~~(Unaudited)~~

Three Months
Ended June 30,

Six Months
Ended June 30,

2005

2004

2005

2004
Operating revenues

   Product sales (including amounts from related parties:
      three months - 2005-$28,234; 2004-$27,668;
      six months - 2005-$82,355; 2004-$55,492)

$

1,274,115

$

913,366

$

2,460,117

$

1,677,066
   Royalties (including amounts from related party:
      three months - 2005-$107,199; 2004-$84,071;
      six months - 2005-$212,258; 2004-$155,368)

200,321

151,860

432,236

305,957
   Contract revenue (including amounts from related parties:
      three months - 2005-$30,425; 2004-$33,891;
      six months - 2005-$56,885; 2004-$70,512)

52,443

62,852

96,104

120,190
           Total operating revenues

1,526,879

1,128,078

2,988,457

2,103,213
Costs and expenses

   Cost of sales (including amounts for related parties:
      three months - 2005-$38,826; 2004-$26,019;
      six months - 2005-$88,856; 2004-$48,664)

269,481

186,683

520,522

301,163
   Research and development
      (including amounts for related parties:
      three months - 2005-$41,367; 2004-$49,457;
      six months - 2005-$82,078; 2004-$88,818)
      (including contract related:
      three months - 2005-$37,136; 2004-$34,571;
      six months - 2005-$63,711; 2004-$71,495)

278,124

212,886

521,364

403,231
   Marketing, general and administrative

356,638

276,654

671,852

523,968
   Collaboration profit sharing (including amounts for related party:
      three months - 2005-$28,727; 2004-$14,827;
      six months - 2005-$52,375; 2004-$26,649)

198,798

145,221

375,075

271,652
   Recurring charges related to redemption

34,482

38,209

68,964

76,418
   Special items:  litigation-related

19,527

13,458

30,784

26,857
           Total costs and expenses

1,157,050

873,111

2,188,561

1,603,289
Operating margin

369,829

254,967

799,896

499,924
Other income, net

31,502

15,444

47,899

37,765
Income before taxes

401,331

270,411

847,795

537,689
Income tax provision

105,165

99,640

267,455

190,331
Net income
$
296,166

$
170,771

$
580,340

$
347,358
Earnings per share

   Basic
$
0.28

$
0.16

$
0.55

$
0.33
   Diluted
$
0.27

$
0.16

$
0.54

$
0.32
Weighted-average shares used to compute earnings per share

   Basic

1,057,564

1,060,619

1,052,228

1,057,955
   Diluted

1,083,841

1,087,087

1,076,519

1,084,618

-44-

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

~~The increasing use and development of alternate therapies.~~

~~The rate of market penetration by competing products.~~

~~The termination of, or change in, an existing arrangement with any of the wholesalers who supply our products.~~

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

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

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

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

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

·	The increasing use and development of alternate therapies.

·	The rate of market penetration by competing products.

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

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

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

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

~~Hoffmann-La Roche's~~

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

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

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

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

·	Fluctuations in foreign currency exchange rates.

·	The initiation of new contractual arrangements with other companies.

·	Whether and when contract milestones are achieved.

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

-45-

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

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

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

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

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

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

The affiliation agreement between us and Roche contains provisions that:

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

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

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

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

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

As of March 31, 2006, Roche owned 587,189,380 shares of our Common Stock, or 55.7% of our outstanding shares. All of our shares owned by Roche are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon Roche’s request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our ~~future products in non-U.S. markets and the timing and amount~~Common Stock. Sales of ~~any related development cost reimbursements.~~

~~Variations in Hoffmann-La Roche's sales and other licensees' sales~~a substantial number of ~~licensed products.~~

~~The expiration or termination~~shares of ~~existing arrangements with other companies and Hoffmann-La~~our Common Stock by Roche ~~which may include development and marketing arrangements for our products~~ in the ~~U.S.~~public market could adversely affect the market price of our Common Stock.

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

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

-46-

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

Additionally, our certificate of incorporation provides that any person purchasing or acquiring an interest in shares of our capital stock shall be deemed to have consented to the ~~U.S.~~

~~The timing~~provisions in the certificate of ~~non-U.S. approvals, if any, for products licensed~~incorporation relating to ~~Hoffmann-La~~competition with Roche, conflicts of interest with Roche, the offer of corporate opportunities to Roche and intercompany agreements with Roche. This deemed consent might restrict the ability to ~~other licensees.~~

~~Fluctuations~~challenge transactions carried out in ~~foreign currency exchange rates.~~

~~The initiation of new contractual arrangements~~compliance with ~~other companies.~~

~~Whether and when contract benchmarks are achieved.~~

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

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

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

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.

~~- 43 -~~

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

While we currently have a certain amount of insurance ~~for~~to minimize our direct exposure to certain business ~~property~~risks, premiums are generally increasing and ~~our products first- and third-party insurance~~coverage is ~~increasingly more costly and narrower~~narrowing in ~~scope, and~~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 ~~damage~~damages in excess of our insurance coverage, we ~~may be required to share that risk in excess~~will incur the cost of ~~our insurance limits.~~the portion of the retained risk. Furthermore, any ~~first- or third-party~~ claims made on our insurance ~~policy~~policies may ~~impact~~affect our ability to obtain or maintain insurance coverage at reasonable ~~costs or at all in the future.~~

costs.

We are subject to environmental and other risks

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

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

-47-

Fluctuations in our operating results could affect the price of our ~~common stock~~

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

~~The timing and volume of bulk shipments to licensees.~~

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

~~The extent of product discounts extended to customers.~~

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

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

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

~~- 44 -~~

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

~~The number and size of any product price increases we may issue.~~

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

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

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

·	The timing and volume of bulk shipments to licensees.

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

·	The extent of product discounts extended to customers.

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

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

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

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

·	Pricing decisions we may adopt.

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

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 ~~in the process of~~ implementing new ~~general ledger, financial reporting, order management, procurement and data warehouse systems to replace our current~~information systems, but we may not be successful in implementing all of the new systems, and transitioning data and other aspects of the process could be expensive, time consuming, disruptive and resource intensive. Any disruptions that may occur in the implementation of new systems or any future systems could adversely affect our ability to report in an accurate and timely manner the results of our consolidated operations, our financial position and cash flows. Disruptions to these systems also could adversely ~~impact~~affect our ability to fulfill orders and interrupt other operational processes. Delayed sales, lower margins or lost customers resulting from these ~~disrup tions~~disruptions could adversely affect our financial results.

Our stock price, like that of many biotechnology companies, is ~~highly~~ 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~~Common Stock has been and may continue to be ~~highly~~ volatile.

-48-

In addition, the following factors may have a significant impact 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 relating to products under development or being commercialized by us or our competitors.~~

~~Developments or outcome of litigation, including litigation regarding proprietary and patent rights.~~

~~Regulatory developments or delays concerning our products in the U.S. and foreign countries.~~

~~Issues concerning the safety of our products or of biotechnology products generally.~~

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

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

~~Our affiliation agreement with Roche Holdings, Inc. (or "Roche") could adversely affect our cash position~~

Our affiliation agreement with Roche provides that we establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock based on an established Minimum Percentage. For more information on our stock repurchase program, see discussion above in "Liquidity and Capital Resources -- Cash Provided by or Used in Financing Activities." See Note 4, "Relationship with Roche and Related Party Transactions," in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for information regarding the Minimum Percentage.

~~- 45 -~~

~~Future sales of our common stock by Roche could cause the price of our common stock to decline~~

As of June 30, 2005, Roche owned 587,189,380 shares of our common stock or 55.3% of our outstanding shares. All of our shares owned by Roche are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon Roche's request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our common stock. Sales of a substantial number of shares of our common stock by Roche in the public market could adversely affect the market price of our common stock.

~~Roche Holdings, Inc., our controlling stockholder, may have interests that are adverse to other stockholders~~

Roche as our majority stockholder controls the outcome of most actions requiring the approval of our stockholders. Our bylaws provide, among other things, that the composition of our board of directors shall consist of at least three directors designated by Roche, three independent directors nominated by the nominating committee and one Genentech executive officer nominated by the nominating committee. Currently, three of our directors, Mr. William Burns, Dr. Erich Hunziker and Dr. Jonathan K.C. Knowles, also serve as officers and employees of Roche Holding Ltd and its affiliates. As long as Roche owns in excess of 50% of our common stock, Roche directors will comprise two of the three members of the nominating committee. However, at any time until Roche owns less than 5% of our stock, Roche will have the right to obtain proportional representation on our board. We cannot assure you that Roche will not seek to influence our business operations in a manner that is contrary to our goals or strategies.

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

~~The affiliation agreement between us and Roche contains provisions that:~~

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

~~Enable Roche to maintain its percentage ownership interest in our common stock.~~

Require us to establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock based on an established Minimum Percentage. For information regarding Minimum Percentage, see Note 4, "Relationship with Roche and Related Party Transactions," in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a discussion of our relationship with Roche and Roche's ability to maintain its percentage ownership interesting our stock. For more information on our stock repurchase program, see discussion above in "Liquidity and Capital Resources -- Cash Provided by or Used in Financing Activities."

These provisions may have the effect of limiting our ability to make acquisitions and while the dollar amounts associated with our future stock repurchases cannot currently be estimated, stock repurchases could have a material adverse impact on our liquidity, credit rating and ability to access additional capital in the financial markets.

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

~~Our certificate of incorporation includes provisions relating to the following matters:~~

~~Competition by Roche affiliates with us.~~

~~Offering of corporate opportunities.~~

~~Transactions with interested parties.~~

~~Intercompany agreements.~~

~~- 46 -~~

~~Provisions limiting the liability of specified employees~~

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

~~Potential conflicts of interest could limit our ability to act on opportunities that are favorable to us but adverse to Roche~~

Persons who are directors and/or officers of Genentech and who are also directors and/or officers of Roche may decline to take action in a manner that might be favorable to us but adverse to Roche. Three of our directors currently serve as officers and employees of Roche Holding Ltd and its affiliates.

Common Stock.

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

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

·	Concerns about the pricing of our products and the potential impact of such on their utilization.

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

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

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

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

·	Period to period fluctuations in our financial results.

Our effective income tax rate may vary significantly

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

~~Recent accounting pronouncements may impact our future financial position and results of operations~~

Under Financial Accounting Standards Board (or "FASB") Interpretation No. 46R (or "FIN 46R"), a revision to Interpretation 46, "Consolidation of Variable Interest Entities," we are required to assess new business development collaborations as well as to 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 in 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 impact on our financial condition and/or results of operations in future periods.

There may be potential new accounting pronouncements or regulatory rulings, which may have an impact on our future financial position and results of operations. In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards (or "FAS") No. 123, "Accounting for Stock-Based Compensation." The revision is referred to as "FAS 123R -- Share-Based Payment", which supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under our employee stock plans. We expect to adopt FAS 123R using the modified prospective basis on January 1, 2006. We expect that our adoption of FAS 123R will result in compensation expense comparable,income before the effect of capitalization of manufacturing related compensation expenses, to those disclosed in Note 1, "Summary of Significant Accounting Polici es -- Accounting for Stock-Based Compensation," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of our Form 10-Q. We are currently evaluating option valuation methodologies and assumptions in light of FAS 123R; the methodologies and assumptions we ultimately use to adopt FAS 123R may be different than those currently used as discussed in Note 1, "Summary of Significant Accounting Policies -- Accounting for Stock-Based Compensation," in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 of our Form 10-Q. We currently expect that our adoption of FAS 123R will have a material impact on our consolidated results of operations.

taxes.

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

As of March 31, 2006, we had approximately $2.0 billion of long-term debt. Our ability to make payments on and to refinance our indebtedness, including our long-term debt obligations, and to fund planned capital expenditures, R&D, as well as stock repurchases and expansion efforts will depend on our

~~- 47 -~~

ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are and will remain beyond our control. Additionally, our indebtedness may increase our vulnerability to general adverse economic and industry conditions, require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, R&D, expansion efforts and other general corporate purposes, and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

~~- 48 -~~

~~Item 3. Quantitative~~

Accounting pronouncements may affect our future financial position and ~~Qualitative Disclosures About Market Risk~~

~~Our market risks at June 30, 2005~~results of operations

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”). As a result, we have ~~not changed significantly from those~~included employee stock-based compensation costs in our results of operations for the quarter ended March 31, 2006, as discussed in ~~Item 7A of our Form 10-K for the year ended December 31, 2004 on file with the Securities and Exchange Commission. See also~~ Note ~~1, "Summary of Significant Accounting Policies -- Derivative Financial Instruments" section in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.~~

~~Item 4. Controls and Procedures~~

~~(a)~~ ~~Evaluation of disclosure controls and procedures.~~ The Company's principal executive and financial officers reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company's principal executive and financial officers concluded that the Company's disclosure controls and procedures are effective in providing them with material information relating to the Company in a timely manner, as required to be disclosed in the reports the Company files under the Exchange Act.

~~(b)~~ ~~Changes in internal control over financial reporting.~~ There was no change in the Company's internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

~~- 49 -~~

~~PART II - OTHER INFORMATION~~

~~Item 1. Legal Proceedings~~

In connection with the Chiron patent infringement lawsuit and interference proceedings relating to United States (or "U.S.") Patent No. 6,054,561, on June 1, 2005, we and Chiron agreed to a settlement of both these interference proceedings and the lawsuit. All pending claims in the lawsuit were dismissed with prejudice, and Chiron has abandoned the contest in the redeclared interferences. The settlement resolves and ends all the patent infringement claims in the lawsuit. The outcome of the interference with respect to our patents and patent applications cannot be determined at this time.

On May 13, 2005, a request was filed by a third party for reexamination of the '415 or 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 Office ordered reexamination of the '415 patent. Because the reexamination process is ongoing, the final outcome of this matter cannot be determined at this time. The '415 patent, which expires in 2018, relates to methods 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 '415 patent to other companies and derive substantial royalties from those licenses.

~~See also Note 3, "Leases and Contingencies,"~~2, “Employee Stock-Based Compensation,” in the Notes to Condensed Consolidated Financial Statements of Part I, Item 1I of this Form 10-Q.

~~See also Item 3~~ Our adoption of FAS 123R is expected to result in compensation expense that will reduce diluted net income per share by approximately $0.15 to $0.17 per share for 2006. However, our estimate of future employee stock-based compensation expense is affected by our stock price, the number of stock-based awards our board of directors may grant in 2006, as well as a number of complex and subjective valuation assumptions and the related tax effect. These valuation assumptions include, but are not limited to, the volatility of our ~~report on Form 10-K for the year ended December 31, 2004,~~stock price and ~~Part II, Item 1 of our report on Form 10-Q for the quarter ended March 31, 2005.~~

employee stock option exercise behaviors.

-49-

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

~~On June 15, 2005, the~~

Under a stock repurchase program approved by our Board of Directors ~~approved an extension~~in December 2003 and most recently extended in April 2006, we are authorized to repurchase up to 100,000,000 shares of our ~~stock repurchase program~~Common Stock for ~~the repurchase~~an aggregate amount of up to ~~an additional $2.0 billion of our common stock for a total of $4.0~~$6.0 billion through June 30, ~~2006. The Board also amended the current repurchase program by increasing the maximum number of shares that can be repurchased from 50 million to 80 million shares. Under~~2007. In this stock repurchase program, purchases may be made in the open market or in privately negotiated transactions from time to time at ~~management's~~management’s discretion. Genentech also may engage in transactions in other Genentech securities in conjunction with the repurchase program, including certain derivative securities. Genentech intends to use the repurchased stock to offset dilution caused by the issuance of shares in connection with ~~Genentech's~~Genentech’s 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 make prudent investments of our cash resources; (ii) to allow for an effective mechanism to provide stock for our employee stock plans; and (iii) to address provisions of our affiliation agreement with Roche relating to maintaining ~~Roche's~~Roche’s minimum ownership percentage. See above in ~~"Relationship~~“Relationship with ~~Roche"~~Roche” for more information on ~~Roche's~~Roche’s minimum ownership percentage. We have entered into Rule 10b5-1 trading plans to repurchase shares in the open market during those periods each quarter when trading in our stock is restricted under our insider trading policy. The current trading plan covers approximately ~~1.5~~2 million shares and will run through ~~December 31, 2005.~~

June 30, 2006.

Our shares repurchased for the three months ended ~~June 30, 2005~~March 31, 2006 were as follows (shares in millions):

Total Number of
Shares Purchased in 2005

Average Price Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
April 1-30, 2005

0.1

$
56.83

May 1-31, 2005

-

-

June 1-30, 2005

-

-

Total

0.1

56.83

29.0

51.0

~~- 50 -~~

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

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.

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

~~At Genentech's Annual Meeting of Stockholders held on April 14, 2005, 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 six director nominees to hold office until the 2006 Annual Meeting of Stockholders or until their successors are duly elected and qualified:~~

Votes
Nominee

For

Withheld
Herbert W. Boyer, Ph.D.

888,986,813

116,574,155
William M. Burns

889,053,464

116,507,504
Erich Hunziker, Ph.D.

887,880,218

117,680,750
Jonathan K.C. Knowles, Ph.D.

887,958,614

117,602,354
Arthur D. Levinson, Ph.D.

911,755,385

93,805,583
Charles A. Sanders, M.D.

971,312,485

34,248,483

2.	~~To ratify Ernst & Young LLP as our independent auditor for 2005.~~

Votes
For

Against

Abstain
997,406,006

7,114,559

1,040,403

Item 6. Exhibits

Exhibit No.	~~(i)~~ Description	~~10.29~~^*	~~Purchase and Sale Agreement and Joint Escrow Instruction, dated as of June 16, 2005, between Genentech and Biogen Idec Inc.~~ Location
10.1	Genentech, Inc. Employee Stock Plan, as amended		Filed on a Current Report on Form 8-K with the U.S. Securities and Exchange Commission on April 25, 2006, and incorporated herein by reference.
15.1	~~(ii)~~	~~15.1~~	Letter regarding Unaudited Interim Financial Information.	Filed herewith
31.1
	~~(iii)~~		~~31.1~~	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as ~~amended.~~ amended	Filed herewith
31.2
	~~(iv)~~		~~31.2~~	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as ~~amended.~~ amended	Filed herewith
32.1
	~~(v)~~		~~32.1~~	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~ 2002	Furnished herewith

~~___________~~

Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934.

~~- 51 -~~

-50-

SIGNATURES~~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, 2005~~ May 1, 2006	/s/ARTHUR D. LEVINSON

		Arthur D. Levinson, Ph.D. Chairman and Chief Executive Officer


Date:	~~August 2, 2005~~ May 1, 2006	/s/DAVID A. EBERSMAN

		David A. Ebersman ~~Senior~~ Executive Vice President and Chief Financial Officer


Date:	~~August 2, 2005~~ May 1, 2006	/s/JOHN M. WHITING

		John M. Whiting Vice President, Controller and Chief Accounting Officer

~~- 52 -~~

-51-

o	or

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

	~~For the transition period from~~ to .

Class ~~Class~~	Number of Shares Outstanding
Common Stock $0.02 par value	~~1,064,282,776~~ 1,053,627,146Outstanding at ~~July 21, 2005~~ April 26, 2006

		Page No.
	PART ~~I -~~ I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3


	Condensed Consolidated Statements of ~~Income -~~ Income— for the three ~~and six~~ months ended ~~June 30,~~March 31, 2006 and 2005 ~~and 2004~~	3


	Condensed Consolidated Statements of Cash ~~Flows -~~ Flows— for the ~~six~~three months ended ~~June 30,~~March 31, 2006 and 2005 ~~and 2004~~	4


	Condensed Consolidated Balance ~~Sheets -~~ ~~June 30, 2005~~Sheets— March 31, 2006 and December 31, ~~2004~~2005	5


	Notes to Condensed Consolidated Financial Statements	~~6 - 15~~
		6-15

	Report of Independent Registered Public Accounting Firm	16

Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~17 - 48~~ 17-36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49 37

Item 4.	Controls and Procedures	49
		37
	~~PART II - OTHER INFORMATION~~
	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	50 38

Item 1A.	Risk Factors	38-49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 4. 6.	~~Submission of Matters to a Vote of Security Holders~~Exhibits	51 50

~~Item 6.~~		~~Exhibits~~	51

SIGNATURES		52 51

	Three Months Ended March 31,
	2006			2005
Revenues
Product sales (including amounts from related parties: 2006-$59; 2005-$54)	$	1,644		$	1,186
Royalties (including amounts from a related party: 2006-$167; 2005-$104)		286			232
Contract revenue (including amounts from related parties: 2006-$28; 2005-$26)		56			44
Total operating revenues		1,986			1,462

Costs and expenses
Cost of sales (including amounts for related parties: 2006 and 2005-$50)		262			256
Research and development (including amounts for related parties: 2006-$53; 2005-$44) (including contract related: 2006-$36; 2005-$27)		374			243
Marketing, general and administrative		441			310
Collaboration profit sharing (including amounts for a related party: 2006-$43; 2005-$24)		226			176
Recurring charges related to redemption		26			35
Special items: litigation-related		13			11
Total costs and expenses		1,342			1,031

Operating income		644			431
Other income (expense):
Interest and other income, net		53			18
Interest expense		(19	)		(3	)
Total other income, net		34			15
Income before taxes		678			446
Income tax provision		257			162
Net income	$	421		$	284

Earnings per share
Basic	$	0.40		$	0.27
Diluted	$	0.39		$	0.27

Shares used to compute basic earnings per share		1,054			1,047
Shares used to compute diluted earnings per share		1,075			1,067

	Three Months Ended March 31,
	2006			2005
Cash flows from operating activities
Net income	$	421		$	284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		96			88
Employee stock-based compensation		74			-
Deferred income taxes		(50	)		(21	)
Deferred revenue		10			(9	)
Litigation-related liabilities		13			13
Tax benefit from employee stock options		-			51
Excess tax benefit from stock-based compensation arrangements		(49	)		-
Gain on sales of securities available-for-sale and other		(3	)		(1	)
Write-down of securities available-for-sale and other		-			4
Changes in assets and liabilities:
Receivables and other current assets		(96	)		(103	)
Inventories		(86	)		25
Investments in trading securities		(7	)		(1	)
Accounts payable, other accrued liabilities, and other long-term liabilities		139			55
Net cash provided by operating activities		462			385

Cash flows from investing activities
Purchases of securities available-for-sale		(454	)		(72	)
Proceeds from sales and maturities of securities available-for-sale		193			162
Capital expenditures		(253	)		(144	)
Change in other assets		(13	)		(8	)
Net cash used in investing activities		(527	)		(62	)

Cash flows from financing activities
Stock issuances under employee stock plans		89			106
Stock repurchases		(227	)		(156	)
Excess tax benefit from stock-based compensation arrangements		49			-
Net cash used in financing activities		(89	)		(50	)

Net (decrease) increase in cash and cash equivalents		(154	)		273
Cash and cash equivalents at beginning of period		1,225			270
Cash and cash equivalents at end of period	$	1,071		$	543

Supplemental cash flow data
Non-cash investing and financing activities
Capitalization of construction in progress related to financing lease transaction	$	27		$	44
Exchange of note receivable for a prepaid royalty and other long-term asset		-			29

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


	For the quarterly period ended ~~June 30, 2005~~ March 31, 2006

or

	Three Months Ended June 30,				Six Months Ended June 30,

	2005		2004		2005		2004

Operating revenues
Product sales (including amounts from related parties: three months - 2005-$28,234; 2004-$27,668; six months - 2005-$82,355; 2004-$55,492)	$	1,274,115	$	913,366	$	2,460,117	$	1,677,066
Royalties (including amounts from related party: three months - 2005-$107,199; 2004-$84,071; six months - 2005-$212,258; 2004-$155,368)		200,321		151,860		432,236		305,957
Contract revenue (including amounts from related parties: three months - 2005-$30,425; 2004-$33,891; six months - 2005-$56,885; 2004-$70,512)		52,443		62,852		96,104		120,190

Total operating revenues		1,526,879		1,128,078		2,988,457		2,103,213
Costs and expenses
Cost of sales (including amounts for related parties: three months - 2005-$38,826; 2004-$26,019; six months - 2005-$88,856; 2004-$48,664)		269,481		186,683		520,522		301,163
Research and development (including amounts for related parties: three months - 2005-$41,367; 2004-$49,457; six months - 2005-$82,078; 2004-$88,818) (including contract related: three months - 2005-$37,136; 2004-$34,571; six months - 2005-$63,711; 2004-$71,495)		278,124		212,886		521,364		403,231
Marketing, general and administrative		356,638		276,654		671,852		523,968
Collaboration profit sharing (including amounts for related party: three months - 2005-$28,727; 2004-$14,827; six months - 2005-$52,375; 2004-$26,649)		198,798		145,221		375,075		271,652
Recurring charges related to redemption		34,482		38,209		68,964		76,418
Special items: litigation-related		19,527		13,458		30,784		26,857

Total costs and expenses		1,157,050		873,111		2,188,561		1,603,289


Operating margin		369,829		254,967		799,896		499,924

Other income, net		31,502		15,444		47,899		37,765


Income before taxes		401,331		270,411		847,795		537,689
Income tax provision		105,165		99,640		267,455		190,331

Net income	$	296,166	$	170,771	$	580,340	$	347,358




Earnings per share
Basic	$	0.28	$	0.16	$	0.55	$	0.33



Diluted	$	0.27	$	0.16	$	0.54	$	0.32




Weighted-average shares used to compute earnings per share
Basic		1,057,564		1,060,619		1,052,228		1,057,955



Diluted		1,083,841		1,087,087		1,076,519		1,084,618

	June 30, 2005		December 31, 2004

Assets
Current assets
Cash and cash equivalents	$	717,350	$	270,123
Short-term investments		1,293,191		1,394,982
Accounts receivable -- product sales (net of allowances: 2005-$65,854; 2004-$59,366; including amounts from related parties: 2005-$9,378; 2004-$11,237)		509,971		599,052
Accounts receivable -- royalties (including amounts from related party: 2005-$130,374; 2004-$119,080)		238,714		217,482
Accounts receivable -- other (net of allowances: 2005-$2,132; 2004-$2,191; including amounts from related parties: 2005-$93,989; 2004-$68,594)		165,133		140,838
Inventories		600,863		590,343
Prepaid expenses		196,985		45,864
Other current assets		213,598		164,073

Total current assets		3,935,805		3,422,757
Long-term marketable debt and equity securities		901,052		1,115,327
Property, plant and equipment, net		2,792,106		2,091,404
Goodwill		1,315,019		1,315,019
Other intangible assets		603,956		668,391
Restricted cash and investments		682,000		682,000
Other long-term assets		316,672		108,497

Total assets	$	10,546,610	$	9,403,395




Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	45,629	$	104,832
Taxes payable		-		134,937
Deferred revenue		44,845		45,989
Other accrued liabilities (including amounts to related parties: 2005-$133,266; 2004-$108,416)		1,051,261		957,508

Total current liabilities		1,141,735		1,243,266
Long-term debt		485,250		412,250
Deferred revenue		247,192		267,805
Litigation-related and other long-term liabilities		692,428		697,884

Total liabilities		2,566,605		2,621,205��

Commitments and contingencies
Stockholders' equity
Preferred stock		-		-
Common stock		21,248		20,943
Additional paid-in capital		8,773,117		8,002,754
Accumulated other comprehensive income		272,967		290,948
Accumulated deficit, since June 30, 1999		(1,087,327)		(1,532,455)

Total stockholders' equity		7,980,005		6,782,190

Total liabilities and stockholders' equity	$	10,546,610	$	9,403,395

	March 31, 2006			December 31, 2005
Assets
Current assets
Cash and cash equivalents	$	1,071		$	1,225
Short-term investments		1,213			1,140
Accounts receivable—product sales (net of allowances: 2006-$93; 2005-$83; including amounts from related parties: 2006-$24; 2005-$4)		615			554
Accounts receivable—royalties (including amounts from related party: 2006-$199; 2005-$173)		332			297
Accounts receivable—other (net of allowances: 2006-$1; 2005-$1; including amounts from related parties: 2006-$129; 2005-$132)		187			199
Inventories		804			703
Prepaid expenses and other current assets		311			268
Total current assets		4,533			4,386
Long-term marketable debt and equity securities		1,658			1,449
Property, plant and equipment, net		3,565			3,349
Goodwill		1,315			1,315
Other intangible assets		548			574
Restricted cash and investments		735			735
Other long-term assets		358			339
Total assets	$	12,712		$	12,147

Liabilities and stockholders’ equity
Current liabilities
Accounts payable (including amounts to related parties: 2006-$3; 2005-$1)	$	328		$	339
Deferred revenue		45			44
Taxes payable		318			62
Other accrued liabilities (including amounts to related parties: 2006-$148; 2005-$132)		1,059			1,215
Total current liabilities		1,750			1,660
Long-term debt		2,103			2,083
Deferred revenue		229			220
Litigation-related and other long-term liabilities		736			714
Total liabilities		4,818			4,677
Commitments and contingencies
Stockholders’ equity
Common stock		21			21
Additional paid-in capital		9,468			9,263
Accumulated other comprehensive income		255			253
Accumulated deficit, since June 30, 1999		(1,850	)		(2,067	)
Total stockholders’ equity		7,894			7,470
Total liabilities and stockholders’ equity	$	12,712		$	12,147

	June 30, 2005			December 31, 2004

Unrealized gains on securities available-for-sale		$	250.4		$	305.1
Unrealized gains (losses) on derivatives			22.6			(14.2)

Accumulated other comprehensive income		$	273.0		$	290.9

	March 31, 2006		December 31, 2005
Net unrealized gains on securities available-for-sale	$	233	$	230
Net unrealized gains on cash flow hedges		22		23
Accumulated other comprehensive income	$	255	$	253

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

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

Diluted-as reported	$	0.39
Diluted-pro forma	$	0.38

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

	Three Months Ended March 31,
	2006			2005
Risk-free interest rate		4.6	%		4.0	%
Dividend yield		0.0	%		0.0	%
Expected volatility		29.0	%		32.0	%
Expected term (years)		4.2			4.2

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

	June 30, 2005			December 31, 2004

Raw materials and supplies		$	62.8		$	57.1
Work in process			363.3			451.8
Finished goods			174.8			81.5

Total		$	600.9		$	590.4

	June 30, 2005						December 31, 2004

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount

Developed product technology	$	1,194.1	$	886.7	$	307.4	$	1,194.1	$	847.7	$	346.4
Core technology		443.5		361.6		81.9		443.5		351.0		92.5
Developed science technology		467.5		467.5		-		467.5		452.9		14.6
Tradenames		144.0		79.5		64.5		144.0		74.7		69.3
Patents		150.6		58.7		91.9		138.0		53.2		84.8
Other intangible assets		103.6		45.3		58.3		101.3		40.5		60.8

Total	$	2,503.3	$	1,899.3	$	604.0	$	2,488.4	$	1,820.0	$	668.4

For the Year Ending December 31,	Amortization Expense

2005 (remaining six months)	$	64.5
2006		124.2
2007		122.8
2008		121.0
2009		72.0
Thereafter		99.5

Total expected future annual amortization	$	604.0

~~Land and land improvements~~	$	~~42.2~~
~~Building~~		~~110.2~~
~~Equipment~~		~~36.7~~
~~Construction in progress~~		~~228.3~~

~~Total~~	$	~~417.4~~

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

	Three Months Ended June 30,						Six Months Ended June 30,

Product Sales	2005		2004		% Change		2005		2004		% Change

Net U.S. Product Sales
Rituxan	$	450.3	$	390.0	15	%	$	890.8	$	751.8	18	%
Avastin		245.7		133.0	85			448.6		171.1	162
Herceptin		152.4		118.0	29			282.0		226.7	24
Tarceva		70.2		-	-			117.8		-	-
Nutropin products		97.1		88.0	10			187.0		172.0	9
Thrombolytics		51.6		50.0	3			102.2		94.3	8
Pulmozyme		46.9		36.5	28			90.9		74.5	22
Xolair		80.4		43.6	84			145.7		73.4	99
Raptiva		21.3		13.4	59			37.9		19.7	92

Total U.S. product sales		1,215.9		872.5	39			2,302.9		1,583.5	45

Net product sales to collaborators		58.2		40.9	42			157.2		93.6	68

Total product sales	$	1,274.1	$	913.4	39		$	2,460.1	$	1,677.1	47

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

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

	Three Months Ended June 30,						Six Months Ended June 30,

Other Income, Net (in millions)	2005		2004		% Change		2005		2004		% Change

	(In millions)
Gains on sales of biotechnology equity securities and other	$	0.5	$	0.4	25	%	$	1.4	$	1.1	27	%
Write-downs of biotechnology debt, equity securities and other		- -		(0.1)	(100)			(3.5)		(0.1)	3,400
Interest income		34.9		16.5	112			56.7		39.5	44
Interest expense		(3.9)		(1.4)	179			(6.7)		(2.8)	139

Total other income, net	$	31.5	$	15.4	105		$	47.9	$	37.7	27

Liquidity and Capital Resources	June 30, 2005		December 31, 2004

	(In millions)
Cash, cash equivalents, short-term investments and long-term marketable debt and equity securities	$	2,911.6	$	2,780.4
Net receivable - equity hedge instruments		109.2		21.3

Total cash, cash equivalents, short-term investments, long-term marketable debt and equity securities, and equity hedge instruments		3,020.8		2,801.7




Working capital		2,794.1		2,179.5
Current ratio		3.4:1		2.8:1

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

	Total Number of Shares Purchased in 2005		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

January 1-31, 2005		1.4		$	48.98
February 1-28, 2005		1.3			47.13
March 1-31, 2005		0.5			48.90
April 1-30, 2005		0.1			56.83

Total		3.3			48.46		29.0		51.0

		Options Outstanding

	Shares Available for Grant	Number of Shares	Weighted Average Exercise Price

December 31, 2003	40,732	96,126	$	25.18
Grants	(20,967)	20,967		53.04
Exercises	-	(21,484)		20.81
Cancellations	1,843	(1,843)		29.92
Additional shares reserved⁽¹⁾	80,000	-		-

December 31, 2004	101,608	93,766		32.32
Grants	(1,645)	1,645		61.08
Exercises	-	(17,580)		24.25
Cancellations	1,324	(1,324)		39.70

June 30, 2005 (Year to date)	101,287	76,507		34.67

				Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted-Average Exercise Price
December 31, 2004		102			94		$	32.32
Grants		(20	)		20			84.01
Exercises		-			(29	)		25.88
Cancellations		2			(2	)		42.16
December 31, 2005		84			83		$	46.64
Grants		(1	)		1			88.10
Exercises		-			(2	)		30.38
Cancellations		1			(1	)		57.63
March 31, 2006 (Year to date)		84			81		$	47.43

	Exercisable				Unexercisable				Total

As of June 30, 2005	Shares	Wtd. Avg. Exercise Price			Shares	Wtd. Avg. Exercise Price			Shares	Wtd. Avg. Exercise Price

In-the-Money	36,528		$	25.70	39,689		$	42.58	76,217		$	34.49
Out-of-the-Money⁽¹⁾	-			-	290			81.80	290			81.80

Total Options Outstanding	36,528				39,979				76,507

	Exercisable				Unexercisable				Total
As of March 31, 2006	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
In-the-Money		39	$	30.06		24	$	46.60		63	$	36.28
Out-of-the-Money⁽¹⁾		-		-		18		86.33		18		86.33
Total Options Outstanding		39				42				81

	2005^**			2004			2003

Net grants during the year as % of outstanding shares		0.03	%		1.82	%		1.69	%
Grants to Named Executive Officers* during the year as % of outstanding shares		0.00	%		0.19	%		0.18	%
Grants to Named Executive Officers during the year as % of total options granted		0.00	%		9.63	%		8.54	%

*	"Named Executive Officers" refers to our Chief Executive Officer and our four other most highly compensated executive officers as defined under Item 402(a) (3) of Regulation S-K of the federal securities laws.
**	~~Reflects year to date activity.~~

	Votes

Nominee	For	Withheld

Herbert W. Boyer, Ph.D.	888,986,813	116,574,155
William M. Burns	889,053,464	116,507,504
Erich Hunziker, Ph.D.	887,880,218	117,680,750
Jonathan K.C. Knowles, Ph.D.	887,958,614	117,602,354
Arthur D. Levinson, Ph.D.	911,755,385	93,805,583
Charles A. Sanders, M.D.	971,312,485	34,248,483