resulted from that work, which are referred
      to
      as the “Riggs/Itakura Patents.” Since that time, we have entered into license
      agreements with various companies to manufacture, use, and sell the products
      covered by the Riggs/Itakura Patents. On August 13, 1999, the COH filed a
      complaint against us in the Superior Court in Los Angeles County, California,
      alleging that we owe royalties to the COH in connection with these license
      agreements, as well as product license agreements that involve the grant of
      licenses under the Riggs/Itakura Patents. On June 10, 2002, a jury voted to
      award the COH approximately $300 million in compensatory damages. On June 24,
      2002, a jury voted to award the COH an additional $200 million in punitive
      damages. Such amounts were accrued as an expense in the second quarter of 2002
      and are included in the accompanying Condensed Consolidated Balance Sheets
      in
“litigation-related and other long-term liabilities” at June 30, 2007 and
      December 31, 2006. We filed a notice of appeal of the verdict and damages awards
      with the California Court of Appeal. On October 21, 2004, the California Court
      of Appeal affirmed the verdict and damages awards in all respects. On November
      22, 2004, the California Court of Appeal modified its opinion without changing
      the verdict and denied Genentech’s request for rehearing. On November 24, 2004,
      we filed a petition seeking review by the California Supreme Court. On February
      2, 2005, the California Supreme Court granted that petition. The appeal to
      the
      California Supreme Court has been fully briefed, and we are waiting to be
      assigned an oral argument date. The amount of cash paid, if any, or the timing
      of such payment in connection with the COH matter will depend on the outcome
      of
      the California Supreme Court’s review of the matter. It may take longer than one
      year to resolve the matter.





We
      recorded accrued interest and bond costs related to the COH trial judgment
      of
      $13 million for the second quarter of 2007 and $14 million for the second
      quarter of 2006, and $26 million for the first six months of 2007 and $27
      million for the first six months of 2006. In conjunction with the COH judgment,
      we posted a surety bond and were required to pledge cash and investments of
      $788
      million at June 30, 2007 and December 31, 2006 to secure the bond. These amounts
      are reflected in “restricted cash and investments” in the accompanying Condensed
      Consolidated Balance Sheets. We expect that we will continue to incur interest
      charges on the judgment and service fees on the surety bond each quarter through
      the process of appealing the COH trial results.





-10-








On
      April 11, 2003, MedImmune, Inc. filed a lawsuit against Genentech, COH, and
      Celltech R & D Ltd. in the U.S. District Court for the Central District of
      California (Los Angeles). The lawsuit relates to U.S. Patent No. 6,331,415
      (the
      Cabilly patent) that we co-own with COH and under which MedImmune and other
      companies have been licensed and are paying royalties to us. The lawsuit
      includes claims for violation of antitrust, patent, and unfair competition
      laws.
      MedImmune is seeking a ruling that the Cabilly patent is invalid and/or
      unenforceable, a determination that MedImmune does not owe royalties under
      the
      Cabilly patent on sales of its Synagis® antibody product, an injunction to
      prevent us from enforcing the Cabilly patent, an award of actual and exemplary
      damages, and other relief. On January 14, 2004 (amending a December 23, 2003
      order), the U.S. District Court granted summary judgment in our favor on all
      of
      MedImmune’s antitrust and unfair competition claims. On April 23, 2004, the
      District Court granted our motion to dismiss all remaining claims in the case.
      On October 18, 2005, the U.S. Court of Appeals for the Federal Circuit affirmed
      the judgment of the District Court in all respects. MedImmune filed a petition
      for certiorari with the United States Supreme Court on November 10, 2005,
      seeking review of the decision to dismiss certain of its claims. The Supreme
      Court granted MedImmune’s petition, and the oral argument of this case before
      the Supreme Court occurred on October 4, 2006. On January 9, 2007, the Supreme
      Court issued a decision reversing the Federal Circuit’s decision and remanding
      the case to the lower courts for further proceedings in connection with the
      patent and contract claims. The trial of this matter has been scheduled for
      June
      23, 2008. The outcome of this matter cannot be determined at this
      time.





On
      May 13, 2005, a request was filed by a third party for reexamination of the
      Cabilly patent. The request sought reexamination on the basis of non-statutory
      double patenting over U.S. Patent No. 4,816,567. On July 7, 2005, the U.S.
      Patent and Trademark Office (Patent Office) ordered reexamination of the Cabilly
      patent. On September 13, 2005, the Patent Office mailed an initial non-final
      Patent Office action rejecting the claims of the Cabilly patent. We filed our
      response to the Patent Office action on November 25, 2005. On December 23,
      2005,
      a second request for reexamination of the Cabilly patent was filed by another
      third party, and on January 23, 2006, the Patent Office granted that request.
      On
      June 6, 2006, the two reexaminations were merged into one proceeding. On August
      16, 2006, the Patent Office mailed a non-final Patent Office action in the
      merged proceeding, rejecting the claims of the Cabilly patent based on issues
      raised in the two reexamination requests. We filed our response to the Patent
      Office action on October 30, 2006. On February 16, 2007, the Patent Office
      mailed a final Patent Office action rejecting all 36 claims of the Cabilly
      patent. We responded to the final Patent Office action on May 21, 2007 and
      requested continued reexamination. On May 31, 2007, the Patent Office granted
      the request for continued reexamination, and in doing so withdrew the finality
      of the February 2007 Patent Office action and agreed to treat our May 21, 2007
      filing as a response to a first Patent Office action. The Cabilly patent, which
      expires in 2018, relates to methods that we and others use to make certain
      antibodies or antibody fragments, as well as cells and DNA used in these
      methods. We have licensed the Cabilly patent to other companies and derive
      significant royalties from those licenses. The claims of the Cabilly patent
      remain valid and enforceable throughout the reexamination and appeals processes.
      Because the above-described proceeding is ongoing, the outcome of this matter
      cannot be determined at this time.





In
      2006, we made development decisions involving our humanized anti-CD20 program,
      and our collaborator, Biogen Idec, disagreed with certain of our development
      decisions related to humanized anti-CD20 products. Under our 2003 collaboration
      agreement with Biogen Idec, we believe that we are permitted under the agreement
      to proceed with further trials of certain humanized anti-CD20 antibodies, and
      Biogen Idec disagreed with our position. The disputed issues have been submitted
      to arbitration. In the arbitration, Biogen Idec filed motions for a preliminary
      injunction and summary judgment seeking to stop us from proceeding with certain
      development activities, including planned clinical trials. On April 20, 2007,
      the arbitration panel denied both Biogen Idec’s motion for a preliminary
      injunction and Biogen Idec’s motion for summary judgment. Resolution of the
      arbitration could require that both parties agree to certain development
      decisions before moving forward with humanized anti-CD20 antibody clinical
      trials, and possibly clinical trials of other collaboration products, including
      Rituxan, in which case we may have to alter or cancel planned trials in order
      to
      obtain Biogen Idec’s approval. The hearing of this matter is scheduled to begin
      in June 2008. We expect a final decision by the arbitrators by
      approximately the end of 2008 unless the parties are able to resolve the matter
      earlier through settlement discussions or otherwise. The outcome of this matter
      cannot be determined at this time.





-11-








**Note
                5.**
            **Relationship
                with Roche Holdings, Inc. and Related Party
                Transactions**





***Roche
      Holdings, Inc.’s**Ability to Maintain Percentage Ownership Interest in
      Our Stock***





We
      issue shares of Common Stock in connection with our stock option and stock
      purchase plans, and we may issue additional shares for other purposes. Our
      affiliation agreement with RHI provides, among other things, that with respect
      to any issuance of our Common Stock in the future, we will repurchase a
      sufficient number of shares so that immediately after such issuance, the
      percentage of our Common Stock owned by RHI will be no lower than 2% below
      the
“Minimum Percentage” (subject to certain conditions). The Minimum Percentage
      equals the lowest number of shares of Genentech Common Stock owned by RHI since
      the July 1999 offering (to be adjusted in the future for dispositions of shares
      of Genentech Common Stock by RHI as well as for stock splits or stock
      combinations) divided by 1,018,388,704 (to be adjusted in the future for stock
      splits or stock combinations), which is the number of shares of Genentech Common
      Stock outstanding at the time of the July 1999 offering, adjusted for stock
      splits. We have repurchased shares of our Common Stock since 2001. The
      affiliation agreement also provides that upon RHI’s request, we will repurchase
      shares of our Common Stock to increase RHI’s ownership to the Minimum
      Percentage. In addition, RHI will have a continuing option to buy stock from
      us
      at prevailing market prices to maintain its percentage ownership interest.
      Under
      the terms of the affiliation agreement, RHI’s Minimum Percentage is 57.7%, and
      RHI’s ownership percentage is to be no lower than 55.7%. At June 30, 2007, RHI’s
      ownership percentage was 55.8%.





**Related
      Party Transactions**





We
      enter into transactions with our related parties, Roche Holding AG and
      affiliates (Roche) and Novartis AG and other Novartis affiliates (Novartis).
      The
      accounting policies that we apply to our transactions with our related parties
      are consistent with those applied in transactions with independent third
      parties.





In
      our royalty and supply arrangements with related parties, we are the principal,
      as defined under EITF Issue No. 99-19, *“**Reporting Revenue Gross as
      a Principal versus Net as an Agent**”* (EITF 99-19), because we bear
      the manufacturing risk, general inventory risk, and the risk to defend our
      intellectual property. For circumstances in which we are the principal in the
      transaction, we record the transaction on a gross basis in accordance with
      EITF
      99-19. Otherwise, our transactions are recorded on a net basis.





***Roche***





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





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Product
                sales to Roche
            
            $
            253
            
            
            $
            73
            
            
            $
            516
            
            
            $
            131Royalties
                earned from Roche
            
            $
            283
            
            
            $
            207
            
            
            $
            538
            
            
            $
            373Contract
                revenue from Roche
            
            $
            30
            
            
            $
            21
            
            
            $
            60
            
            
            $
            40Cost
                of sales on product sales to Roche
            
            $
            137
            
            
            $
            64
            
            
            $
            258
            
            
            $
            113Research
                and development (R&D) expenses incurred on joint development projects
                with Roche
            
            $
            70
            
            
            $
            53
            
            
            $
            128
            
            
            $
            95





R&D
      expenses are partially reimbursable to us by Roche. In addition, these amounts
      include R&D expenses resulting from the net settlement of amounts we owed to
      Roche on R&D expenses that Roche incurred on joint development projects,
      less amounts reimbursable****to us by Roche on these
      respective projects.





-12-








***Novartis***





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





We
      have an agreement with Novartis Pharma AG (a wholly owned subsidiary of Novartis
      AG) under which Novartis Pharma AG has the exclusive right to develop and market
      Lucentis outside the U.S. for indications related to diseases or disorders
      of
      the eye. As part of this agreement, the parties will share the cost of certain
      of our ongoing development expenses for Lucentis. Novartis Pharma AG makes
      royalty payments to us on sales of Lucentis outside the U.S.





We,
      along with Novartis Pharma AG, are co-developing Xolair in the U.S., and we
      and
      Novartis are co-promoting Xolair in the U.S. We record all sales and cost of
      sales in the U.S., and Novartis markets the product in and records all sales
      and
      cost of sales in Europe. We and Novartis share the resulting U.S. and European
      operating profits, respectively, according to prescribed profit sharing
      percentages, and our U.S. and European profit sharing expenses are recorded
      as
      collaboration profit sharing expense.





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





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Product
                sales to Novartis
            
            $
            3
            
            
            $
            2
            
            
            **$**
            6
            
            
            $
            2Royalties
                earned from Novartis
            
            $
            13
            
            
            $
            –
            
            
            $
            19
            
            
            $
            –Contract
                revenue from Novartis
            
            $
            4
            
            
            $
            13
            
            
            $
            44
            
            
            $
            23Cost
                of sales on product sales to Novartis
            
            $
            3
            
            
            $
            1
            
            
            $
            7
            
            
            $
            2R&D
                expenses incurred on joint development projects with
                Novartis
            
            $
            9
            
            
            $
            12
            
            
            $
            19
            
            
            $
            22Collaboration
                profit sharing expense to Novartis
            
            $
            49
            
            
            $
            48
            
            
            $
            96
            
            
            $
            91





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





R&D
      expenses are partially reimbursable to us by Novartis. In addition, these
      amounts include R&D expenses resulting from the net settlement of amounts we
      owed to Novartis on R&D expenses that Novartis incurred on joint development
      projects, less amounts reimbursable****to us by Novartis on
      these respective projects.








**Note
                6.**
            **Income
                Taxes**





The
      effective income tax rate was 37% in the second quarter and in the first six
      months of 2007, compared to 38% in the second quarter and in the first six
      months of 2006. The decrease in the income tax rate is primarily due to the
      extension of the federal R&D tax credit and an increase in the domestic
      manufacturing deduction in 2007.





-13-








**Note
                7.**
            **Subsequent
                Event**





On
      August 2, 2007, we acquired 100% of the shares of Tanox, Inc., a publicly held
      company based in Houston, Texas, specializing in the discovery of
      biotherapeutics based on monoclonal antibody technology, for $20 per share
      for a
      total cash value of approximately $919 million, including estimated transaction
      costs. We expect to complete the purchase price allocation for this acquisition
      pending the receipt of final asset appraisals and the completion of certain
      other analyses in the third quarter of 2007.








-14-








**Report
      of Independent Registered Public Accounting
      Firm**








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





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





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





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





We
      have previously audited, in accordance with the standards of the Public Company
      Accounting Oversight Board (United States), the consolidated balance sheet
      of
      Genentech, Inc. as of December 31, 2006, and the related consolidated statements
      of income, stockholders’ equity, and cash flows for the year then ended, not
      presented herein, and in our report dated February 5, 2007, we expressed an
      unqualified opinion on those consolidated financial statements including an
      explanatory paragraph relating to the change in method of accounting for
      stock-based compensation in accordance with guidance provided in Statement
      of
      Financial Accounting Standards No. 123(R), “Share-based Payment.” In our
      opinion, the information set forth in the accompanying condensed consolidated
      balance sheet as of December 31, 2006, is fairly stated, in all material
      respects, in relation to the consolidated balance sheet from which it has been
      derived.








/s/ Ernst
                & Young LLP





Palo
      Alto, California


July
      20, 2007,


except
      for Note 7, as to which the date is


August
      2, 2007








-15-








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








**GENENTECH,
      INC.**


**FINANCIAL
      REVIEW**





**Overview**





The
      information included in this Quarterly Report on Form 10-Q should be read in
      conjunction with the Consolidated Financial Statements and accompanying notes
      included in our Annual Report on Form 10-K for the year ended December 31,
      2006.





***The
      Company***





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





***Major
      Developments in the Second Quarter of 2007***





We
      primarily earn revenue and income and generate cash from product sales and
      royalty revenue. In the second quarter of 2007, our total operating revenue
      was
      $3,004 million, an increase of 37% from $2,199 million in the second quarter
      of
      2006. Our net income for the second quarter of 2007 was $747 million, an
      increase of 41% from $531 million in the second quarter of 2006. In the first
      six months of 2007, our total operating revenue was $5,847 million, an increase
      of 40% from $4,185 million in the first six months of 2006. Our net income
      for
      the first six months of 2007 was $1,453 million, an increase of 53% from $952
      million in the first six months of 2006.





In
      June 2007, we submitted two supplemental Biologic License Applications (sBLAs)
      with the United States (U.S.) Food and Drug Administration (FDA) for the use
      of
      Herceptin in combination with a chemotherapy regimen containing doxorubicin,
      cyclophosphamide, and Taxotere and in combination with a non-anthracycline
      chemotherapy regimen consisting of Taxotere and carboplatin based on data from
      the BCIRG-006 trial.





On
      June 26, 2007, we entered into a collaboration agreement with Abbott
      Laboratories for the global research, development, and commercialization of
      two
      of Abbott’s investigational anti-cancer, small molecule compounds: ABT-263 and
      ABT-869. ABT-263 is currently in Phase I clinical trials and we, in
      collaboration with Abbott, are planning to initiate Phase II trials with
      ABT-869 in solid tumor types in the second half of 2007.





During
      the second quarter of 2007, we achieved four manufacturing milestones: (i)
      we
      received FDA licensure of our Oceanside, California manufacturing facility
      to
      produce bulk Avastin, (ii) we received approval for a new aseptic fill-finish
      line in South San Francisco, California; (iii) we broke ground on our E. coli
      production facility in Singapore, and (iv) we achieved mechanical completion
      of
      our second manufacturing facility in Vacaville, California, for which we
      continue to anticipate licensure in 2009.





On
      August 2, 2007, we acquired 100% of the shares of Tanox, Inc. for $20 per share
      for a total cash value of approximately $919 million, including estimated
      transaction costs. We expect to complete the purchase price allocation for
      this
      acquisition pending the receipt of final asset appraisals and the completion
      of
      certain other analyses in the third quarter of 2007.





***Our
      Strategy and Goals***





As
      announced in 2006, our business objectives for the years 2006 through 2010
      include bringing at least 20 new molecules into clinical development, bringing
      at least 15 major new products or indications onto the market, becoming the
      number one U.S. oncology company in sales, and achieving certain financial
      growth measures. These





-16-





objectives
      are reflected in our revised Horizon 2010 strategy and goals summarized on
      our
      website at www.gene.com/gene/about/corporate/growthstrategy.





***Economic,
      Industry-wide, and Other Factors***





Our
      strategy and goals are challenged by economic and industry-wide factors that
      affect our business. Key factors that affect our future growth are discussed
      below:


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

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

- Our
          near-term growth will depend on our ability to execute on recent product
          approvals, including Lucentis for the treatment of neovascular (wet)
          age-related macular degeneration (AMD) and Avastin for the treatment of
          non-small cell lung cancer, and to successfully obtain FDA approvals for
          potential new indications for our existing products such as Avastin for
          the
          treatment of metastatic breast cancer and anti-CD20 molecules for the
          treatment of immunological disorders.

- Our
          business model requires appropriate pricing and reimbursement for our
          products, to offset the costs and risks of drug development. The pricing
          of
          our products has received negative press coverage and public scrutiny.
          We will
          continue to meet with patient groups, payers, and other stakeholders in
          the
          healthcare system to understand their issues and concerns. The reimbursement
          environment for our products may change in the future and become more
          challenging.

- As
          the Medicare and Medicaid programs are the largest payers for our products,
          rules related to coverage and reimbursement continue to represent an important
          issue for our business. New regulations related to hospital and physician
          payment continue to be implemented annually. To date, we have not seen
          any
          detectable effects of the new rules on our product sales.

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




-17-





- Manufacturing
          biotherapeutics is difficult and complex, and requires facilities specifically
          designed and validated to run biotechnology production processes. The
          manufacture of a biotherapeutic requires developing and maintaining a process
          to reliably manufacture and formulate the product at an appropriate scale,
          obtaining regulatory approval to manufacture the product, and is subject
          to
          changes in regulatory requirements or standards that may require modifications
          to the manufacturing process. Additionally, we may have an excess of available
          capacity, which could lead to an idling of a portion of our manufacturing
          facilities and incurring unabsorbed or idle plant charges, or other excess
          capacity charges, resulting in an increase in our cost of
          sales.

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




**Marketed
      Products**





We
      commercialize in the U.S. the biotechnology products listed below:





*Avastin*
      (bevacizumab) is an anti-VEGF humanized antibody approved for use in combination
      with intravenous 5-fluorouracil-based chemotherapy as a treatment for patients
      with first- or second-line metastatic cancer of the colon or rectum. It is
      also
      approved for use in combination with carboplatin and paclitaxel chemotherapy
      for
      the first-line treatment of unresectable, locally advanced, recurrent or
      metastatic non-squamous, non-small cell lung cancer.





*Rituxan*(rituximab) is an anti-CD20 antibody that we commercialize with Biogen
      Idec, Inc. It is approved for:


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

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

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

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

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

*Herceptin*(trastuzumab) is a humanized anti-HER2 antibody approved for use as
        an
        adjuvant treatment of node-positive breast cancer as part of a treatment
        regimen
        containing doxorubicin, cyclophosphamide, and paclitaxel for patients who
        have
        tumors that overexpress the human epidermal growth factor receptor 2 (HER2)
        protein. It is also approved for use as a first-line therapy in combination
        with
        paclitaxel and as a single agent in second- and third-line therapy for patients
        with HER2-positive metastatic breast cancer.





*Lucentis*
      (ranibizumab) is an anti-VEGF antibody fragment approved for the treatment
      of
      neovascular (wet) age-related macular degeneration.





*Xolair*
      (omalizumab) is a humanized anti-IgE antibody, which we commercialize with
      Novartis Pharma AG (Novartis). Xolair is approved for adults and adolescents
      (age 12 or older) with moderate to severe persistent asthma





-18-





who
      have a positive skin test or in vitro reactivity to a perennial aeroallergen
      and
      whose symptoms are inadequately controlled with inhaled
      corticosteroids.





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





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





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





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





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





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





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





**Licensed
      Products**





We
      receive royalty revenue from various licensees, including significant royalty
      revenue from Roche Holding AG and affiliates (Roche) on sales of:


- Herceptin,
          Pulmozyme, and Avastin outside the U.S.;

- Rituxan
          outside the U.S., excluding Japan; and

- Nutropin
          products, Activase, and TNKase in Canada.

See
      Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial
      Statements of Part I, Item 1 of this Form 10-Q for information regarding certain
      patent-related legal proceedings.





**Available
      Information**





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


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

-19-





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

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

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





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





We
      believe the following policies to be critical to understanding our financial
      condition, results of operations, and expectations for 2007, because these
      policies require management to make significant estimates, assumptions, and
      judgments about matters that are inherently uncertain.





***Contingencies***





We
      are currently, and have been, involved in certain legal proceedings, including
      patent infringement litigation. We are also involved in licensing and contract
      disputes, and other matters. See Note 4, “Contingencies,” in the Notes to
      Condensed Consolidated Financial Statements of Part I, Item 1 of this Form
      10-Q
      for further information on these matters. We assess the likelihood of any
      adverse judgments or outcomes for these legal matters as well as potential
      ranges of probable losses. We record an estimated loss as a charge to income
      if
      we determine that, based on information available at the time, the loss is
      probable and the amount of loss can be reasonably estimated. Included in
“litigation-related and other long-term liabilities” in the accompanying
      Condensed Consolidated Balance Sheet at June 30, 2007 is $751 million, which
      represents our estimate of the costs for the current resolution of the City
      of
      Hope National Medical Center (COH) matter. The nature of these matters is highly
      uncertain and subject to change; as a result, the amount of our liability for
      certain of these matters could exceed or be less than the amount of our current
      estimates, depending on the final outcome of these matters. An outcome of such
      matters that is different from previously estimated could have a material effect
      on our financial position or our results of operations in any one
      quarter.





***Revenue
      Recognition – Avastin U.S. Product Sales***





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





In
      order to make our estimate of the amount of free Avastin to be provided to
      patients under the program, we need to estimate several factors, most notably:
      the number of patients who are currently being treated for FDA-approved
      indications and the start date for their treatment regimen, the extent to which
      doctors and patients may elect to enroll in the program, the number of patients
      who will meet the financial eligibility requirements of the program, and the
      duration and extent of treatment for the FDA-approved indications, among other
      factors. We have based our





-20-





enrollment
      assumptions on physician surveys and other information that we consider
      relevant. We will continue to update our estimates in each reporting period
      as
      new information becomes available. If the actual results underlying this
      deferred revenue accounting vary significantly from our estimates, we will
      need
      to make adjustments to these estimates, which could have a material effect
      on
      revenue and earnings in the period of adjustment. Based on these estimates,
      we
      defer a portion of Avastin revenue on product vials sold through normal
      commercial channels. The deferred revenue will be recognized as free Avastin
      vials are delivered. In the first six months of 2007, we deferred a net amount
      of approximately $3 million of our Avastin sales, resulting in a total deferred
      revenue liability in connection with the Avastin Patient Assistance Program
      of
      $12 million in our Condensed Consolidated Balance Sheet at June 30,
      2007.





***Product
      Sales Allowances***





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





Definitions
      for the product sales allowance types are as follows:


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

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

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

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

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

We
      believe that our estimates related to product returns allowances and wholesaler
      inventory management payments are not material amounts, based on the historical
      levels of credits and allowances as a percentage of product sales. We believe
      that our estimates related to healthcare provider contractual chargebacks and
      prompt-pay sales discounts do not have a high degree of estimation complexity
      or
      uncertainty, as the related amounts are settled within a short period of time.
      We consider rebate allowances and accruals to be the only estimations that
      involve material amounts and require a higher degree of subjectivity and
      judgment necessary. As a result of the uncertainties involved in estimating
      rebate allowances and accruals, there is a likelihood that materially different
      amounts could be reported under different conditions or using different
      assumptions.





Our
      rebates are based on definitive agreements or legal requirements (such as
      Medicaid). These rebates are primarily estimated using historical and other
      data, including patient usage, customer buying patterns, applicable
      contractual





-21-





rebate
      rates, and contract performance by the benefit providers. Direct rebates are
      accrued at the time of sale and recorded as allowances against trade accounts
      receivable; indirect (including Medicaid) rebates are accrued at the time of
      sale and recorded as liabilities. Rebate estimates are evaluated quarterly
      and
      may require changes to better align our estimates with actual results. As part
      of this evaluation, we review changes to Medicaid legislation, changes to state
      rebate contracts, changes in the level of discounts, and significant changes
      in
      product sales trends. Although rebates are accrued at the time of sale, rebates
      are typically paid out, on average, up to six months after the sale. We believe
      that our rebate allowances and accruals estimation process provides a high
      degree of confidence in the amounts established and that the annual allowance
      amounts provided for would not vary by more than approximately 3% based on
      our
      estimate that our changes in rebate allowances and accruals estimates related
      to
      prior years have not exceeded 3%. To illustrate our sensitivity to changes
      in
      the rebate allowances and accruals process, as much as a 10% change in our
      annualized rebate allowances and accruals provision experienced to date in
      2007
      (which is in excess of three times the level of variability that we reasonably
      expect to observe for rebates) would have an approximate $18 million effect
      on
      our income before taxes (or approximately $0.01 per share after taxes). The
      total rebate allowances and accruals recorded in our Condensed Consolidated
      Balance Sheet were $61 million as of June 30, 2007.





All
      of the aforementioned categories of allowances and accruals are evaluated
      quarterly and adjusted when trends or significant events indicate that a change
      in estimate is appropriate. Such changes in estimate could materially affect
      our
      results of operations or financial position; however, to date they have not
      been
      material. It is possible that we may need to adjust our estimates in future
      periods. As of June 30, 2007, our Condensed Consolidated Balance Sheet reflected
      estimated product sales allowance reserves and accruals totaling approximately
      $158 million.





***Royalties***





For
      substantially all of our agreements with licensees, we estimate royalty revenue
      and royalty receivables in the period the royalties are earned, which is in
      advance of collection. Our estimates of royalty revenue and receivables in
      those
      instances are based on communication with some licensees, historical
      information, forecasted sales trends, and collectibility. Differences between
      actual royalty revenue and estimated royalty revenue are adjusted for in the
      period in which they become known, typically the following quarter. If the
      collectibility of a royalty amount is doubtful, royalty revenue is not recorded.
      In the case of a receivable related to previously recognized royalty revenue
      that is subsequently determined to be uncollectible, the receivable is reserved
      for in the period in which the circumstances that make collectibility doubtful
      are determined. Historically, adjustments to our royalty receivables have not
      been material to our consolidated financial condition or results of
      operations.





We
      have confidential licensing agreements with a number of companies on U.S. Patent
      No. 6,331,415 (the Cabilly patent), under which we receive royalty revenue
      on
      sales of products that are covered by the patent. The Cabilly patent, which
      expires in 2018, relates to methods that we and others use to make certain
      antibodies or antibody fragments, as well as cells and DNA used in these
      methods. The U.S. Patent and Trademark Office (Patent Office) is performing
      a
      reexamination of the patent and on February 16, 2007 issued a final Patent
      Office action rejecting all 36 claims of the Cabilly patent. We responded to
      the
      final Patent Office action on May 21, 2007 and requested continued
      reexamination. On May 31, 2007, the Patent Office granted the request for
      continued reexamination, and in so doing withdrew the finality of the February
      2007 Patent Office action and agreed to treat our May 21, 2007 filing as a
      response to a first Patent Office action. The claims of the patent remain valid
      and enforceable throughout the reexamination and appeals processes. See also
      Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial
      Statements of Part I, Item 1 of this Form 10-Q for further information on our
      Cabilly patent reexamination.





Cabilly
      patent royalties are generally due 60 days after the end of the quarter.
      Additionally, we pay COH a percentage of our Cabilly patent royalty revenue
      60
      days after the quarter in which we receive payments from our licensees. As
      of
      June 30, 2007, our Condensed Consolidated Balance Sheet included Cabilly patent
      receivables totaling approximately $48 million and the related COH payable
      totaling approximately $18 million.





***Income
      Taxes***





Income
      tax provision is based on income before taxes and is computed using the
      liability method. Deferred tax assets and liabilities are determined based
      on
      the difference between the financial statement and tax basis of assets
      and





-22-





liabilities
      using tax rates projected to be in effect for the year in which the differences
      are expected to reverse. Significant estimates are required in determining
      our
      provision for income taxes. Some of these estimates are based on interpretations
      of existing tax laws or regulations. Various internal and external factors
      may
      have favorable or unfavorable effects on our future effective income tax rate.
      These factors include, but are not limited to, changes in tax laws, regulations
      and/or rates, changing interpretations of existing tax laws or regulations,
      changes in estimates of prior years’ items, past and future levels of R&D
      spending, acquisitions, and changes in overall levels of income before
      taxes.





On
      January 1, 2007, we adopted the provisions of Financial Accounting Standards
      Board (FASB) Interpretation No. 48, *“**Accounting for
      Uncertainty in Income Taxes**”* (FIN 48). As a result of the
      implementation of FIN 48, we evaluated our income tax position and reclassified
      $147 million of unrecognized tax benefits from current liabilities to long-term
      liabilities as of January 1, 2007, and we also reclassified the balance as
      of
      December 31, 2006, for consistency, in the accompanying Condensed Consolidated
      Balance Sheets.





***Inventories***





Inventories
      may include currently marketed products manufactured under a new process or
      at
      facilities awaiting regulatory licensure. These inventories are capitalized
      based on management’s judgment of probable near-term regulatory licensure. The
      valuation of inventory requires us to estimate the value of inventory that
      may
      expire prior to use or that may fail to be released for commercial sale. The
      determination of obsolete inventory requires us to estimate the future demands
      for our products, and in the case of pre-approval inventories, to estimate
      the
      regulatory approval date for the product or for the licensure of either the
      manufacturing facility or the new manufacturing process. We may be required
      to
      expense previously capitalized inventory costs upon a change in our estimate,
      due to, among other potential factors, the denial or delay of approval of a
      product or the licensure of either a manufacturing facility or a new
      manufacturing process by the necessary regulatory bodies, or new information
      that suggests that the inventory will not be saleable.





***Employee
      Stock-Based Compensation***





Under
      the provisions of Statement of Financial Accounting Standards (FAS) No.
      123(R), *“**Share-Based Paymen**t**”* (FAS 123R),
      employee stock-based compensation is estimated at the date of grant based on
      the
      employee stock award’s fair value using the Black-Scholes option-pricing model
      and is recognized as expense ratably over the requisite service period in a
      manner similar to other forms of compensation paid to employees. The
      Black-Scholes option-pricing model requires the use of certain subjective
      assumptions. The most significant of these assumptions are our estimates of
      the
      expected volatility of the market price of our stock and the expected term
      of
      the award. Due to the redemption of our Special Common Stock in June 1999
      (Redemption) by Roche Holdings, Inc. (RHI), there is limited historical
      information available to support our estimate of certain assumptions required
      to
      value our stock options. When establishing an estimate of the expected term
      of
      an award, we consider the vesting period for the award, our recent historical
      experience of employee stock option exercises (including forfeitures), the
      expected volatility, and a comparison to relevant peer group data. As required
      under the accounting rules, we review our valuation assumptions at each grant
      date, and, as a result, our valuation assumptions used to value employee
      stock-based awards granted in future periods may change. See also Note 2,
“Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated
      Financial Statements of Part I, Item 1 of this Form 10-Q for further
      information.





-23-








**Results
      of Operations**


*(In
      millions, except per share amounts)*





**Three
                Months**
              **Ended
                June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                June 30,****2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**Product
                sales
            
            $
            2,443
            
            
            $
            1,810
            
            
            
            35
            %
            
            $
            4,773
            
            
            $
            3,454
            
            
            
            38
            %Royalties
            
            
            484
            
            
            
            316
            
            
            
            53
            
            
            
            903
            
            
            
            602
            
            
            
            50Contract
                revenue
            
            
            77
            
            
            
            73
            
            
            
            5
            
            
            
            171
            
            
            
            129
            
            
            
            33Total
                operating revenue
            
            
            3,004
            
            
            
            2,199
            
            
            
            37
            
            
            
            5,847
            
            
            
            4,185
            
            
            
            40Cost
                of sales
            
            
            429
            
            
            
            284
            
            
            
            51
            
            
            
            821
            
            
            
            546
            
            
            
            50Research
                and development
            
            
            603
            
            
            
            390
            
            
            
            55
            
            
            
            1,213
            
            
            
            764
            
            
            
            59Marketing,
                general and administrative
            
            
            532
            
            
            
            471
            
            
            
            13
            
            
            
            1,023
            
            
            
            912
            
            
            
            12Collaboration
                profit sharing
            
            
            277
            
            
            
            259
            
            
            
            7
            
            
            
            529
            
            
            
            485
            
            
            
            9Recurring
                charges related to redemption
            
            
            26
            
            
            
            26
            
            
            
            –
            
            
            
            52
            
            
            
            52
            
            
            
            –Special
                items: litigation-related
            
            
            13
            
            
            
            14
            
            
            
            (7
            )
            
            
            26
            
            
            
            27
            
            
            
            (4
            )Total
                costs and expenses
            
            
            1,880
            
            
            
            1,444
            
            
            
            30
            
            
            
            3,664
            
            
            
            2,786
            
            
            
            32Operating
                income
            
            
            1,124
            
            
            
            755
            
            
            
            49
            
            
            
            2,183
            
            
            
            1,399
            
            
            
            56Other
                income (expense):Interest
                and other income, net
            
            
            75
            
            
            
            121
            
            
            
            (38
            )
            
            
            149
            
            
            
            174
            
            
            
            (14
            )Interest
                expense
            
            
            (17
            )
            
            
            (18
            )
            
            
            (6
            )
            
            
            (35
            )
            
            
            (37
            )
            
            
            (5
            )Total
                other income, net
            
            
            58
            
            
            
            103
            
            
            
            (44
            )
            
            
            114
            
            
            
            137
            
            
            
            (17
            )Income
                before taxes
            
            
            1,182
            
            
            
            858
            
            
            
            38
            
            
            
            2,297
            
            
            
            1,536
            
            
            
            50Income
                tax provision
            
            
            435
            
            
            
            327
            
            
            
            33
            
            
            
            844
            
            
            
            584
            
            
            
            45Net
                income
            
            $
            747
            
            
            $
            531
            
            
            
            41
            
            
            $
            1,453
            
            
            $
            952
            
            
            
            53Earnings
                per share:Basic
            
            $
            0.71
            
            
            $
            0.50
            
            
            
            42
            
            
            $
            1.38
            
            
            $
            0.90
            
            
            
            53Diluted
            
            $
            0.70
            
            
            $
            0.49
            
            
            
            43
            
            
            $
            1.36
            
            
            $
            0.89
            
            
            
            53Cost
                of sales as a % of product sales
            
            
            18
            %
            
            
            16
            %
            
            
            
            
            
            
            17
            %
            
            
            16
            %Research
                and development as a % of operating revenue
            
            
            20
            
            
            
            18
            
            
            
            
            
            
            
            21
            
            
            
            18Marketing,
                general and administrative as a % of operating revenue
            
            
            18
            
            
            
            21
            
            
            
            
            
            
            
            17
            
            
            
            22Pretax
                operating margin
            
            
            37
            
            
            
            34
            
            
            
            
            
            
            
            37
            
            
            
            33Effective
                income tax rate
            
            
            37
            
            
            
            38
            
            
            
            
            
            
            
            37
            
            
            
            38


________________________


Percentages
      in this table and throughout management’s discussion and analysis of financial
      condition and results of operations may reflect rounding
      adjustments.








-24-








***Total
      Operating Revenue***





Total
      operating revenue increased 37% in the second quarter of 2007 and 40% in the
      first six months of 2007 from the comparable periods in 2006. These increases
      were primarily due to higher product sales and royalty revenue, and are further
      discussed below.





***Total
      Product Sales***


*(In
      millions)*





**Three
                Months**
              **Ended
                  June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**Net
                U.S. product salesAvastin
            
            $
            564
            
            
            $
            423
            
            
            
            33
            %
            
            $
            1,097
            
            
            $
            821
            
            
            
            34
            %Rituxan
            
            
            582
            
            
            
            526
            
            
            
            11
            
            
            
            1,117
            
            
            
            1,003
            
            
            
            11Herceptin
            
            
            329
            
            
            
            320
            
            
            
            3
            
            
            
            640
            
            
            
            610
            
            
            
            5Lucentis
            
            
            209
            
            
            
            10
            
            
            
            *
            
            
            
            420
            
            
            
            10
            
            
            
            *Xolair
            
            
            120
            
            
            
            105
            
            
            
            14
            
            
            
            231
            
            
            
            200
            
            
            
            16Tarceva
            
            
            102
            
            
            
            103
            
            
            
            (1
            )
            
            
            203
            
            
            
            196
            
            
            
            4Nutropin
                products
            
            
            94
            
            
            
            98
            
            
            
            (4
            )
            
            
            185
            
            
            
            185
            
            
            
            –Thrombolytics
            
            
            67
            
            
            
            62
            
            
            
            8
            
            
            
            135
            
            
            
            121
            
            
            
            12Pulmozyme
            
            
            55
            
            
            
            47
            
            
            
            17
            
            
            
            107
            
            
            
            96
            
            
            
            11Raptiva
            
            
            27
            
            
            
            22
            
            
            
            23
            
            
            
            51
            
            
            
            43
            
            
            
            19Total
                U.S. product sales(1)
            
            
            2,149
            
            
            
            1,716
            
            
            
            25
            
            
            
            4,186
            
            
            
            3,285
            
            
            
            27Net
                product sales to collaborators
            
            
            294
            
            
            
            94
            
            
            
            213
            
            
            
            587
            
            
            
            169
            
            
            
            247Total
                product sales
            
            $
            2,443
            
            
            $
            1,810
            
            
            
            35
            
            
            $
            4,773
            
            
            $
            3,454
            
            
            
            38


______________________


*
            Calculation
                not meaningful.(1)
            The
                totals may not appear to sum due to
                rounding.





Total
      product sales increased 35% in the second quarter and 38% in the first six
      months of 2007 from the comparable periods in 2006. Total U.S. product sales
      increased 25% to $2,149****million in the second quarter and
      27% to $4,186 million in the first six months of 2007 from the comparable
      periods in 2006. This increase in U.S. sales over the comparable periods was
      due
      to higher sales across most products, in particular higher sales of our oncology
      products and sales of Lucentis. Increased U.S. sales volume accounted for 86%,
      or $371 million, of the increase in U.S. net product sales in the second quarter
      of 2007, and 87%, or $786 million, of the increase in the first six months
      of
      2007. Changes in net U.S. sales prices across the portfolio accounted for most
      of the remaining increase in net U.S. product sales in the second quarter and
      first six months of 2007.





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





*Avastin*





Net
      U.S. sales of Avastin increased 33% to $564****million in the
      second quarter and 34% to $1,097 million in the first six months of 2007 from
      the comparable periods in 2006. Net U.S. sales in the first six months of 2007
      excluded $3 million of revenue that we deferred in connection with our Avastin
      Patient Assistance Program. There have been no price increases on
      Avastin.





-25-








The
      increases in sales were primarily a result of increased use of Avastin in
      metastatic non-small cell lung cancer (NSCLC), approved on October 11, 2006,
      and, to a lesser extent, in metastatic breast cancer (mBC), an unapproved
      use of Avastin. Among first-line metastatic NSCLC patients, we estimate that
      Avastin penetration was approximately 30% in the second quarter of 2007, an
      increase from the adoption rate in the second quarter of 2006. With respect
      to
      dose, use of the 15mg/kg/every-three-weeks dose remained at approximately 75%,
      consistent with the first quarter of 2007. However, our tracking study for
      the
      second quarter of 2007 was fielded prior to the presentation of the results
      from
      the Roche-sponsored Phase III BO17704 study at the American Society of Clinical
      Oncology in June 2007. The BO17704 study evaluated two different doses of
      Avastin in combination with gemcitabine and cisplatin chemotherapy compared
      to
      chemotherapy alone in patients with previously untreated, advanced NSCLC. This
      study evaluated a 15mg/kg/every-three-weeks dose of Avastin (the dose approved
      in the U.S. for use in combination with carboplatin and paclitaxel) and a
      7.5mg/kg/every-three-weeks dose of Avastin (a dose not approved for use in
      the
      U.S.). Both doses met the primary endpoint of prolonging progression-free
      survival (PFS) compared to chemotherapy alone. Although the study was not
      designed to compare the Avastin doses, a similar treatment effect in PFS was
      observed between the two arms. We expect the results of the BO17704 study to
      lead to some level of increased adoption of Avastin at the lower dose of
      7.5mg/kg/every-three-weeks. Efficacy data from other clinical studies conducted
      by any party in the U.S. or internationally (such as AVADO, Roche’s study
      evaluating two doses of Avastin in first-line mBC), showing or perceived to
      be
      showing a similar or an improved treatment benefit at a lower dose or shorter
      duration of therapy, could further negatively affect future sales of
      Avastin.





In
      mBC, we estimate that Avastin use slightly increased in the second quarter
      of
      2007 compared to the second quarter of 2006, and use was essentially flat
      compared to the first quarter of 2007. In first-line metastatic colorectal
      cancer (CRC), we estimate that penetration, duration of treatment, and dosing
      remained flat in the second quarter of 2007 compared to the second quarter
      of
      2006. In combined second- and third-line CRC, we estimate that Avastin
      penetration decreased in the second quarter of 2007 compared to the second
      quarter of 2006, due to increased competition, and was flat compared to the
      first quarter of 2007. We believe that Avastin sales growth for the second
      half
      of 2007 will depend on increased penetration in the first-line treatment of
      metastatic NSCLC and the extent to which physicians prescribe Avastin at its
      approved dose.





*Rituxan*





Net
      U.S. sales of Rituxan increased 11% to $582****million in the
      second quarter and 11% to $1,117 million in the first six months of 2007 from
      the comparable periods in 2006. It remains difficult to precisely determine
      the
      sales split between Rituxan use in oncology and immunology settings, since
      many
      treatment centers treat both types of patients. However, based on our
      market research, we believe that the sales growth resulted from increased
      use of Rituxan in treating rheumatoid arthritis (RA), approved on February
      28,
      2006, and the use of Rituxan following first-line therapy in indolent
      non-Hodgkin’s lymphoma (NHL), including areas of unapproved uses. We estimate
      that Rituxan’s overall adoption rate in combined markets of NHL, including areas
      of unapproved use, and chronic lymphocytic leukemia (CLL), an unapproved use,
      remained flat in the first half of 2007 and throughout 2006. Also contributing
      to the increase in product sales were price increases effective on March 29,
      2006, October 5, 2006, and March 26, 2007.





*Herceptin*





Net
      U.S. sales of Herceptin increased 3% to $329****million in
      the second quarter and 5% to $640 million in the first six months of 2007 from
      the comparable periods in 2006. The increases in product sales resulted
      primarily from price increases effective on March 26, 2006, October 3, 2006,
      and
      March 29, 2007. Also contributing to the growth in sales was increased use
      of
      Herceptin in the treatment of adjuvant (early-stage) HER2-positive breast
      cancer, approved on November 16, 2006. We estimate that Herceptin’s penetration
      in adjuvant HER2-positive breast cancer patients was over 70% in the second
      quarter of 2007, an increase from the adoption rate in the second quarter of
      2006.





-26-








*Lucentis*





Lucentis
      was approved by the FDA for the treatment of neovascular (wet) age-related
      macular degeneration (AMD) on June 30, 2006. Net U.S. sales were $209 million
      in
      the second quarter of 2007 and $211 million in the first quarter of 2007. New
      patient share in the second quarter of 2007 was approximately 55%, consistent
      with the first quarter of 2007. We believe that sales growth will depend on
      continued dosing of existing patients beyond the first year of therapy and
      to a lesser extent on increased penetration in newly diagnosed patients
      (including gains against the unapproved use of Avastin in this setting). Over
      the longer term, growth may also be affected by the duration of
      treatment.





*Xolair*





Net
      U.S. sales of Xolair increased 14% to $120****million in the
      second quarter and 16% to $231 million in the first six months of 2007 from
      the
      comparable periods in 2006. The sales growth was primarily driven by increased
      penetration in the asthma market and, to a lesser extent, price increases
      effective on April 4, 2006 and October 17, 2006. We believe that sales in the
      first six months of 2007 were modestly affected by the FDA’s request that
      we strengthen the existing warning of the potential risk for anaphylaxis in
      patients receiving Xolair by adding a boxed warning to the product label and
      implementing a Risk Minimization Action Plan (RiskMAP), including providing
      a
      medication guide for patients. We and Novartis, our co-promotion collaborator,
      agreed on a new U.S. label and RiskMAP with the FDA that emphasize the incidence
      of anaphylaxis and instruct physicians that patients should be closely observed
      for an appropriate period of time after Xolair administration. We believe this
      update to the label and RiskMAP will not have a significant effect on the way
      that specialists prescribe Xolair.





*Tarceva*





Net
      U.S. sales of Tarceva decreased 1% to $102****million in the
      second quarter and increased 4% to $203 million in the first six months of
      2007
      from the comparable periods in 2006. Returns and return reserve requirements
      were higher than normal in the second quarter of 2007. We estimate that
      Tarceva’s overall penetration in NSCLC remained flat in the first six months of
      2007 relative to the same period in 2006. Duration of therapy in second-line
      NSCLC increased in the first six months of 2007 compared to the same period
      in
      2006. We estimate that Tarceva’s penetration in first-line pancreatic cancer in
      the second quarter of 2007 remained flat compared to the second quarter of
      2006. Sales results were primarily affected by price increases
      effective on November 14, 2006 and May 1, 2007, and, to a lesser extent,
      increases in duration of therapy. Future sales growth in NSCLC will depend
      on
      increases in duration of therapy and penetration, particularly against
      chemotherapy within select second-line NSCLC patient subsets.





*Nutropin
      Products*





Combined
      net U.S. sales of our Nutropin products decreased 4% to
      $94****million in the second quarter and remained flat at
      $185 million in the first six months of 2007 from the comparable periods in
      2006. The decrease from the second quarter of 2006 was due to lower sales
      volume, partially resulting from the loss of managed care product placement
      due
      to pricing. The volume decrease was partially offset by price increases
      effective on March 1, 2007.





*Thrombolytics*





Combined
      net U.S. sales of our three thrombolytic products—Activase, Cathflo Activase,
      and TNKase—increased 8% to $67 million in the second quarter and 12% to
      $135 million in the first six months of 2007 from the comparable periods in
      2006. The increases were primarily due to growth in Cathflo Activase sales
      in
      the catheter clearance market and increased Activase sales in the acute ischemic
      stroke market, partially offset by lower sales of TNKase. Also contributing
      to
      the increases in product sales were price increases effective on February 14,
      2006, July 6, 2006, and January 18, 2007.





-27-








*Pulmozyme*





Net
      U.S. sales of Pulmozyme increased 17% to $55****million in
      the second quarter and 11% to $107 million in the first six months of 2007
      from
      the comparable periods in 2006. The increases reflected price increases
      effective on June 29, 2006 and May 31, 2007, and, to a lesser extent, increased
      penetration in certain patient segments.





*Raptiva*





Net
      U.S. sales of Raptiva increased 23% to $27****million in the
      second quarter and 19% to $51 million in the first six months of 2007 from
      the
      comparable periods in 2006. The growth in sales was primarily due to increased
      penetration in hand and foot psoriasis patients and, to a lesser extent, price
      increases effective on August 10, 2006 and May 31, 2007.





*Sales
      to Collaborators*





Product
      sales to collaborators, for use in non-U.S. markets, increased 213% to
      $294****million in the second quarter and 247% to $587
      million in the first six months of 2007 from the comparable periods in 2006.
      The
      increases were primarily due to more favorable Herceptin pricing terms that
      were
      part of the new supply agreement with Roche signed in the third quarter of
      2006
      and higher sales of Herceptin, Avastin, and Rituxan to Roche. The favorable
      Roche Herceptin pricing terms will continue through the end of
      2008.





For
      the full year 2007, we expect sales to collaborators to approximately double
      relative to 2006 levels.





***Royalties***





Royalty
      revenue increased 53% to $484****million in the second
      quarter and 50% to $903 million in the first six months of 2007 from the
      comparable periods in 2006. The increases were primarily due to higher sales
      by
      Roche of our Herceptin, Avastin, and Rituxan products. Of the overall royalties
      received, royalties from Roche represented approximately 58% in the second
      quarter and 60% in the first six months of 2007 compared to approximately 65%
      in
      the second quarter and 62% in the first six months of 2006. The increases were
      also due to an acceleration of royalties in the second quarter of 2007, as
      discussed below. Royalties from other licensees included royalty revenue on
      our
      patent licenses, including our Cabilly patent as discussed below.





In
      June 2007, we entered into a transaction with an existing licensee to license
      from them the right to co-develop and commercialize certain molecules. In
      exchange, we released the licensee from its obligation to make certain royalty
      payments to us that would have otherwise been owed over the
      three-and-a-half-year period ending June 2010, and that period may be extended
      contingent upon certain events as defined in the agreement. We estimate that
      the
      fair value of the royalty revenue owed to us over the three-and-a-half-year
      period, less any amount recognized in the first quarter of 2007, was
      approximately $65 million, and this amount was recognized as royalty revenue
      in
      the second quarter of 2007.  We also recognized a similar amount as
      R&D expense for the purchase of the new license, and thus the second quarter
      net earnings per share (EPS) effect of entering into this new collaboration
      was
      not significant.








-28-





We
      have confidential licensing agreements with a number of companies on U.S. Patent
      No. 6,331,415 (the Cabilly patent) under which we receive royalty revenue on
      sales of products that are covered by the patent. The Cabilly patent expires
      in
      December 2018. The net pretax contributions related to the Cabilly patent were
      as follows *(in millions)*:





**Three
                  Months**
                **Ended
                  June 30, 2007**
            
            
            **Six
                  Months**
                **Ended
                  June 30, 2007**Royalty
                revenue
            
            $
            46
            
            
            $
            108Gross
                expenses(1)
            
            $
            27
            
            
            $
            57Net
                of tax effect of Cabilly patent on diluted EPS
            
            $
            0.01
            
            
            $
            0.03


______________________


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





See
      also Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial
      Statements of Part I, Item 1 of this Form 10-Q for further information on our
      Cabilly patent reexamination.





Cash
      flows from royalty income include revenue denominated in foreign currencies.
      We
      currently purchase simple foreign currency put option contracts (options) and
      forwards to hedge these foreign currency cash flows. These options and forwards
      are due to expire between 2007 and 2009.





For
      the full year 2007, we expect royalty revenue to increase more than 30% over
      the
      2006 level of $1,354 million; however, royalties are difficult to forecast
      because of the number of licensees and products involved, and potential
      licensing and intellectual property disputes.





***Contract
      Revenue***





Contract
      revenue increased 5% to $77****million in the second quarter
      and 33% to $171 million in the first six months of 2007 from the comparable
      periods in 2006. The increase in the first six months of 2007 was primarily
      due
      to recognition of a $30 million milestone payment from Novartis for European
      Union approval of Lucentis for the treatment of patients with AMD and higher
      reimbursements from Roche related to R&D efforts on Avastin. See “Related
      Party Transactions” below for more information on contract revenue from Roche
      and Novartis.





Contract
      revenue varies each quarter and is dependent on a number of factors, including
      the timing and level of reimbursements from ongoing development efforts,
      milestones, and opt-in payments received, and new contract arrangements. For
      the
      full year 2007, we expect contract revenue to be relatively flat compared to
      $290 million in 2006.





***Cost
      of Sales***





Cost
      of sales as a percentage of product sales was 18% in the second quarter and
      17%
      in the first six months of 2007 compared to 16% in the second quarter and first
      six months of 2006. The increases were due to the recognition of employee
      stock-based compensation expense of $16 million in the second quarter and $33
      million in the first half of 2007, related to products sold for which employee
      stock-based compensation expense was previously capitalized as part of inventory
      costs, and to higher volume of lower margin sales to collaborators. Cost of
      sales as a percentage of product sales was favorably affected by U.S. product
      sales mix (increased sales of our higher margin products, primarily Lucentis,
      Avastin, and Herceptin in the first half of 2007) and a price increase on sales
      of Herceptin to Roche.





***Research
      and Development***





Research
      and development (R&D) expenses increased 55% to
      $603****million in the second quarter and 59% to $1,213
      million in the first six months of 2007 from the comparable periods in 2006.
      A
      significant portion of the increases in R&D expenses was due to an increase
      in up-front, in-licensing expense for new collaborations. The higher levels
      of





-29-





expenses
      also reflected increased development activity across our entire product
      portfolio, including increased spending on clinical trials, post-marketing
      studies, and clinical manufacturing expenses (notably for Rituxan, Avastin,
      Xolair, and Herceptin), and early-stage projects, as well as higher research
      expenses due to increased headcount and headcount-related expenses in support
      of
      new molecular entities.





R&D
      as a percentage of operating revenue was 20%****in the second
      quarter and 21% in the first six months of 2007 compared to 18% in the second
      quarter and first six months of 2006.





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





**Three
                Months**
              **Ended
                June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                June 30,****Research
                and Development**
            
            **2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**Product
                development (including post-marketing)
            
            $
            387
            
            
            $
            301
            
            
            
            29
            %
            
            $
            799
            
            
            $
            584
            
            
            
            37
            %Research
            
            
            128
            
            
            
            75
            
            
            
            71
            
            
            
            195
            
            
            
            149
            
            
            
            31In-licensing
                (up-front and ongoing fees)
            
            
            88
            
            
            
            14
            
            
            
            529
            
            
            
            219
            
            
            
            31
            
            
            
            606Total
                R&D
            
            $
            603
            
            
            $
            390
            
            
            
            55
            
            
            $
            1,213
            
            
            $
            764
            
            
            
            59





***Marketing,
      General and Administrative***





Marketing,
      general and administrative (MG&A) expenses increased 13% to
      $532****million in the second quarter and 12% to $1,023
      million in the first six months of 2007 from the comparable periods in 2006.
      The
      increases were primarily due to: (i) an increase in corporate expenses,
      including charitable donations and losses on property and equipment disposals,
      (ii) an increase in royalty expense, primarily to Biogen Idec resulting from
      higher Roche sales of Rituxan, and (iii) an increase in marketing and sales
      expense primarily in support of Herceptin (adjuvant setting), Rituxan (RA
      setting), and post-launch activities related to Lucentis.





MG&A
      as a percentage of operating revenue was 18% in the second quarter and 17%
      in
      the first six months of 2007 compared to 21% in the second quarter and 22%
      in
      the first six months of 2006.





***Collaboration
      Profit Sharing***





Collaboration
      profit sharing expenses increased 7% to $277****million in
      the second quarter and 9% to $529 million in the first six months of 2007 from
      the comparable periods in 2006 due to higher sales of Rituxan, Xolair, and
      Tarceva and the related profit sharing expenses.





The
      following table summarizes the amounts resulting from the respective profit
      sharing collaborations for the periods presented *(in
      millions)*:





**Three
                Months**
              **Ended
                June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                June 30,****2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**U.S.
                Rituxan profit sharing expense
            
            $
            188
            
            
            $
            173
            
            
            
            9
            %
            
            $
            354
            
            
            $
            325
            
            
            
            9
            %U.S.
                Tarceva profit sharing expense
            
            
            49
            
            
            
            48
            
            
            
            2
            
            
            
            96
            
            
            
            91
            
            
            
            5Total
                Xolair profit sharing expense
            
            
            40
            
            
            
            38
            
            
            
            5
            
            
            
            79
            
            
            
            69
            
            
            
            14Total
                collaboration profit sharing expense
            
            $
            277
            
            
            $
            259
            
            
            
            7
            
            
            $
            529
            
            
            $
            485
            
            
            
            9





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





-30-








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





Collaboration
      profit sharing expense, exclusive of R&D expenses, related to Biogen Idec
      for the periods ended June 30, 2007 and 2006 consisted of the following *(in
      millions)*:





**Three
                Months**
              **Ended
                June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                June 30,****2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**Product
                sales, net
            
            $
            582
            
            
            $
            525
            
            
            
            11
            %
            
            $
            1,117
            
            
            $
            1,002
            
            
            
            11
            %Combined
                commercial and manufacturing costs and expenses
            
            
            146
            
            
            
            116
            
            
            
            26
            
            
            
            276
            
            
            
            230
            
            
            
            20Combined
                co-promotion profits
            
            $
            436
            
            
            $
            409
            
            
            
            7
            
            
            $
            841
            
            
            $
            772
            
            
            
            9Amount
                due to Biogen Idec for their share of co-promotion profits – included in
                collaboration profit sharing expense
            
            $
            188
            
            
            $
            173
            
            
            
            9
            %
            
            $
            354
            
            
            $
            325
            
            
            
            9
            %





Biogen
      Idec’s relative share of combined commercial costs determines the amount shown
      as collaboration profit sharing expense, exclusive of R&D
      expenses.





Revenue
      and expenses related to our collaboration with Biogen Idec separately included
      the following *(in millions)*:





**Three
                Months**
              **Ended
                June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                June 30,****2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**Contract
                revenue from Biogen Idec (R&D reimbursement)
            
            $
            34
            
            
            $
            23
            
            
            
            48
            %
            
            $
            55
            
            
            $
            39
            
            
            
            41
            %Royalty
                expense on sales of Rituxan to Roche and Zenyaku and other patent
                costs –
                included in MG&A expense
            
            $
            51
            
            
            $
            45
            
            
            
            13
            %
            
            $
            107
            
            
            $
            80
            
            
            
            34
            %





***Recurring
      Charges Related to Redemption***





We
      recorded recurring charges related to the June 1999 Redemption and push-down
      accounting. These charges were $26 million in the second quarters of 2007 and
      2006, and $52 million in the first six months of 2007 and 2006, and comprised
      the amortization of Redemption-related intangible assets in the periods
      presented.





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





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





We
      recorded accrued interest and bond costs related to the COH trial judgment
      of
      $13 million for the second quarter of 2007 and $14 million for the second
      quarter of 2006, and $26 million for the first six months of 2007 and $27
      million for the first six months of 2006. We expect that we will continue to
      incur interest charges on the judgment and service fees on the surety bond
      each
      quarter through the process of appealing the COH trial results. The amount
      of
      cash to be paid, if any, or the timing of such payment in connection with the
      COH matter will depend on the outcome of the California Supreme Court’s review.
      It may take longer than one year to resolve this matter. See Note





-31-





4,
      “Contingencies,” in the Notes to the Condensed Consolidated Financial Statements
      of Part I, Item 1 of this Form 10-Q for further information regarding our
      litigation.





***Operating
      Income***





Operating
      income was $1,124 million in the second quarter of 2007, a 49% increase from
      the
      second quarter of 2006, and $2,183 million in the first six months of 2007,
      a
      56% increase from the comparable period in 2006. Our operating income as a
      percentage of operating revenue (pretax operating margin) was 37% in the second
      quarter of 2007 and 34% in the second quarter of 2006, and was 37% in the first
      six months of 2007 and 33% in the first six months of 2006.





***Other
      Income (Expense)***





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





**Three
                Months**
              **Ended
                June 30,**
            
            
            
            
            
            **Six
                Months**
              **Ended
                June 30,****Other
                Income, Net**
            
            **2007**
            
            
            **2006**
            
            
            **% Change**
            
            
            **2007**
            
            
            **2006**
            
            
            **% Change**Gains
                on sales of biotechnology equity securities, net
            
            $
            4
            
            
            $
            66
            
            
            
            (94
            )%
            
            $
            12
            
            
            $
            69
            
            
            
            (83
            )%Write-downs
                of biotechnology debt and equity securities
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (4
            )
            
            
            –
            
            
            
            –Interest
                income
            
            
            70
            
            
            
            54
            
            
            
            30
            
            
            
            140
            
            
            
            103
            
            
            
            36Interest
                expense
            
            
            (17
            )
            
            
            (18
            )
            
            
            (6
            )
            
            
            (35
            )
            
            
            (37
            )
            
            
            (5
            )Other
                miscellaneous income
            
            
            1
            
            
            
            1
            
            
            
            –
            
            
            
            1
            
            
            
            2
            
            
            
            (50
            )Total
                other income, net
            
            $
            58
            
            
            $
            103
            
            
            
            (44
            )
            
            $
            114
            
            
            $
            137
            
            
            
            (17
            )





Other
      income, net decreased 44% to $58 million in the second quarter of 2007 and
      17%
      to $114 million in the first six months of 2007 over the comparable periods
      in
      2006. Gains on sales of biotechnology equity securities, net were lower
      resulting from approximately $63 million in gains from sales of certain of
      our
      biotechnology equity investments in the second quarter of 2006. Interest income
      increased primarily due to higher yields and higher average cash balances in
      the
      second quarter and first six months of 2007 from the comparable periods in
      2006.
      For the full year 2007, we expect other income, net to be approximately 80%
      of
      2006 levels, although this may vary with fluctuations in interest rates and
      unexpected gains or losses from our biotechnology equity portfolio.





***Income
      Tax Provision***





The
      effective income tax rate was 37% in the second quarter and first six months
      of
      2007, compared to 38% in the second quarter and first six months of 2006. The
      decrease in the income tax rate was primarily due to the extension of the
      federal R&D tax credit and an increase in the domestic manufacturing
      deduction in 2007.





We
      adopted the provisions of FIN 48 on January 1, 2007. Implementation of FIN
      48
      did not result in any adjustment to our Condensed Consolidated Statements of
      Income or a cumulative adjustment to retained earnings (accumulated deficit).
      As
      a result of the implementation of FIN 48, we reclassified $147 million of
      unrecognized tax benefits from current liabilities to long-term liabilities
      as
      of January 1, 2007, and we also reclassified the balance as of December 31,
      2006, for consistency, in the accompanying Condensed Consolidated Balance
      Sheets, none of which would have been considered due in 2007 in the presentation
      of our Contractual Obligations table in our Annual Report on Form 10-K for
      the
      year ended December 31, 2006.





-32-








**Liquidity
      and Capital Resources**


*(In
      millions)*





**June
                  30,****2007**
            
            
            **December 31,****2006**Unrestricted
                cash, cash equivalents, short-term investments, and long-term marketable
                debt and equity securities
            
            $
            5,078
            
            
            $
            4,325Net
                receivable equity hedge instruments
            
            
            38
            
            
            
            50Total
                unrestricted cash, cash equivalents, short-term investments, long-term
                marketable debt and equity securities, and equity hedge
                instruments
            
            $
            5,116
            
            
            $
            4,375Working
                capital
            
            
            4,710
            
            
            $
            3,694Current
                ratio
            
            3.4:1
            
            
            2.8:1





Total
      unrestricted cash, cash equivalents, short-term investments, and long-term
      marketable securities, including the fair value of the equity hedge instruments,
      were approximately $5.1 billion at June 30, 2007, an increase of $741 million
      from December 31, 2006. This increase primarily reflects cash generated from
      operations and cash increases from stock option exercises, partially offset
      by
      cash used for repurchases of our Common Stock and capital expenditures. To
      mitigate the risk of market value fluctuation, certain of our biotechnology
      marketable equity securities are hedged with zero-cost collars and forward
      contracts, which are carried at fair value. See Note 4, “Investment Securities
      and Financial Instruments,” in the Notes to the Consolidated Financial
      Statements of Part II, Item 8 of our Form 10-K for the year ended December
      31, 2006 for further information regarding activity in our marketable investment
      portfolio and derivative instruments.





See
      “Our affiliation agreement with Roche Holdings, Inc. could adversely affect
      our
      cash position” among other risk factors below in Part II, Item 1A, “Risk
      Factors,” of this Form 10-Q and Note 4, “Contingencies,” in the Notes to
      Condensed Consolidated Financial Statements of Part I, Item 1 of this Form
      10-Q
      for factors that could negatively affect our cash position.





***Cash
      Provided by Operating Activities***





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





Our
      “accounts receivable—product sales” was $1,068 million at June 30, 2007, an
      increase of $103 million from December 31, 2006. The increase was primarily
      due
      to higher product sales of Avastin and higher sales of Herceptin and Avastin
      to
      Roche. The average collection period of our “accounts receivable—product sales”
as measured in days’ sales outstanding (DSO) was 40 days for the second quarter
      2007 compared to 33 days in the second quarter of 2006 and 42 days in the first
      quarter of 2007. The increase from the second quarter of 2006 was primarily
      due
      to the extended payment terms of approximately 100 days that we offered certain
      wholesalers in conjunction with the launch of Lucentis on June 30, 2006. This
      program ended on June 30, 2007 and was revised so that extended payment terms
      for Lucentis will continue through March 31, 2008. Under the revised program,
      extended payment terms of approximately 60 additional days will be offered
      through September 30, 2007 and then extended payment terms of approximately
      30
      additional days will be offered through March 31, 2008. Due to the shorter
      payment terms under the revised program, we expect a slight decrease in our
      DSO
      during the second half of 2007.





Our
      inventory balance was $1,365 million at June 30, 2007, an increase of $187
      million from December 31, 2006. The increase was primarily due to finished
      goods
      of our Herceptin and Avastin products, as well as bulk campaign production
      of
      our Avastin product. In the first six months of 2007, we capitalized into
      inventory $40 million of non-cash employee stock-based compensation costs
      pursuant to FAS 123R, and recognized $33 million of previously capitalized
      employee stock-based compensation costs in cost of sales.





Accounts
      payable, other accrued liabilities, and other long-term liabilities increased
      $132 million in the first six months of 2007. This increase was mainly due
      to
      increases in accrued royalties, taxes payable, accrued
      marketing





-33-





expenses,
      and other liabilities, which were mainly due to the growth in the business,
      partially offset by decreases in accrued compensation due to payments made
      during the first six months of 2007.





***Cash
      Used in Investing Activities***





Cash
      used in investing activities was primarily related to capital expenditures
      and
      purchases, sales, and maturities of investments. Capital expenditures were
      $475
      million during the first six months of 2007 compared to $538 million during
      the
      first six months of 2006. Capital expenditures in the first six months of 2007
      included ongoing construction of our second manufacturing facility in Vacaville,
      California,****leasehold improvements for newly constructed
      buildings on our South San Francisco, California campus, and purchase of
      equipment and information systems.





***Cash
      Used in Financing Activities***





Cash
      used in financing activities was primarily related to activities under our
      employee stock plans and our stock repurchase program. We used cash for stock
      repurchases of $666 million during the first six months of 2007 and $540 million
      during the first six months of 2006 pursuant to our stock repurchase program
      approved by our Board of Directors. We also received $276 million during the
      first six months of 2007 and $187 million during the first six months of 2006
      related to stock option exercises and stock issuances under our employee stock
      plans. The excess tax benefits from stock-based compensation arrangements were
      $127 million in the first six months of 2007 and $90 million in the first six
      months of 2006.





Under
      a stock repurchase program approved by our Board of Directors in December 2003
      and most recently extended in April 2007, we are authorized to repurchase up
      to
      100 million shares of our Common Stock for an aggregate price of up to $8.0
      billion through June 30, 2008. In this program, as in previous stock repurchase
      programs, purchases may be made in the open market or in privately negotiated
      transactions from time to time at management’s discretion. We also may engage in
      transactions in other Genentech securities in conjunction with the repurchase
      program, including certain derivative securities. As of June 30, 2007, we have
      not engaged in any such transactions. We intend to use the repurchased stock
      to
      offset dilution caused by the issuance of shares in connection with our employee
      stock plans. Although there are currently no specific plans for the shares
      that
      may be purchased under the program, our goals for the program are (i) to address
      provisions of our affiliation agreement with RHI related to maintaining RHI’s
      minimum ownership percentage, (ii) to make prudent investments of our cash
      resources, and (iii) to allow for an effective mechanism to provide stock for
      our employee stock plans. See below in “Relationship with Roche Holdings, Inc.”
for more information on RHI’s minimum ownership percentage.





We
      have entered into Rule 10b5-1 trading plans to repurchase shares in the open
      market during those periods each quarter when trading in our stock is restricted
      under our insider trading policy. The current trading plan covered approximately
      four million shares and expired on June
      30,****2007.





Our
      shares repurchased during the first six months of 2007 were as follows*(shares in millions)*:





**Total
                  Number of**
                **Shares
                  Purchased**
            
            
            **Average
                  Price**
                **Paid****per
                  Share**January
                1–31, 2007
            
            
            3.0
            
            
            $
            87.33February
                1–28, 2007
            
            
            0.9
            
            
            
            86.54March
                1–31, 2007
            
            
            0.6
            
            
            
            82.33April
                1–30, 2007
            
            
            0.8
            
            
            
            82.14May
                1–31, 2007
            
            
            1.4
            
            
            
            79.65June
                1–30, 2007
            
            
            1.3
            
            
            
            75.84Total
            
            
            8.0
            
            
            $
            83.16





As
      of June 30, 2007, 70 million shares had been purchased under our stock
      repurchase program for $5.0 billion, and a maximum of 30 million additional
      shares may be purchased under the program through June 30, 2008.





-34-








**Off-Balance
      Sheet Arrangements**





We
      have certain contractual arrangements that create potential risk for us and
      are
      not recognized in our Condensed Consolidated Balance Sheets. We believe there
      have been no significant changes in the off-balance sheet arrangements disclosed
      in our Annual Report on Form 10-K for the year ended December 31, 2006 that
      have
      or are reasonably likely to have a material current or future effect on our
      financial condition, changes in financial condition, revenue or expenses,
      results of operations, liquidity, capital expenditures, or capital
      resources.





***Contractual
      Obligations***





During
      the first six months of 2007, we believe that there have been no significant
      changes in our payments due under contractual obligations, as disclosed in
      our
      Annual Report on Form 10-K for the year ended December 31, 2006, except as
      noted
      above in “Income Tax Provision.”





**Contingencies**





We
      are party to various legal proceedings, including patent infringement litigation
      and licensing and contract disputes, and other matters. See Note 4,
“Contingencies,” in the Notes to Condensed Consolidated Financial Statements of
      Part I, Item 1 of this Form 10-Q for further information.





**Relationship
      with Roche Holdings, Inc.**





***Roche
      Holdings, Inc.’s Ability to Maintain Percentage Ownership Interest in Our
      Stock***





We
      issue shares of Common Stock in connection with our stock option and stock
      purchase plans, and we may issue additional shares for other purposes. Our
      affiliation agreement with RHI provides, among other things, that with respect
      to any issuance of our Common Stock in the future, we will repurchase a
      sufficient number of shares so that immediately after such issuance, the
      percentage of our Common Stock owned by RHI will be no lower than 2% below
      the
“Minimum Percentage” (subject to certain conditions). The Minimum Percentage
      equals the lowest number of shares of Genentech Common Stock owned by RHI since
      the July 1999 offering (to be adjusted in the future for dispositions of shares
      of Genentech Common Stock by RHI as well as for stock splits or stock
      combinations) divided by 1,018,388,704 (to be adjusted in the future for stock
      splits or stock combinations), which is the number of shares of Genentech Common
      Stock outstanding at the time of the July 1999 offering, as adjusted for stock
      splits. We have repurchased shares of our Common Stock since 2001 (see
      discussion above in “Liquidity and Capital Resources”). The affiliation
      agreement also provides that, upon RHI’s request, we will repurchase shares of
      our Common Stock to increase RHI’s ownership to the Minimum Percentage. In
      addition, RHI will have a continuing option to buy stock from us at prevailing
      market prices to maintain its percentage ownership interest. Under the terms
      of
      the affiliation agreement, RHI’s Minimum Percentage is 57.7% and RHI’s ownership
      percentage is to be no lower than 55.7%. At June 30, 2007, RHI’s ownership
      percentage was 55.8%.





**Related
      Party Transactions**





We
      enter into transactions with our related parties, Roche Holding AG and
      affiliates (Roche) and Novartis AG and other Novartis affiliates (Novartis).
      The
      accounting policies that we apply to our transactions with our related parties
      are consistent with those applied in transactions with independent third
      parties, and all related party agreements are negotiated on an arm’s-length
      basis.





In
      our royalty and supply arrangements with related parties, we are the principal,
      as defined under Emerging Issues Task Force (EITF) Issue No. 99-19,
*“**Reporting Revenue Gross as a Principal**v**ersus
      Net as an Agent**”* (EITF 99-19), because we bear the manufacturing
      risk, general inventory risk, and the risk to defend our intellectual property.
      For circumstances in which we are the principal in the transaction, we record
      the transaction on a gross basis in accordance with EITF 99-19. Otherwise our
      transactions are recorded on a net basis.





-35-








***Roche***





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





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Product
                sales to Roche
            
            $
            253
            
            
            $
            73
            
            
            $
            516
            
            
            $
            131Royalties
                earned from Roche
            
            $
            283
            
            
            $
            207
            
            
            $
            538
            
            
            $
            373Contract
                revenue from Roche
            
            $
            30
            
            
            $
            21
            
            
            $
            60
            
            
            $
            40Cost
                of sales on product sales to Roche
            
            $
            137
            
            
            $
            64
            
            
            $
            258
            
            
            $
            113R&D
                expenses incurred on joint development projects with Roche
            
            $
            70
            
            
            $
            53
            
            
            $
            128
            
            
            $
            95





R&D
      expenses are partially reimbursable to us by Roche. In addition, these amounts
      include R&D expenses resulting from the net settlement of amounts that we
      owed to Roche for R&D expenses that Roche incurred on joint development
      projects, less amounts reimbursable to us by Roche on these respective
      projects.





***Novartis***





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





We
      have an agreement with Novartis Pharma AG (a wholly owned subsidiary of Novartis
      AG) under which Novartis Pharma AG has the exclusive right to develop and market
      Lucentis outside the U.S. for indications related to diseases or disorders
      of
      the eye. As part of this agreement, the parties will share the cost of certain
      of our ongoing development expenses for Lucentis. Novartis Pharma AG makes
      royalty payments to us on sales of Lucentis outside the U.S.





We,
      along with Novartis Pharma AG, are co-developing Xolair in the U.S., and we
      and
      Novartis are co-promoting Xolair in the U.S. We record all sales and cost of
      sales in the U.S., and Novartis markets the product in and records all sales
      and
      cost of sales in Europe. We and Novartis share the resulting U.S. and European
      operating profits according to prescribed profit sharing percentages, and our
      U.S. and European profit sharing expenses are recorded as collaboration profit
      sharing expense.





-36-








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





**Three
                  Months**
                **Ended
                  June 30,**
            
            
            **Six
                  Months**
                **Ended
                  June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Product
                sales to Novartis
            
            $
            3
            
            
            $
            2
            
            
            $
            6
            
            
            $
            2Royalties
                earned from Novartis
            
            $
            13
            
            
            $
            –
            
            
            $
            19
            
            
            $
            –Contract
                revenue from Novartis
            
            $
            4
            
            
            $
            13
            
            
            $
            44
            
            
            $
            23Cost
                of sales on product sales to Novartis
            
            $
            3
            
            
            $
            1
            
            
            $
            7
            
            
            $
            2R&D
                expensesincurred on joint development projectswith
                Novartis
            
            $
            9
            
            
            $
            12
            
            
            $
            19
            
            
            $
            22Collaboration
                profit sharing expense to Novartis
            
            $
            49
            
            
            $
            48
            
            
            $
            96
            
            
            $
            91





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





R&D
      expenses are partially reimbursable to us by Novartis. In addition, these
      amounts include R&D expenses resulting from the net settlement of amounts
      that we owed to Novartis for R&D expenses that Novartis incurred on
      joint development projects, less amounts reimbursable to us by Novartis on
      these respective projects.





**Stock
      Options**





***Option
      Program Description***





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





All
      stock option grants are made with the approval of the Compensation Committee
      of
      the Board of Directors or an authorized delegate.





-37-








***General
      Option Information***





***Summary
      of Option Activity***


*(Shares
      in millions)*





**Options
                  Outstanding****Shares
                  Available**
                **for
                  Grant**
            
            
            **Number
                  of**
                **Shares**
            
            
            **Weighted-Average**
                **Exercise
                  Price****December
                31, 2005**
            
            
            83.7
            
            
            
            82.8
            
            
            $
            46.64Grants
            
            
            (17.5
            )
            
            
            17.5
            
            
            
            79.85Exercises
            
            
            –
            
            
            
            (9.5
            )
            
            
            30.42Cancellations
            
            
            2.5
            
            
            
            (2.5
            )
            
            
            62.09**December
                31, 2006**
            
            
            68.7
            
            
            
            88.3
            
            
            $
            54.53Grants
            
            
            (0.8
            )
            
            
            0.8
            
            
            
            81.99Exercises
            
            
            –
            
            
            
            (6.5
            )
            
            
            31.35Cancellations
            
            
            1.6
            
            
            
            (1.6
            )
            
            
            74.07**June
                30, 2007 (Year to Date)**
            
            
            69.5
            
            
            
            81.0
            
            
            $
            56.27





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


*(Shares
      in millions)*





**Exercisable**
            
            
            **Unexercisable**
            
            
            **Total****As
                of June 30, 2007**
            
            **Shares**
            
            
            **Weighted-Average**
                **Exercise****Price**
            
            
            **Shares**
            
            
            **Weighted-Average**
                **Exercise****Price**
            
            
            **Shares**
            
            
            **Weighted-Average**
                **Exercise****Price**In-the-Money
            
            
            40
            
            
            $
            34.13
            
            
            
            7
            
            
            $
            51.56
            
            
            
            47
            
            
            $
            36.66Out-of-the-Money(1)
            
            
            8
            
            
            $
            85.88
            
            
            
            26
            
            
            $
            81.99
            
            
            
            34
            
            
            $
            82.89Total
                Options Outstanding
            
            
            48
            
            
            
            
            
            
            
            33
            
            
            
            
            
            
            
            81


______________________


(1)
            Out-of-the-money
                options are those options with an exercise price equal to or greater
                than
                the fair market value of Genentech Common Stock, $75.66, at the close
                of
                business on June 29, 2007.





***Dilutive
      Effect of Options***





Grants,
      net of cancellations, as a percentage of outstanding shares were
      (0.08%)****for the first six months of 2007,
      1.43%****for the year ended December 31, 2006, and 1.70% for
      the year ended December 31, 2005.





***Equity
      Compensation Plan Information***





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





******





This
      report contains forward-looking statements regarding our Horizon 2010 strategy
      of bringing 20 new molecules into clinical development, bringing at least 15
      major new products or indications onto the market, becoming the number one
      U.S.
      oncology company in sales, and achieving certain financial growth measures;
      licensure of a manufacturing facility; the timing of clinical trials for
      ABT-869; physicians decisions with respect Avastin dosing;
      Avastin, Lucentis and Tarceva sales growth; the effect of a new label and
      RiskMAP on the use of Xolair; sales to collaborators; royalty and contract
      revenue; other income, net; days of sales outstanding; and purchase price
      allocation for the acquisition of Tanox.





These
      forward-looking statements involve risks and uncertainties, and the cautionary
      statements set forth below and those contained in “Risk Factors” in this Form
      10-Q identify important factors that could cause actual results to differ
      materially from those predicted in any such forward-looking statements. Such
      factors include, but are not limited to, difficulty in enrolling patients in
      clinical trials; additional time requirements for data analysis;
      efficacy





-38-





data
      concerning any of our products which shows or is perceived to show similar
      or
      improved treatment benefit at a lower dose or shorter duration of therapy;
      BLA
      preparation and decision making; FDA actions or delays; failure to obtain FDA
      approval; difficulty in obtaining materials from suppliers; unexpected safety,
      efficacy or manufacturing issues for us or our contractors/collaborators; the
      ability to supply product and meet demand for our products; product withdrawals;
      competition; pricing decisions by us or our competitors; our ability to protect
      our proprietary rights; the outcome of, and expenses associated with, litigation
      or legal settlements; increased cost of sales; variations in collaborator sales
      and expenses; actions by Roche Holdings, Inc. that are adverse to our interests;
      decreases in third party reimbursement rates; and new accounting pronouncements
      or guidance. We disclaim and do not undertake any obligation to update or revise
      any forward-looking statement in this Form 10-Q.





-39-








**Item
      3. Quantitative and Qualitative Disclosures
      About Market
      Risk**





Our
      market risks at June 30, 2007 have not changed materially from those discussed
      in Item 7A of our Form 10-K for the year ended December 31, 2006 on file with
      the U.S. Securities and Exchange Commission.





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





**Item
      4. Controls and
      Procedures**





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





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





-40-








**PART
      II—OTHER INFORMATION**








**Item
      1. Legal Proceedings**





See
      Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial
      Statements of Part I, Item 1 of this Form 10-Q for a description of legal
      proceedings as well as certain other matters.





See
      also Item 3 of our Annual Report on Form 10-K for the year ended December 31,
      2006 and Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter
      ended March 31, 2007.








**Item
      1A. Risk Factors**





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





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





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


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

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

- Failure
          to receive the necessary regulatory approvals or a delay in receiving such
          approvals. Among other things, such delays may be caused by slow enrollment
          in
          clinical studies; extended length of time to achieve study endpoints;
          additional time requirements for data analysis or Biologic License Application
          (BLA) preparation; discussions with the United States (U.S.) Food and Drug
          Administration (FDA); FDA requests for additional preclinical or clinical
          data; analyses or changes to study design; or unexpected safety, efficacy,
          or
          manufacturing issues.

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

- Manufacturing
          costs, pricing or reimbursement issues, or other factors may make the product
          uneconomical.

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

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

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





-41-








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


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

- The
          number of products entering into development from late-stage research.
          For
          example, there is no guarantee that internal research efforts will succeed
          in
          generating a sufficient number of product candidates that are ready to
          move
          into development or that will be available for in-licensing on terms
          acceptable to us and permitted under the anti-trust laws.

- Decisions
          by Roche Holding AG and affiliates (Roche) whether to exercise its options
          to
          develop and sell our future products in non-U.S. markets and the timing
          and
          amount of any related development cost reimbursements.

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

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

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

- Future
          levels of revenue.

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





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





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


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

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



-42-





- Failure
          to comply with existing or future regulatory
          requirements.

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

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





**We
      face competition.**





We
      face competition from pharmaceutical companies and biotechnology
      companies.





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





*Avastin:* Avastin
      competes in metastatic colorectal cancer (CRC) with Erbitux®
(Imclone/Bristol-Myers Squibb), which is an EGFR-inhibitor approved for the
      treatment of irinotecan refractory or intolerant metastatic CRC patients; and
      with VectibixTM (Amgen), which is indicated for the treatment of patients with
      EGFR-expressing metastatic CRC who have disease progression on or following
      fluoropyrimidine-, oxaliplatin-, and irinotecan- containing regimens. In
      addition, Avastin competes with Nexavar® (sorafenib, Bayer Corporation/Onyx
      Pharmaceuticals, Inc.), Sutent® (sunitinib malate, Pfizer, Inc.), and Torisel®
(Wyeth) for the treatment of patients with advanced renal cell carcinoma (an
      unapproved use of Avastin).





Avastin
      could face competition from products in development that currently do not have
      regulatory approval. Amgen initiated head-to-head clinical trials comparing
      AMG
      706 and Avastin in non small cell lung cancer (NSCLC) and metastatic breast
      cancer (mBC). There
      are also ongoing head-to-head clinical trials comparing both Sutent®and
      AZD2171 (AstraZeneca) to Avastin.Additionally, there are more than 65
      molecules that target VEGF inhibition, and over 130 companies are developing
      molecules that, if successful in clinical trials, may compete with
      Avastin.





*Rituxan:* Rituxan’s
      current competitors in hematology-oncology include Bexxar® (GlaxoSmithKline
      [GSK]) and Zevalin® (Biogen Idec Inc.), both of which are radioimmunotherapies
      indicated for the treatment of patients with relapsed or refractory low-grade,
      follicular or transformed B-cell non-Hodgkin’s lymphoma (NHL). Other potential
      competitors include Campath® (Bayer Corporation/Genzyme) in relapsed chronic
      lymphocytic leukemia (CLL) (an unapproved use of Rituxan), Velcade®
(Millennium Pharmaceuticals, Inc.), which is indicated for multiple myeloma
      and
      more recently, mantle cell lymphoma (both unapproved uses of Rituxan) and
      Revlimid® (Celgene), which is indicated for multiple myeloma and myelodysplastic
      syndromes (both unapproved uses of Rituxan).





Rituxan’s
      current competitors in rheumatoid arthritis (RA) include Enbrel® (Amgen/Wyeth),
      Humira® (Abbott Laboratories), Remicade® (Johnson & Johnson), Orencia®
(Bristol-Myers Squibb), and Kineret® (Amgen). These products are approved for
      use in a broader RA patient population than the approved population for Rituxan.
      In addition, molecules in development that, if successful in clinical trials,
      may compete with Rituxan in RA include: ActemraTM, an anti-interleukin-6
      receptor being developed by Chugai and Roche; CimziaTM (certolizumab pegol), an
      anti-TNF antibody being developed by UCB; and CNTO 148 (golimumab), an anti-TNF
      antibody being developed by Centocor, Inc.





Rituxan
      may face future competition in both hematology-oncology and RA from Humax CD20TM
(Ofatumumab), an anti-CD20 antibody being co-developed by Genmab and
      GSK. Genmab and GSK announced their plans to file for approval and launch
      of HumaxTM in the fourth quarter of 2008 for monotherapy use in refractory
      CLL and monotherapy use in Rituxan refractory NHL. In addition, we are aware
      of
      other anti-CD20 molecules in development that, if successful in clinical trials,
      may compete with Rituxan.





-43-








*Herceptin:*Herceptin
      faces competition in the relapsed metastatic setting from Tykerb® (lapatinib
      ditosylate), manufactured by GSK. On March 13, 2007, the FDA approved Tykerb®,
      in combination with capecitabine, for the treatment of patients with advanced
      or
      metastatic breast cancer whose tumors overexpress HER2 and who have received
      prior therapy, including an anthracycline, a taxane, or Herceptin. We believe
      that lapatinib use is primarily within its labeled indication in the later
      lines
      of mBC; as a result, the impact on Herceptin in the second quarter of 2007
      was limited.





*Lucentis:* We
      are aware that retinal specialists are currently using Avastin to treat the
      wet
      form of age-related macular degeneration (AMD), an unapproved use for Avastin,
      which results in significantly less revenue to us per treatment compared to
      Lucentis. We expect Avastin use to continue in this setting. Additionally,
      the
      National Eye Institute announced plans to fund a head-to-head trial of Avastin
      and Lucentis in this setting. Lucentis also competes with Macugen® (Pfizer/OSI
      Pharmaceuticals), and with Visudyne® (Novartis) alone, in combination with
      Lucentis, in combination with Avastin, or in combination with the off-label
      steroid triamcinolone in wet AMD. In addition, if successful in clinical trials,
      VEGF-Trap-Eye, a vascular endothelial growth factor blocker being developed
      by
      Bayer Corporation and Regeneron, may compete with Lucentis.





*Xolair:*Xolair
      faces competition from other asthma therapies, including inhaled
      corticosteroids, long-acting beta agonists, combination products such as
      fixed-dose inhaled corticosteroids/long-acting beta agonists and leukotriene
      inhibitors, as well as oral corticosteroids and immunotherapy.





*Tarceva:*Tarceva
      competes with the chemotherapy agents Taxotere® (Sanofi-Aventis) and Alimta®
(Eli Lilly and Company), both of which are indicated for the treatment of
      relapsed non-small cell lung cancer (NSCLC). Recent increases in the off-label
      use of Avastin in combination with chemotherapy in second-line NSCLC have also
      had an impact in this setting. In front-line pancreatic cancer, Tarceva
      primarily competes with Gemzar® (Eli Lilly) monotherapy and Gemzar® in
      combination with other chemotherapeutic agents. Tarceva could also face
      competition in the future from products in late-phase development, such as
      Erbitux® (Bristol-Myers Squibb) and Xeloda® (Roche), which currently do not have
      regulatory approval for use in NSCLC or pancreatic cancer.





*Nutropin:* Nutropin
      faces competition in the growth hormone market, from other companies currently
      selling growth hormone products. Nutropin’s current competitors are Genotropin®
(Pfizer), Norditropin® (Novo Nordisk), Humatrope® (Eli Lilly and Company),
      Tev-Tropin® (Teva Pharmaceutical Industries Ltd.), and Saizen® (Serono, Inc.).
      In addition, follow-on biologics that are not therapeutically equivalent (not
      substitutable) for current growth hormone products are beginning to enter the
      market. Omnitrope® (Sandoz), a biologic similar to Genotropin®, launched in
      January 2007. In March 2007, Cangene received an approvable letter from the
      FDA
      for its growth hormone AccretropinTM as a biologic similar to Humatrope®.
      Valtropin® (LG Life Sciences along with its partner Biopartners) also received
      FDA approval in April 2007 as a biologic similar to Humatrope® for three
      indications: short stature associated with growth hormone deficiency and Turner
      Syndrome in pediatrics, and growth hormone deficiency in adults. Furthermore,
      as
      a result of multiple competitors, we have experienced, and may continue to
      experience, a loss of patient share and increased competition for managed care
      product placement. Obtaining placement on the preferred product lists of managed
      care companies may require that we further discount the price of
      Nutropin.





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





*Pulmozyme:*Pulmozyme
      currently faces competition from the use of hypertonic saline, an inexpensive
      approach to clearing the lungs of cystic fibrosis patients.





*Raptiva:*Raptiva
      competes with established therapies for moderate-to-severe psoriasis, including
      oral systemics such as methotrexate and cyclosporin as well as ultraviolet
      light
      therapies. In addition, Raptiva competes with biologic agents Amevive®
(Astellas), Enbrel® (Amgen), and Remicade® (Centocor). Raptiva also competes
      with the





-44-





biologic
      agent Humira® (Abbott), which is currently used off-label in the psoriasis
      market. Abbott is expecting FDA approval of Humira® for the treatment of
      psoriasis in the first quarter of 2008.





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





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





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





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





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


- The
          inability of a supplier to provide raw materials used for manufacture of
          our
          products;

- Equipment
          obsolescence, malfunctions, or failures;

- Product
          quality or contamination problems;

- Damage
          to a facility, including our warehouses and distribution facilities, due
          to
          natural disasters, including, but not limited to, earthquakes, as our South
          San Francisco, Vacaville, and Oceanside facilities are located in areas
          where
          earthquakes have occurred;

- Changes
          in FDA regulatory requirements or standards that require modifications
          to our
          manufacturing processes;

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

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

- Failure
          to maintain an adequate state of GMP compliance; and



-45-





- Implementation
                and integration of our new enterprise resource planning system, including
                the
                portions related to manufacturing and
                distribution.

In
      addition, there are inherent uncertainties associated with forecasting future
      demand, especially for newly introduced products of ours or of those for whom
      we
      produce products, and as a consequence we may have inadequate capacity to meet
      our own actual demands and/or the actual demands of those for whom we produce
      products. Alternatively, we may have an excess of available capacity, which
      could lead to an idling of a portion of our manufacturing facilities and
      incurring unabsorbed or idle plant charges, or other excess capacity charges,
      resulting in an increase in our cost of sales.





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





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





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





The
      patent positions of pharmaceutical and biotechnology companies can be highly
      uncertain and involve complex legal and factual questions. Accordingly, we
      cannot predict with certainty the breadth of claims allowed in companies’
patents. Patent disputes are frequent and may ultimately preclude the
      commercialization of products. We have in the past been, are currently, and
      may
      in the future be involved in material litigation and other legal proceedings
      related to our proprietary rights, such as the Cabilly reexamination (discussed
      in Note 4, “Contingencies,” in the Notes to Condensed Consolidated Financial
      Statements of Part I, Item 1 of this Form 10-Q)and disputes in connection with
      licenses granted to or obtained from third parties. Such litigation and other
      legal proceedings are costly in their own right and could subject us to
      significant liabilities with third parties, including the payment of
      significant royalty expenses, the loss of significant royalty income, or other
      expenses or losses.  Furthermore, an adverse decision or ruling could
      force us to either obtain third-party licenses at a material cost or cease
      using
      the technology or commercializing the product in dispute. An adverse decision
      or
      ruling with respect to one or more of our patents or other intellectual property
      rights could cause us to incur a material loss of royalties and other revenue
      from licensing arrangements that we have with third parties, and could
      significantly interfere with our ability to negotiate future licensing
      arrangements.





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





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





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





-46-








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





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





**Other
      factors could affect our product sales.**





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


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

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

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

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

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

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

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



-47-





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

- The
          increasing use and development of alternate therapies.

- The
          rate of market penetration by competing products.

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

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





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





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


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

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

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

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

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

- The
          initiation of new contractual arrangements with other
          companies.

- Whether
          and when contract milestones are achieved.

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

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

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

- Fluctuations
          in foreign currency exchange rates.



-48-








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





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





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





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





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





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





RHI’s
      ownership percentage is diluted by the exercise of stock options to purchase
      shares of our Common Stock by our employees and the purchase of shares of our
      Common Stock through our employee stock purchase plan. See Note 2, “Employee
      Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial
      Statements in Part I, Item 1 of this Form 10-Q for information regarding
      employee stock plans. In order to maintain RHI’s Minimum Percentage, we
      repurchase shares of our Common Stock under the stock repurchase program. While
      the dollar amounts associated with future stock repurchase programs cannot
      currently be determined, future stock repurchases could have a material adverse
      effect on our liquidity, credit rating, and ability to access additional capital
      in the financial markets.





**Our
      affiliation agreement with Roche Holdings, Inc. could limit our ability to
      make
      acquisitions.**





Our
      affiliation agreement with RHI contains provisions that:


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

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

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

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





-49-








**Future
      sales of our Common Stock by Roche Holdings, Inc. could cause the price of
      our
      Common Stock to decline.**





As
      of June 30, 2007, RHI owned 587,189,380 shares of our Common Stock, or 55.8
      percent of our outstanding shares. All of our shares owned by RHI are eligible
      for sale in the public market subject to compliance with the applicable
      securities laws. We have agreed that, upon RHI’s request, we will file one or
      more registration statements under the Securities Act of 1933 in order to permit
      RHI to offer and sell shares of our Common Stock. Sales of a substantial number
      of shares of our Common Stock by RHI in the public market could adversely affect
      the market price of our Common Stock.





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





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





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





**We
      may incur material product liability costs.**





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





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





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





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





We
      use certain hazardous materials in connection with our research and
      manufacturing activities. In the event that such hazardous materials are stored,
      handled, or released into the environment in violation of law or any permit,
      we
      could be subject to loss of our permits, government fines, or penalties and/or
      other adverse governmental or private





-50-





actions.
      The levy of a substantial fine or penalty, the payment of significant
      environmental remediation costs, or the loss of a permit or other authorization
      to operate or engage in our ordinary course of business could materially
      adversely affect our business.





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





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





Our
      operating results may vary from period to period for several reasons,
      including:


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

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

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

- The
          timing and volume of bulk shipments to licensees.

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

- The
          extent of product discounts extended to customers.

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

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

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

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

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

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





Portions
      of our information technology infrastructure may experience interruptions,
      delays, or cessations of service or produce errors. As part of our enterprise
      resource planning efforts, we are implementing new information systems, but
      we
      may not be successful in implementing all of the new systems, and transitioning
      data and other aspects of the process could be expensive, time consuming,
      disruptive, and resource intensive. Any disruptions that may occur in the
      implementation of new systems or any future systems could adversely affect
      our
      ability to report in an accurate





-51-





and
      timely manner the results of our consolidated operations, financial position,
      and cash flows. Disruptions to these systems also could adversely affect our
      ability to fulfill orders and interrupt other operational processes. Delayed
      sales, lower margins, or lost customers resulting from these disruptions could
      adversely affect our financial results.





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





The
      market prices for securities of biotechnology companies in general have been
      highly volatile and may continue to be highly volatile in the future. In
      addition, the market price of our Common Stock has been and may continue to
      be
      volatile.





The
      following factors may have a significant effect on the market price of our
      Common Stock:


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

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

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

- Developments
          or outcomes of litigation, including litigation regarding proprietary and
          patent rights.

- Regulatory
          developments or delays concerning our products in the U.S. and other
          countries.

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

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

- Period-to-period
          fluctuations in our financial results.

**Our
      effective income tax rate may vary significantly.**





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





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





As
      of June 30, 2007, we had approximately $2.0 billion of long-term debt. Our
      ability to make payments on and to refinance our indebtedness, including our
      long-term debt obligations, and to fund planned capital expenditures, R&D,
      as well as stock repurchases and expansion efforts will depend on our ability
      to
      generate cash in the future. This risk, to a certain extent, is subject to
      general economic, financial, competitive, legislative, regulatory, and other
      factors that are and will remain beyond our control. Additionally, our
      indebtedness may increase our vulnerability to general adverse economic and
      industry conditions, and require us to dedicate a substantial portion of our
      cash flow from operations to payments on our indebtedness, which would reduce
      the availability of our cash flow to fund working capital, capital expenditures,
      R&D, expansion efforts, and other general corporate purposes, and limit our
      flexibility in planning for, or reacting to, changes in our business and the
      industry in which we operate.





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





Under
      Financial Accounting Standards Board Interpretation No. 46R (FIN 46R), a
      revision to FIN 46, *“**Consolidation of Variable Interest
      Entities**,**”* we are required to assess new business
      development collaborations as





-52-





well
      as reassess, upon certain events, some of which are outside our control, the
      accounting treatment of our existing business development collaborations based
      on the nature and extent of our variable interests in the entities, as well
      as
      the extent of our ability to exercise influence over the entities, with which
      we
      have such collaborations. Our continuing compliance with FIN 46R may result
      in
      our consolidation of companies or related entities with which we have a
      collaborative arrangement, and this may have a material effect on our financial
      condition and/or results of operations in future periods.








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





Under
      a stock repurchase program approved by our Board of Directors in December 2003
      and most recently extended in April 2007, we are authorized to repurchase up
      to
      100 million shares of our Common Stock for an aggregate price of up to $8.0
      billion through June 30, 2008. In this program, as in previous stock repurchase
      programs, purchases may be made in the open market or in privately negotiated
      transactions from time to time at management’s discretion. We also may engage in
      transactions in other Genentech securities in conjunction with the repurchase
      program, including certain derivative securities. As of June 30, 2007, we have
      not engaged in any such transactions. We intend to use the repurchased stock
      to
      offset dilution caused by the issuance of shares in connection with our employee
      stock plans. Although there are currently no specific plans for the shares
      that
      may be purchased under the program, our goals for the program are (i) to address
      provisions of our affiliation agreement with Roche Holdings, Inc. (RHI) related
      to maintaining RHI’s minimum ownership percentage, (ii) to make prudent
      investments of our cash resources, and (iii) to allow for an effective mechanism
      to provide stock for our employee stock plans. See Note 5, “Relationship with
      Roche Holdings, Inc. and Related Party Transactions,” in the Notes to Condensed
      Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for more
      information on RHI’s minimum ownership percentage.





We
      have entered into Rule 10b5-1 trading plans to repurchase shares in the open
      market during those periods each quarter when trading in our stock is restricted
      under our insider trading policy. The current trading plan covered approximately
      four million shares and expired on June 30, 2007.





Our
      shares repurchased during the second quarter of 2007 were as follows*(shares
      in millions)*:





**Total
                  Number of**
                **Shares
                  Purchased**
            
            
            **Average
                  Price Paid**
                **per
                  Share**
            
            
            **Total
                  Number of****Shares**
                **Purchased
                  as****Part
                  of**
                **Publicly****Announced**
                **Plans
                  or****Programs**
            
            
            **Maximum
                  Number****of**
                **Shares
                  that May****Yet
                  Be**
                **Purchased****Under
                  the Plans**
                **or****Programs**April
                1–30, 2007
            
            
            0.8
            
            
            $
            82.14May
                1–31, 2007
            
            
            1.4
            
            
            
            79.65June
                1–30, 2007
            
            
            1.3
            
            
            
            75.84Total
            
            
            3.5
            
            
            $
            78.84
            
            
            
            70
            
            
            
            30





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








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**Item
      4. Submission
      of Matters to a Vote
      of Security Holders**





At
      our Annual Meeting of Stockholders held on April 20, 2007, two matters were
      voted upon. A description of each matter and a tabulation of the votes for
      each
      of the matters follows:





1.
            To
                elect seven director nominees to hold office until the 2008 Annual
                Meeting
                of Stockholders or until their successors are duly elected and
                qualified:





**Votes****Nominee**
            
            **For**
            
            
            **Withheld**Herbert
                W. Boyer, Ph.D.
            
            
            899,987,204
            
            
            
            116,486,921William
                M. Burns
            
            
            869,665,794
            
            
            
            146,808,331Erich
                Hunziker, Ph.D.
            
            
            869,667,962
            
            
            
            146,806,163Jonathan
                K. C. Knowles, Ph.D.
            
            
            869,674,066
            
            
            
            146,800,059Arthur
                D. Levinson, Ph.D.
            
            
            904,232,619
            
            
            
            112,241,506Debra
                L. Reed
            
            
            997,540,812
            
            
            
            18,933,313Charles
                A. Sanders, M.D.
            
            
            998,034,537
            
            
            
            18,439,588





2.
            To
                ratify Ernst & Young LLP as our independent registered public
                accounting firm for 2007.





**Votes****For**
            
            **Against**
            
            **Abstain**1,011,122,963
            
            5,004,278
            
            346,884








**Item
      6. Exhibits**





**Exhibit
                No.**
            **Description**
            **Location**15.1
            Letter
                regarding Unaudited Interim Financial Information.
            Filed
                herewith31.1
            Certification
                of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                promulgated under the Securities Exchange Act of 1934, as
                amended
            Filed
                herewith31.2
            Certification
                of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
                promulgated under the Securities Exchange Act of 1934, as
                amended
            Filed
                herewith32.1
            Certifications
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
            Furnished
                herewith








-54-








**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





GENENTECH,
                INC.Date:
            August
                  2, 2007
            
            /s/ARTHUR
                  D. LEVINSONArthur
                D. Levinson, Ph.D.
              Chairman
                and Chief Executive OfficerDate:
            August 2,
                  2007
            
            /s/DAVID
                  A. EBERSMANDavid
                A. Ebersman
              Executive
                Vice President and
              Chief
                Financial OfficerDate:
            August 2,
                  2007
            
            /s/ROBERT
                  E. ANDREATTARobert
                E. Andreatta
              Controller
                and Chief Accounting Officer








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