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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________

FORM 10-K
(Mark O n e )
˛ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
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 94-2347624
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

1 DNA Way, S outh S an Francisco, California 94080


(Address of principal executive offices) (Zip Code)

(650) 225-1000
(Registrant’s telephone number, including area code)

S ecurities registered pursuant to S ection 12(b) of the Act:


Title of Each C lass Nam e of Each Exch an ge on W h ich Re giste re d
Common Stock, $0.02 par value New York Stock Exchange

S ecurities registered pursuant to S ection 12(g) of the Act:


None
(T itle of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ˛ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ˛

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 ˛ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

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

Large accelerated filer ˛ Accelerated filer o


Non-accelerated filer o Smaller reporting company o

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

The aggregate market value of Common Stock held by non-affiliates as of June 30, 2008 was $35,103,983,241.(A) All executive officers and directors of the
registrant and Roche Holdings, Inc. have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.

Number of shares of Common Stock outstanding as of February 6, 2009: 1,053,413,655

Documents incorporated by reference:


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Portions of the Definitive Proxy Statement with respect to the 2009 Annual M eeting of Stockholders to be filed by Genentech, Inc. with
the Securities and Exchange Commission (hereinafter referred to as “Proxy Statement”) Part III
________________________
(A)
Excludes 587,253,150 shares of Common Stock held by directors and executive officers of Genentech and Roche Holdings, Inc.
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GENENTECH, INC.

2008 Form 10-K Annual Report

Table of Contents

Page
PART I
Item 1 Business 1
Overview 1
Marketed Products 1
Licensed Products 2
Products in Development 3
Related Party Arrangements 6
Distribution and Commercialization 6
Manufacturing and Raw Materials 7
Proprietary Technology—Patents and Trade Secrets 7
Competition 9
Government Regulation 9
Research and Development 10
Human Resources 10
Environment 10
Available Information 11
Item 1A Risk Factors 11
Item 1B Unresolved Staff Comments 25
Item 2 Properties 25
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 29
Executive Officers of the Company 30

PART II
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 32
Item 6 Selected Financial Data 34
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 7A Quantitative and Qualitative Disclosures About Market Risk 72
Item 8 Financial Statements and Supplementary Data 74
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 117
Item 9A Controls and Procedures 117
Item 9B Other Information 119

PART III
Item 10 Directors, Executive Officers and Corporate Governance 120
Item 11 Executive Compensation 120
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 120
Item 13 Certain Relationships and Related Transactions, and Director Independence 120
Item 14 Principal Accountant Fees and Services 120

PART IV
Item 15 Exhibits and Financial Statement Schedules 121
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
SIGNATURES 125

In this report, “Genentech,” “we,” “us,” and “our” refer to Genentech, Inc. and its consolidated subsidiaries. “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); Genentech ®; Herceptin ® (trastuzumab) anti-HER2 antibody; Lucentis ® (ranibizumab) 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; 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
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Inc.; Tarceva ® (erlotinib) is a registered trademark of OSI Pharmaceuticals, Inc.; and Xolair® (omalizumab) anti-IgE antibody is a registered
trademark of Novartis AG. This report also includes other trademarks, service marks, and trade names of other companies.

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PART I

Item 1. BUSINESS

Overview

Genentech is a leading biotechnology company that discovers, develops, manufactures, and commercializes medicines for patients with
significant unmet medical needs. A number of the currently approved biotechnology products originated from or are based on Genentech
science. We commercialize multiple biotechnology products and also receive royalties from companies that are licensed to market products
based on our technology. See “Marketed Products” and “Licensed Products” below. Genentech was organized in 1976 as a California
corporation and was reincorporated in Delaware in 1987.

Marketed Products

We commercialize the pharmaceutical products listed below in the United States (U.S.):

Avastin (bevacizumab) is an anti-VEGF (vascular endothelial growth factor) 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 (NSCLC). On February 22, 2008, we received accelerated approval
from the U.S. Food and Drug Administration (FDA) to market Avastin in combination with paclitaxel chemotherapy for the treatment of
patients who have not received prior chemotherapy for metastatic human epidermal growth factor receptor 2 (HER2)-negative breast cancer
(BC).

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 (NHL) as a single agent. Rituxan is also
approved for patients with previously untreated follicular, CD20-positive, B-cell NHL in combination with cyclophosphamide, vincristine, and
prednisone (CVP) chemotherapy. Rituxan is indicated for patients with non-progressing (including stable disease), low-grade, CD20-positive,
B-cell NHL, as a single agent, after first-line CVP chemotherapy. Rituxan is also indicated for patients with previously untreated diffuse large B-
cell, CD20-positive NHL in combination with cyclophosphamide, doxorubicin, vincristine, and prednisone (CHOP) or other anthracycline-
based chemotherapy regimens. Rituxan is also indicated for use in combination with methotrexate to reduce signs and symptoms and slow the
progression of structural damage in adult patients with moderate-to-severe rheumatoid arthritis (RA) who have had an inadequate response to
one or more tumor necrosis factor (TNF) antagonist therapies.

Herceptin (trastuzumab) is a humanized anti-HER2 antibody approved for treatment of patients with node-positive or node-negative early-
stage BC, whose tumors overexpress the HER2 protein, as part of an adjuvant treatment regimen containing 1) doxorubicin,
cyclophosphamide, and either paclitaxel or docetaxel or 2) docetaxel and carboplatin, and as a single agent following multi-modality
anthracycline-based adjuvant therapy. It is also approved for use as a first-line metastatic BC therapy in combination with paclitaxel and as a
single agent in patients who have received one or more chemotherapy regimens for metastatic disease.

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

Xolair (omalizumab) is a humanized anti-IgE (immunoglobulin E) antibody that we commercialize with Novartis Pharma AG. Xolair is approved
for adults and adolescents (age 12 or older) with moderate-to-severe persistent asthma who have a positive skin test or in vitro reactivity to a
perennial aeroallergen and whose symptoms are inadequately controlled with inhaled corticosteroids.

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Tarceva (erlotinib), which we commercialize with OSI Pharmaceuticals, Inc., is a small-molecule tyrosine kinase inhibitor of the HER1/epidermal
growth factor receptor signaling pathway. Tarceva is approved for the treatment of patients with locally advanced or metastatic NSCLC 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) 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.

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 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

Royalty Revenue

The majority of our royalty revenue is derived from sales of our products outside of the U.S., and the majority of these product sales are made
by our related parties, Roche Holding AG and affiliates (Roche) and Novartis Pharma AG and affiliates (Novartis). These licensed products are
sometimes sold under different trademarks or trade names. Royalty revenue from our related parties represented 71% of our total royalty
revenue in 2008, and resulted from the sales of our licensed products that are presented in the following table:

Produ ct Trade Nam e Lice n se e Lice n se d Te rritory


Trastuzumab Herceptin Roche Worldwide excluding U.S.
Rituximab Rituxan/MabThera® Roche Worldwide excluding U.S. and
Japan
Bevacizumab Avastin Roche Worldwide excluding U.S.
Dornase alfa, recombinant Pulmozyme Roche Worldwide excluding U.S.
Alteplase and Tenecteplase Activase and TNKase Roche Canada
Somatropin Nutropin Roche Canada
Daclizumab Zenapax® Roche Worldwide excluding U.S.
Ranibizumab Lucentis Novartis Worldwide excluding U.S.
Omalizumab Xolair Novartis Worldwide excluding U.S.(1)
________________________
(1)
T hese royalties are earned as a result of our 2007 acquisition of T anox, Inc.

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Our remaining royalty revenue is derived from license agreements with companies that sell and/or manufacture products based on technology
developed by us, or intellectual property to which we have rights. In 2008, approximately 40% of this remaining royalty revenue related to the
Cabilly patent. See Item 3, “Legal Proceedings,” below for information regarding certain Cabilly patent-related legal matters, including the
status of the Cabilly patent reexamination and the Centocor, Inc. (a wholly-owned subsidiary of Johnson & Johnson) litigation.

Products in Development

Our product development efforts, including those of our collaborators, cover a wide range of medical conditions, including cancer and immune
diseases. Below is a summary of products and current stages of development. For additional information on our development pipeline, visit
our website at www.gene.com.

Produ ct De scription
Awaiting FDA Action
Avastin A Supplemental Biologic License Application (sBLA) was submitted to the FDA on
September 30, 2008 for the use of Avastin in combination with Interferon alpha-2a for the
treatment of patients with advanced renal cell carcinoma. This product is being developed
in collaboration with Roche. The FDA action date is August 1, 2009.
Avastin An sBLA was submitted to the FDA on October 31, 2008 for the use of Avastin as a single
agent in previously treated patients with glioblastoma. This product is being developed in
collaboration with Roche. The FDA action date is May 5, 2009.
Rituxan An sBLA was submitted to the FDA on September 15, 2008 for the treatment of patients
with moderate-to-severe active RA who have had an inadequate response to disease-
modifying anti-rheumatic drugs (DMARDs). This product is being developed in
collaboration with Roche and Biogen Idec. The FDA action date is July 17, 2009.
Xolair An sBLA was submitted for pediatric patients (aged 6-12) with asthma on December 5,
2008. This product is being developed in collaboration with Novartis. The FDA action date
is October 8, 2009.
Preparing for Filing
Avastin We are preparing to submit two additional studies (AVADO and RIBBON I) to the FDA for
the first-line treatment of metastatic HER2-negative BC. The filings, expected by June 30,
2009, are required as part of the accelerated approval that we received from the FDA on
February 22, 2008. This product is being developed in collaboration with Roche.
Tarceva OSI Pharmaceuticals, in collaboration with Genentech and Roche, is preparing to submit a
supplemental New Drug Application (sNDA) to the FDA for the use of Tarceva in first-line
maintenance therapy for advanced NSCLC following initial treatment with platinum-based
chemotherapy. This product is being developed in collaboration with OSI Pharmaceuticals
and Roche. We expect to submit the sNDA in the first half of 2009.
Rituxan We are in discussions with the FDA regarding the submission requirements for potential
sBLAs for the use of Rituxan in combination with fludarabine and cyclophosphamide
chemotherapy in frontline and relapsed CD20-positive chronic lymphocytic leukemia (CLL).
This product is being developed in collaboration with Roche and Biogen Idec.

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Phase III
Ocrelizumab (2nd Generation anti-CD20) Ocrelizumab is being evaluated in RA and for lupus nephritis. This product is being
developed in collaboration with Roche and Biogen Idec(1).
Avastin Avastin is being evaluated in adjuvant colon cancer, diffuse large B-cell lymphoma, first-
line advanced gastric cancer, adjuvant HER2-negative BC, adjuvant lung cancer, first-line
ovarian cancer, and hormone refractory prostate cancer in collaboration with Roche.
Avastin is also being evaluated in gastrointestinal stromal tumors, high-risk carcinoid
cancer, second-line HER2-negative metastatic BC in combination with several
chemotherapy regimens, first-line metastatic BC in combination with endocrine therapy,
and platinum-sensitive relapsed ovarian cancer.
Herceptin +/- Avastin The combination of Avastin and Herceptin is being evaluated in first-line metastatic and
adjuvant HER2-positive BC. These products are being developed in collaboration with
Roche.
Avastin +/- Tarceva We announced that a Phase III study evaluating Tarceva in combination with Avastin as
maintenance therapy following initial treatment with Avastin plus chemotherapy in
advanced NSCLC met its primary endpoint of progression-free survival, and was stopped
early on the recommendation of an independent data safety monitoring board after a pre-
planned interim analysis. We are evaluating the submission requirements for a potential
sNDA for the use of Avastin and Tarceva as combination therapy in first-line NSCLC
maintenance. This study was conducted in collaboration with Roche.
Herceptin Herceptin is being evaluated for the treatment of patients with early-stage HER2-positive
BC to compare one year duration of treatment with two years duration of treatment. This
product is being developed in collaboration with Roche.
Herceptin +/- Pertuzumab Pertuzumab is being evaluated in first-line HER2-positive metastatic BC in combination with
Herceptin and chemotherapy. This product is being developed in collaboration with Roche.
Rituxan Rituxan is being evaluated in follicular NHL patients who achieve a response following
induction with chemotherapy plus Rituxan. This product is being developed in
collaboration with Roche and Biogen Idec.
Rituxan Rituxan is being evaluated for the first-line treatment of patients with moderate-to-severe
active RA in collaboration with Roche and Biogen Idec. Rituxan is also being evaluated in
lupus nephritis and ANCA-associated vasculitis in collaboration with Biogen Idec.
Tarceva Tarceva is being evaluated in adjuvant NSCLC. This product is being developed in
collaboration with OSI Pharmaceuticals and Roche.
TNKase TNKase is being evaluated in the treatment of dysfunctional hemodialysis and central
venous access catheters.
Xolair A liquid formulation of Xolair is being evaluated for adult asthma. Xolair is also being
evaluated in patients with asthma that is not controlled with high-dose inhaled
corticosteroids and long–acting beta-agonists. Xolair is being developed in collaboration
with Novartis.
Lucentis Lucentis is being evaluated in the treatment of diabetic macular edema in collaboration with
Novartis Ophthalmics. Lucentis is also being evaluated in the treatment of retinal vein
occlusion.

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Preparing for Phase III


Avastin We are preparing for Phase III clinical trials in first-line glioblastoma multiforme. This
product is being developed in collaboration with Roche.
Trastuzumab-DM1 We are preparing for Phase III clinical trials in second-line HER2-positive metastatic BC.
This product is being developed in collaboration with Roche.
Phase II
Ocrelizumab Ocrelizumab is being evaluated in relapsing remitting multiple sclerosis. This product is
being developed in collaboration with Roche and Biogen Idec(1).
GA101 GA101 is being evaluated in hematologic malignancies (relapsed and refractory NHL and
CLL). This product is being developed in collaboration with Roche and Biogen Idec.
Apo2L/TRAIL Apo2L/TRAIL is being evaluated in first-line metastatic NSCLC in combination with
chemotherapy and Avastin and in indolent relapsed NHL in combination with Rituxan. This
product is being developed in collaboration with Amgen.
Apomab Apomab is being evaluated in first-line metastatic NSCLC in combination with
chemotherapy and Avastin, and in indolent relapsed NHL in combination with Rituxan.
Avastin Avastin is being evaluated in relapsed multiple myeloma, extensive small cell lung cancer,
non-squamous NSCLC with previously treated brain metastases, and NSCLC with
squamous cell histology. This product is being developed in collaboration with Roche.
Pertuzumab Pertuzumab is being evaluated in ovarian cancer in combination with chemotherapy. This
product is being developed in collaboration with Roche.
Trastuzumab-DM1 Trastuzumab-DM1 is being evaluated in first, second, and third-line HER2-positive
metastatic BC. This product is being developed in collaboration with Roche.
ABT-869 ABT-869 is being evaluated for the treatment of several types of tumors. This product is
being developed in collaboration with Abbott Laboratories.
GDC 0449 (Hedgehog Pathway Inhibitor) GDC-0449 is being evaluated in first-line metastatic colorectal cancer (CRC) in combination
with chemotherapy and Avastin, as a single agent in ovarian cancer maintenance therapy,
and as a single agent in advanced basal cell carcinoma. This product is being developed in
collaboration with Curis, Inc. and Roche.
Dacetuzumab (Anti-CD40) Dacetuzumab is being evaluated in combination with Rituxan plus chemotherapy for
patients with relapsed or refractory diffuse large B-cell lymphoma. This product is being
developed in collaboration with Seattle Genetics, Inc.
Anti-IL13 Anti-IL13 is being evaluated in patients with uncontrolled asthma.
Preparing for Phase II
GA101 We are preparing for a Phase II clinical trial in Rituxan refractory indolent NHL and in
relapsed indolent NHL. This product is being developed in collaboration with Roche and
Biogen Idec.
MetMAb We are preparing for a Phase II clinical trial of MetMAb and Tarceva as combination
therapy in second- and third-line metastatic NSCLC.

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Xolair We are preparing for a Phase II clinical trial in chronic idiopathic urticaria in collaboration
with Novartis.
Pertuzumab We are preparing for a Phase II clinical trial in second-line metastatic NSCLC in
combination with Tarceva. This product is being developed in collaboration with Roche.
rhuMAb IFN alpha We are preparing for a Phase II clinical trial in systemic lupus erythematosus.
Phase I and Preparing for Phase I We have multiple new molecular entities in Phase I or preparing for Phase I.
________________________
(1)
Our collaborator Biogen Idec disagrees with certain of our development decisions under our 2003 collaboration agreement. A hearing related to the arbitration
began on September 15, 2008 and the hearing was closed on January 8, 2009. We expect to receive a ruling within six months of the conclusion of the
hearing, i.e., no later than July 2009. See P art I, Item 3, “ Legal Proceedings,” of this Form 10-K for further information.

Related Party Arrangements

See “Relationship with Roche” and “Related Party Transactions” below in Part II, Item 7 of this Form 10-K for information on our collaboration
arrangements with Roche and Novartis.

Distribution and Commercialization

We have a U.S.-based marketing, sales and distribution organization. Our sales efforts are focused on specialist physicians in private practice
or at hospitals and major medical centers in the U.S. In general, our products are sold largely to wholesalers, specialty distributors or directly
to hospital pharmacies and specialist physicians in private practice. We utilize common pharmaceutical company marketing techniques,
including sales representatives calling on individual physicians and distributors, advertisements, professional symposia, direct mail, and
public relations, as well as other methods.

Through Genentech Access Solutions, we provide reimbursement support, patient assistance programs and customer service programs related
to our products. The Genentech Access to Care Foundation provides free product to eligible uninsured patients and those deemed uninsured
due to payer denial in the U.S. The Genentech Access to Care Foundation is a non-profit entity funded by Genentech, Inc. To further support
patient access to therapies for certain diseases, we donate to various independent public charities that offer financial assistance, such as co-
pay assistance, to eligible patients. We also maintain a physician-related product waste replacement program and an expired product program
that, subject to certain specific conditions, gives eligible customers the right to return expired products to us for replacement or credit at 5% to
8% below their current purchase prices.

In February 2007, we launched the Avastin Patient Assistance Program, a voluntary program that enables eligible patients who receive greater
than 10,000 milligrams of Avastin over a 12-month period to receive free Avastin 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. 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.

As discussed in Note 14, “Segment, Significant Customer and Geographic Information,” in the Notes to Consolidated Financial Statements in
Part II, Item 8 of this Form 10-K, our combined sales to three major wholesalers, AmerisourceBergen Corporation, McKesson Corporation, and
Cardinal Health, Inc., constituted 86% in 2008 and 2007, and 85% in 2006 of our total net U.S. product sales. Also discussed in Note 14 are net
U.S. product sales and net foreign revenue in 2008, 2007, and 2006.

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Manufacturing and Raw Materials

We manufacture biotherapeutic products and product candidates for commercial and clinical purposes. Our production system includes
manufacturing of bulk drug substance, as well as formulation, filling and packaging of the drug product. The bulk drug substance
manufacturing process includes cell culture/fermentation operations, during which cells are grown that express proteins which are purified for
use as therapeutic products. Formulation of the drug product involves filtering and diluting proteins to obtain the appropriate concentrations
for human use. In the final processes, we fill vials or syringes with the formulated proteins and package them for distribution.

Our manufacturing network consists of three bulk manufacturing sites in California. We expect FDA licensure of a bulk drug substance
manufacturing site in Singapore in 2010. Fill/finish activities take place in South San Francisco, California. An additional fill/finish facility in
Hillsboro, Oregon is planned for licensure in 2010. For further information see also “Properties” in Part I, Item 2 of this Form 10-K. In addition
to our owned facilities, we also engage third party contract manufacturers to produce or assist in the production of some of our bulk and
finished products, delivery devices and product candidates. Our manufacturing partners operate facilities across North America, Europe, and
Asia. Our global supply of our drug products is significantly dependent on the uninterrupted and efficient operation of these facilities.

Raw materials and supplies required for the production of our principal products are, in some instances, sourced from one supplier and, in
other instances, from multiple suppliers. In those cases for which raw materials are available through only one supplier, that supplier may be
either a sole source (the only recognized supply source available to us) or a single source (the only approved supply source for us among
other sources). We have adopted policies that attempt, to the extent feasible, to minimize raw material supply risks to us, including
maintenance of greater levels of raw materials inventory and coordination with our collaborators to implement raw materials sourcing strategies
in quantities adequate to meet our needs. Due to the unique nature of the production processes used to manufacture our products, certain raw
materials, drug delivery devices and components are the proprietary products of single-source unaffiliated third-party suppliers. In some
cases, such proprietary products are specifically cited in our FDA drug application, which limits our ability for substitution. We currently
manage the risk associated with such sole-sourced raw materials by active inventory management, relationship management and alternate
source development, where feasible. We also monitor the financial condition of certain suppliers, their ability to supply our needs, and the
market conditions for these raw materials.

We, as well as our third party service providers, suppliers, and manufacturers are subject to continuing inspection by the FDA or comparable
agencies in other jurisdictions. Any delay, interruption or other issues that arise in the manufacture, formulation, filling, packaging, or storage
of our products, including as a result of a failure of our facilities or the facilities or operations of third parties to pass any regulatory agency
inspection, could significantly impair our ability to sell our products.

We believe that our existing manufacturing network of internal and external facilities and suppliers will allow us to meet our near-term and mid-
term manufacturing needs for our current commercial products and our product candidates in clinical trials. Our existing licensed
manufacturing facilities operate under multiple licenses from the FDA, regulatory authorities in the European Union, and other regulatory
authorities. However, additional manufacturing facilities and outside sources may be required to meet our long-term research, development
and commercial production needs.

For additional risks associated with manufacturing and raw materials, see “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” under “Risk Factors” below in Part I, Item 1A of this Form 10-K.

Proprietary Technology—Patents and Trade Secrets

We seek patents on inventions originating from our ongoing research and development (R&D) activities. We have been issued patents and
have patent applications pending that are related to a number of current and potential

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products, including products licensed to others. Patents, issued or applied for, cover inventions ranging from basic recombinant DNA
techniques to processes related to specific products and to the products themselves. Our issued patents extend for varying periods according
to the date of patent application filing or grant and the legal term of patents in the various countries where patent protection is obtained. The
actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage as
determined by the patent office or courts in the country, and the availability of legal remedies in the country. We consider that in the
aggregate our patent applications, patents and licenses under patents owned by third parties are of material importance to our operations. For
our five highest selling products, we have identified in the following table the latest-to-expire U.S. patents that are owned or controlled by or
exclusively licensed to Genentech having claims directed to product-specific compositions of matter (such as nucleic acids, proteins, and
protein-producing host cells). This table does not identify all patents that may be related to these products. For example, in addition to the
listed patents, we have patents on platform technologies (that relate to certain general classes of products or methods), as well as patents on
methods of using or administering many of our products, that may confer additional patent protection. We also have pending patent
applications that may give rise to new patents related to one or more of these products.

Produ ct Late st-to-Expire Produ ct-S pe cific U.S. Pate n t(s) Ye ar of Expiration
Avastin 6,884,879 2017
7,169,901 2019
Rituxan 5,677,180 2014
5,736,137 2015
7,381,560 2016
Herceptin 6,339,142 2019
6,407,213 2019
7,074,404 2019
Lucentis 6,884,879 2017
7,169,901 2019
Xolair 6,329,509 2018

The information in the above table is based on our current assessment of patents that we own or control or have exclusively licensed. The
information is subject to revision, for example, in the event of changes in the law or legal rulings affecting our patents or if we become aware of
new information. Significant legal issues remain unresolved as to the extent and scope of available patent protection for biotechnology
products and processes in the U.S. and other important markets outside the U.S. We expect that litigation will likely be necessary to determine
the term, validity, enforceability, and/or scope of certain of our patents and other proprietary rights. An adverse decision or ruling with respect
to one or more of our patents could result in the loss of patent protection for a product and, in turn, the introduction of competitor products or
follow-on biologics to the market earlier than anticipated, and could force us to either obtain third-party licenses at a material cost or cease
using a technology or commercializing a product. We are currently involved in a number of legal proceedings involving our patents and those
of others. These proceedings may result in a significant commitment of our resources in the future and, depending on their outcome, may
adversely affect the term, validity, enforceability, and/or scope of certain of our patent or other proprietary rights (such as the Cabilly patent
discussed in Item 3, “Legal Proceedings”), and may cause us to incur a material loss of royalties, other revenue, and/or market exclusivity for
one or more of our products. The patents that we obtain or the unpatented proprietary technology that we hold may not afford us significant
commercial protection.

We have obtained licenses from various parties that we deem to be necessary or desirable for the manufacture, use, or sale of our products.
These licenses (both exclusive and non-exclusive) generally require us to pay royalties to the parties on product sales. In conjunction with
these licenses, disputes sometimes arise regarding whether royalties are owed on certain product sales or the amount of royalties that are
owed. The resolution of such disputes may cause us to incur significant additional royalty expenses or other expenses.

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Our trademarks—Activase, Avastin, Cathflo, Genentech, Herceptin, Lucentis, Nutropin, Nutropin AQ, Nutropin AQ Pen, Pulmozyme, Raptiva,
Rituxan (licensed from Biogen Idec), TNKase, Xolair (licensed from Novartis), and Tarceva (licensed from OSI Pharmaceuticals)—in the
aggregate are of material importance. All of our trademarks are covered by registrations or pending applications for registration in the U.S.
Patent and Trademark Office (Patent Office) and in other countries. Trademark protection continues in some countries for as long as the mark
is used and, in other countries, for as long as it is registered. Registrations generally are for fixed, but renewable, terms.

Our royalty revenue for patent licenses, know-how, and other related rights amounted to $2,539 million in 2008, $1,984 million in 2007, and
$1,354 million in 2006. Royalty expenses were $753 million in 2008, $712 million in 2007, and $568 million in 2006.

Competition

We face competition from pharmaceutical companies and biotechnology companies. The introduction of new competitive products, including
follow-on biologics, new safety or efficacy information about existing products, pricing decisions by us or our competitors, the rate of market
penetration by competitors’ products, and/or development and use of alternate therapies 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. For risks associated with
competition, see “We face competition” under “Risk Factors” below in Part I, Item 1A of this Form 10-K.

Government Regulation

Regulation by governmental authorities in the U.S. and other countries is a significant factor in the manufacture and marketing of our products
and in ongoing research and product development activities. All of our products require regulatory approval by governmental agencies prior
to commercialization. Our products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the
FDA and regulatory authorities in other countries. Various statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping, and marketing of such products. The lengthy process of seeking these approvals, and the subsequent
compliance with applicable statutes and regulations, require the expenditure of substantial resources.

The activities that are required before a pharmaceutical product may be marketed in the U.S. begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and required animal studies to assess the potential safety and efficacy of the product and
its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug Application, which must
be reviewed by the FDA before proposed clinical testing in humans can begin. Typically, clinical testing involves a three-phase process. In
Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution
and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to provide enough
data to evaluate the preliminary efficacy, optimal dosages, and expanded evidence of safety. In Phase III, large-scale, multi-center clinical trials
are conducted with patients afflicted with a target disease in order to provide enough data to statistically evaluate the efficacy and safety of
the product, as required by the FDA. The results of the preclinical and clinical testing of a pharmaceutical product are then submitted to the
FDA in the form of a New Drug Application (NDA), or a Biologic License Application (BLA), for approval to commence commercial sales. In
responding to an NDA or a BLA, the FDA may grant marketing approval, grant conditional approval (such as an accelerated approval),
request additional information, or deny the application if the FDA determines that the application does not provide an adequate basis for
approval. Most R&D projects fail to produce data sufficiently compelling to enable progression through all of the stages of development and
to obtain FDA approval for commercial sale. See also “The successful development of pharmaceutical products is highly uncertain and
requires significant expenditures and time” under “Risk Factors” below in Part I, Item 1A of this Form 10-K.

Among the conditions for an NDA or a BLA approval is the requirement that the prospective manufacturer’s quality control and
manufacturing procedures conform on an ongoing basis with current Good Manufacturing Practices (cGMP). Before approval of a BLA, the
FDA will usually perform a preapproval inspection of the facility to determine its compliance with cGMP and other rules and regulations.
Manufacturers must expend time, money and

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effort in the area of production and quality control to ensure full compliance with cGMP. After a facility is licensed for the manufacture of any
product, manufacturers are subject to periodic inspections by the FDA.

We are also subject to various laws and regulations related to safe working conditions, clinical, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and
infectious disease agents, used in connection with our research.

Our revenue and profitability may be affected by the continuing efforts of government and third-party payers to contain or reduce the costs of
healthcare through various means. For example, in certain foreign markets, pricing or profitability of pharmaceutical products is subject to
governmental control. In the U.S. there have been, and we expect that there will continue to be, a number of federal and state proposals to
implement similar governmental control.

In addition, in the U.S. and elsewhere, sales of pharmaceutical products are dependent in part on the availability of reimbursement to the
physician or consumer from third-party payers, such as the government or private insurance plans. Government and private third-party payers
are increasingly challenging the prices charged for medical products and services, through class-action litigation and otherwise. New
regulations related to hospital and physician payment continue to be implemented annually. To date, we have not seen any material effects of
the new rules on our product sales. See also “Decreases in third-party reimbursement rates may affect our product sales, results of operations
and financial condition” under “Risk Factors” below in Part I, Item 1A of this Form 10-K.

We are also subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false claims
laws. For risks associated with healthcare fraud and abuse, see “If there is an adverse outcome in our pending litigation or other legal actions,
our business may be harmed” under “Risk Factors” below in Part I, Item 1A of this Form 10-K.

Research and Development

A significant portion of our operating expenses is related to R&D. Generally, R&D expenses consist of the costs of our own independent R&D
efforts and the costs associated with collaborative R&D and in-licensing arrangements. R&D costs, including up-front fees and milestone
payments paid to collaborators, are expensed as incurred. Costs associated with in-licensing arrangements are expensed as incurred if the
underlying technology and/or intellectual property rights acquired are determined to not have an alternative future use. R&D expenses,
excluding any acquisition-related in-process research and development charges, were $2,800 million in 2008, $2,446 million in 2007, and $1,773
million in 2006. We also receive reimbursements from certain collaborators on some of our R&D expenditures, depending on the mix of
spending between us and our collaborators. These R&D expense reimbursements are primarily included in contract revenue, and were $227
million in 2008, $196 million in 2007, and $185 million in 2006.

We intend to maintain our strong commitment to R&D. Biotechnology products generally take 10 to 15 years to research, develop, and bring
to market in the U.S. As discussed above, clinical development typically involves three phases of study: Phase I, II, and III. The most
significant costs associated with clinical development are Phase III trials, as they tend to be the longest and largest studies conducted during
the drug development process. Product completion timelines and costs vary significantly by product and are difficult to predict.

Human Resources

As of December 31, 2008, we had 11,186 employees.

Environment

We have made, and will continue to make, expenditures for environmental compliance and protection. Expenditures for compliance with
environmental laws and regulations have not had, and are not expected to have, a material effect on our capital expenditures, results of
operations, or competitive position.

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Available Information

The following information can be found on our website at www.gene.com or can be obtained free of charge by contacting our Investor
Relations Department at (650) 225-4150 or by sending an e-mail message to investor.relations@gene.com:

ü 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 is reasonably practicable after such material is electronically filed with the U.S. Securities and Exchange Commission;

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

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

Item 1A. RISK FACTORS

This Form 10-K 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 pharmaceutical products is highly uncertain and requires significant expenditures and time.

Successful development of pharmaceutical products 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:

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

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

ü Failure to receive the necessary U.S. and international 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 BLA or NDA preparation; discussions with the FDA; FDA requests for additional
preclinical or clinical data; FDA delays due to staffing or resource limitations at the agency; analyses of or changes to study design;
or unexpected safety, efficacy, or manufacturing issues.

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

ü Manufacturing costs, pricing, reimbursement issues, or other factors may make the product uneconomical to commercialize.

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

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ü The contractual or intellectual property 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 for a product are not successful, we will not recover our substantial investments in that product.

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

ü The number and 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.

ü 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 ready to move into development or that product
candidates will be available for in-licensing on terms acceptable to us and permitted under anti-trust laws.

ü Decisions by 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.

ü 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 research and development, which we may record as an R&D expense.

ü Participation in a number of collaborative R&D arrangements. In 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.

ü Charges incurred in connection with expanding our product manufacturing capabilities, as described below 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.”

ü Future levels of revenue.

ü Our ability to supply product for use in clinical trials.

We face competition.

We face competition from pharmaceutical companies and biotechnology companies.

The introduction of new competitive products or follow-on biologics, new safety or efficacy information about or new indications for existing
products, pricing decisions by us or our competitors, the rate of market penetration by competitors’ products, and/or development and use of
alternate therapies 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.

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Avastin: Avastin competes in metastatic CRC with Erbitux® (ImClone Systems Inc. (a wholly-owned subsidiary of Eli Lilly and
Company)/Bristol-Myers Squibb/Merck KGaA), which is an epidermal growth factor receptor (EGFR) inhibitor approved for the treatment of
irinotecan refractory or intolerant metastatic CRC patients; and with Vectibix™ (Amgen Inc.), 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.

Avastin could also face competition from Erbitux® in metastatic NSCLC. At the 2008 annual meeting of the American Society of Clinical
Oncology (ASCO), ImClone and Bristol-Myers Squibb presented data from a Phase III study of Erbitux® in combination with vinorelbine plus
cisplatin showing that the study met its primary endpoint of increasing overall survival compared with chemotherapy alone in patients with
advanced NSCLC. ImClone and Bristol-Myers Squibb submitted, then withdrew, and plan to eventually resubmit, an sBLA for U.S. approval
with the FDA for advanced NSCLC. Merck KGaA has filed a European application for Erbitux® in this indication. Avastin also faces
competition in advanced or metastatic NSCLC from the chemotherapy Alimta® (Eli Lilly), which received approval in the third quarter of 2008
for use in first-line NSCLC in combination with cisplatin. The approval for Alimta® in first line NSCLC is limited to use in patients with non-
squamous histology. In NSCLC, both Erbitux® and Alimta® are included in the National Comprehensive Cancer Network (NCCN) guidelines
and compendia as first-line options. The Erbitux® listing in the first-line setting is limited to combinations with cisplatin and vinorelbine.
Alimta® is listed as an option for non-squamous patients in the first-line setting and as maintenance therapy for patients previously having a
response.

Other potential Avastin competitors include 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. Sanofi-Aventis is developing a
vascular endothelial growth factor (VEGF) inhibitor, VEGF-Trap, in multiple indications, including metastatic CRC and metastatic NSCLC.
Avastin could also face competition from the VEGF receptor-2 inhibitor (IMC-1121b) under development by ImClone in several indications,
including BC. There are also ongoing head-to-head clinical trials comparing both Sutent ® and AZD2171 (AstraZeneca) to Avastin. Likewise,
Amgen is conducting head-to-head clinical trials comparing AMG 706 to Avastin in NSCLC and metastatic BC, and Pfizer is conducting a
head-to-head trial comparing Sutent ® to Avastin in BC. Antisoma’s vascular disrupting agent, ASA404, has an ongoing Phase III trial in first-
line NSCLC (ATTRACT-1) and a planned Phase III trial in second-line NSCLC (ATTRACT-2). Overall, there are more than 65 molecules in
clinical development that target VEGF inhibition that, if successful in clinical trials, may compete with Avastin.

Rituxan: Current competitors for Rituxan in hematology-oncology include Bexxar® (GlaxoSmithKline [GSK]) and Zevalin® (Cell Therapeutics),
both of which are radioimmunotherapies indicated for the treatment of patients with relapsed or refractory low-grade, follicular, or transformed
B-cell NHL. Cell Therapeutics recently filed an sBLA based on data from the Zevalin FIT trial, showing a benefit as consolidation therapy in
frontline follicular NHL. Bexxar has an ongoing study nearing completion that may also expand its label to earlier settings in indolent NHL.
Other potential competitors include Campath® (Bayer Corporation/Genzyme Corporation) in previously untreated and relapsed 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); Revlimid® (Celgene Corporation), which is indicated for multiple myeloma and
myelodysplastic syndromes (both unapproved uses of Rituxan); and Treanda ® (Cephalon, Inc.), which is approved for CLL and was recently
approved for the treatment of indolent NHL patients who have progressed while on or shortly after a Rituxan-containing regimen.

Current competitors for Rituxan in RA include Enbrel® (Amgen/Wyeth), Humira® (Abbott), Remicade ® (Johnson & Johnson), Orencia®
(Bristol-Myers Squibb), and Kineret® (Amgen). These products are approved for use in an RA patient population that is broader than the
population in which Rituxan is approved for use. In addition, molecules in development that, if approved by the FDA, may compete with
Rituxan in RA include: Actemra™ , an anti-interleukin-6 receptor being developed by Chugai Pharmaceutical Co. Ltd. and Roche; Cimzia™
(certolizumab pegol), an anti-TNF antibody being developed by UCB S.A.; and CNTO 148 (golimumab), an anti-TNF antibody being
developed by Centocor and Schering-Plough Corporation.

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Rituxan may face future competition in both hematology-oncology and RA from Arzerra™ (ofatumumab), an anti-CD20 antibody being co-
developed by Genmab A/S and GSK. Genmab and GSK recently presented positive results from their pivotal trial for CLL at the American
Society of Hematology meeting. They announced on January 30, 2009 that they filed for approval of Arzerra™ for monotherapy use in
refractory CLL. Additional ongoing studies include a monotherapy trial for refractory indolent NHL. In addition, we are aware of other anti-
CD20 molecules in development that, if successful in clinical trials, may compete with Rituxan. Finally, positive results were announced from a
pivotal trial for BiovaxID™ (BioVest International, Inc.) for indolent NHL patients post front-line induction. BioVest has announced plans
to file for approval of BiovaxID™ in indolent NHL in the U.S.

Herceptin: Herceptin faces competition in the relapsed metastatic setting from Tykerb ® (lapatinib ditosylate) which is manufactured by GSK.
Tykerb® is approved in combination with capecitabine for the treatment of patients with advanced or metastatic BC whose tumors overexpress
HER2 and who have received prior therapy, including an anthracycline, a taxane, and Herceptin. Tykerb® is currently being studied in adjuvant
and multiple lines of metastatic HER2-positive BC.

Lucentis: We are aware that retinal specialists are currently using Avastin to treat the wet form of AMD, an unapproved use for Avastin,
which results in significantly less revenue to us per treatment compared to Lucentis. As of January 1, 2008, we no longer directly supply
Avastin to compounding pharmacies. Ocular use of Avastin continues, as physicians can purchase Avastin from authorized distributors and
have it shipped to the destination of the physicians’ choice. Additionally, an independent head-to-head trial of Avastin and Lucentis in wet
AMD is being partially funded by the National Eye Institute, which announced that enrollment had commenced in February 2008. 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 off-label steroids in wet AMD. In addition, VEGF-Trap-Eye, a vascular endothelial growth
factor blocker being developed by Bayer and Regeneron Pharmaceuticals, Inc., is in Phase III clinical trials for the treatment of wet AMD.

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) both of which are indicated for
the treatment of relapsed NSCLC. Tarceva may face future competition in relapsed NSCLC from Zactima™ (AstraZeneca), Erbitux® (Bristol-
Myers Squibb/ImClone), ASA404 (Novartis/Antisoma), and from a potential re-filing of Iressa® (AstraZeneca) in the U.S. Alimta® received
approval in the third quarter of 2008 for first-line treatment of locally advanced and metastatic NSCLC, for patients with non-squamous
histology. Eli Lilly has filed with the FDA for U.S. approval of Alimta® in first-line maintenance NSCLC. ImClone and Bristol-Myers Squibb
have filed with the FDA for U.S. approval of Erbitux® in first-line NSCLC. Both Alimta® and Erbitux® are compendia listed and included in the
NCCN guidelines for first-line metastatic NSCLC in accordance with their trials. In front-line pancreatic cancer, Tarceva primarily competes with
Gemzar® (Eli Lilly) monotherapy and Gemzar® in combination with other chemotherapeutic agents. Tarceva could face competition in the future
from products in development for the treatment of pancreatic cancer. We could face competition from generic versions of Tarceva. In February
2009, OSI Pharmaceuticals, with whom we collaborate on Tarceva, announced receipt of a notice letter advising that Teva Pharmaceuticals
USA, Inc. submitted an Abbreviated New Drug Application (ANDA) to the FDA requesting permission to manufacture and market a generic
version of Tarceva. OSI Pharmaceuticals announced that it expects to file a patent infringement lawsuit against Teva seeking to restrict
approval of the ANDA.

Nutropin: Nutropin faces competition in the growth hormone market from multiple competitors, including Humatrope ® (Eli Lilly), Genotropin®
(Pfizer), Norditropin® (Novo Nordisk), Saizen ® (Merck Serono), and Tev-Tropin® (Teva Pharmaceutical Industries Ltd.). In addition,
Accretropin® (Cangene Corporation), a biologic growth hormone, has been approved and is also pending launch. Nutropin also faces
competition from follow-on biologics, including Omnitrope® (Sandoz Inc.) and Valtropin ® (LG Life Sciences Ltd.), the latter of which has been
approved and is pending launch.

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As a result of this competition, 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. In addition to managed care placement, patient and healthcare provider services provided by growth hormone
manufacturers are increasingly important to creating brand preference.

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® (EKR Therapeutics, Inc.).

Pulmozyme: Pulmozyme currently faces competition from the use of hypertonic saline, an inexpensive approach to clearing sputum from the
lungs of cystic fibrosis patients. Approximately 30 percent of cystic fibrosis patients receive hypertonic saline, and we estimate that in a small
percentage of patients (less than 5 percent), this use will affect how a physician may prescribe or a patient may use Pulmozyme. Infants and
toddlers are most likely to be prescribed hypertonic saline rather than Pulmozyme.

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 Pharma AG), Enbrel®,
and Remicade ®. Raptiva also competes with the biologic agent Humira®, which was approved by the FDA for use in moderate-to-severe
psoriasis on January 18, 2008. Raptiva may face future competition from the biologic Ustekinumab/CNTO-1275 (Centocor), for which a filing
was made with the FDA for approval in the treatment of psoriasis on December 4, 2007. Additionally, we expect Raptiva to lose market share to
competitors due to cases of progressive multifocal leukoencephalopathy (PML) in Raptiva patients as discussed in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.

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

Changes in the third-party reimbursement environment 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 and patients from various levels of U.S. and international 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 Prescription Drug Improvement and Modernization Act of 2003; the Deficit Reduction Act of 2005; the
Medicare, Medicaid, and State Children’s Health Insurance Program Extension Act of 2007; and the Medicare Improvements for Patients and
Providers Act of 2008; changes in formulary or compendia listings; or changes in private third-party payers’ policies toward reimbursement for
our products may reduce reimbursement of our products’ costs to physicians, pharmacies, and distributors. Decreases in third-party
reimbursement for our products could reduce usage of the products, sales to collaborators, and royalties, and may have a material adverse
effect on our product sales, results of operations, and financial condition. The pricing and reimbursement environment for our products may
change in the future and become more challenging due to, among other reasons, policies advanced by the new presidential
administration, new healthcare legislation passed by Congress or fiscal challenges faced by all levels of government health administration
authorities.

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

We are subject to stringent regulations 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. 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 NDA are substantial and can require a number of years. In addition, even if our products
receive regulatory approval, they remain subject to ongoing FDA regulations, including, for example, obligations to conduct additional clinical
trials or other testing, 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:

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

ü Loss of, or changes to, previously obtained approvals or accelerated approvals, including those resulting from post-approval safety
or efficacy issues. For example, with respect to the FDA’s accelerated approval of Avastin in combination with paclitaxel
chemotherapy for the treatment of patients who have not received prior chemotherapy for metastatic HER2-negative BC, the FDA
may withdraw or modify such approval, or request additional post-marketing studies. Additionally, we may be unable to maintain
regulatory approval for Raptiva, or we may be subject to other regulatory requirements or actions that significantly restrict the use of
Raptiva, due to cases of PML in Raptiva patients. On February 19, 2009, the European Medicines Agency announced that it
recommended the suspension of the marketing authorization for Raptiva from our collaborator, Merck Serono, and the FDA issued a
public health advisory regarding Raptiva, as discussed in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Part II, Item 7 of this Form 10-K.

ü Failure to comply with existing or future regulatory requirements.

ü A determination by the FDA that study endpoints used in clinical trials for our products are not sufficient for product approval.

ü Changes to manufacturing processes, manufacturing process standards, or cGMP following approval, or changing interpretations of
those factors.

In addition, the current regulatory framework could change, or additional regulations could arise at any stage during our product development
or marketing that 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.

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

Manufacturing pharmaceutical products is difficult and complex, and requires facilities specifically designed and validated for that purpose. It
can take more than five years to design, construct, validate, and license a new biotechnology manufacturing facility. We currently produce our
products at our manufacturing facilities 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:

ü The inability of a supplier to provide raw materials or supplies used to manufacture our products.

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ü Equipment obsolescence, malfunctions, or failures.

ü Product quality or contamination problems, due to a number of factors including, but not limited to, accidental or willful human error.

ü Damage to a facility, including our warehouses and distribution facilities, due to events such as fires or earthquakes, as our South
San Francisco, Vacaville, and Oceanside facilities are located in areas where earthquakes and/or fires have occurred.

ü Changes in FDA regulatory requirements or standards that require modifications to our manufacturing processes.

ü 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.

ü A supplier or contract manufacturer going out of business or failing to produce product as contractually required.

ü Failure to maintain an adequate state of cGMP compliance.

See also, “Our business is affected by macroeconomic conditions.”

In addition, there are inherent uncertainties associated with forecasting future demand or actual demand for our products or products that we
produce for others, and as a consequence we may have inadequate capacity or inventory to meet actual demand. Alternatively, as a result of
these inherent uncertainties, we may have excess capacity or inventory, which could lead to an idling of a portion of our manufacturing
facilities, during which time we would incur unabsorbed or idle plant charges, costs associated with the termination of existing contract
manufacturing relationships, costs associated with a reduction in workforce, costs associated with unsalable inventory, or other excess
capacity charges, resulting in an increase in our cost of sales (COS). For example, in 2008, we recognized charges of approximately $90 million
related to unexpected failed lots, delays in manufacturing start-up campaigns, and excess capacity.

Difficulties or delays in our or our contractors’ manufacturing 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.

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

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). If such sole-source or single-source suppliers were to limit or terminate production or otherwise fail to
supply these materials for any reason, we may not be able to obtain such raw materials and supplies without significant delay or at all, and
such failures could have a material adverse effect on our product sales and our business.

Difficulties or delays in our or our contractors’ 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 that will be allowed

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in patents, nor can we predict with certainty the outcome of disputes about the infringement, validity, or enforceability of 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 patent litigation and
re-examination (discussed in Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II,
Item 8 of this Form 10-K), the proprietary rights of third parties, 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 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 obtain third-party licenses at a material cost, cease using the technology in dispute, terminate the R&D or
commercialization of a product, cause us to incur a material loss of sales and/or royalties and other revenue from licensing arrangements that
we have with third parties, and/or significantly interfere with our ability to negotiate future licensing arrangements.

The presence of patents or other proprietary rights belonging to other parties may subject us to infringement claims and may lead to a loss of
our entire investment in a product or technology.

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 subject to 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; a judgment with a 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.

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 and state 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, if we
were convicted of violating federal or state statutes, 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 in part 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 we were found liable for violating these laws,
or if the government were to allege that we have violated, or if we are convicted of violating these laws, there could be a material adverse effect
on our business, including our stock price.

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Roche’s unsolicited proposal and related matters may adversely affect our business.

On July 21, 2008, we announced that we received an unsolicited proposal from Roche to acquire all of the outstanding shares of our Common
Stock not owned by Roche (the Roche Proposal). A special committee of our Board of Directors, composed of the independent directors (the
Special Committee) was formed to review and consider the terms and conditions of the Roche Proposal, any business combination with Roche
or any offer by Roche to acquire our securities, negotiate as appropriate, and, in the Special Committee’s discretion, recommend or not
recommend the acceptance of the Roche Proposal by the minority shareholders. On August 13, 2008, we announced that the Special
Committee had unanimously concluded that the Roche Proposal substantially undervalues the company, but would consider a proposal that
recognizes the value of the company and reflects the significant benefits that would accrue to Roche as a result of full ownership. On January
30, 2009, Roche announced that it intended to commence a cash tender offer which would replace the Roche Proposal that was announced on
July 21, 2008. On January 30, 2009, in response to the announcement by Roche, the Special Committee urged shareholders to take no action
with respect to the announcement by Roche and that the Special Committee will announce a formal position within 10 business days following
the commencement of such a tender offer by Roche. On February 9, 2009, Roche commenced a cash tender offer for all of the outstanding
shares of our Common Stock not owned by Roche for $86.50 per share (the Roche Tender Offer). Also on February 9, 2009, the Special
Committee urged shareholders to take no action with respect to the Roche Tender Offer. The Special Committee announced that it intended to
take a formal position within 10 business days of the commencement of the Roche Tender Offer, and would explain in detail its reasons for that
position by filing a Statement on Schedule 14D-9 with the Securities and Exchange Commission.

The review and response to the Roche Proposal, the Roche Tender Offer or any other tender offer or other proposal by Roche and related
matters requires the expenditure of significant time and resources by us and may be a significant distraction for our management and
employees. The Roche Proposal or the Roche Tender Offer may create uncertainty for our management, employees, current and potential
collaborators, and other third parties. On August 18, 2008, the Special Committee adopted two retention plans and two severance plans that
together cover substantially all employees of the company, including our named executive officers. The two retention plans were implemented
in lieu of our 2008 annual stock option grant and the two severance plans were adopted in addition to existing severance plans. Nevertheless,
this uncertainty could adversely affect our ability to retain key employees and to hire new talent; cause collaborators to terminate, or not to
renew or enter into arrangements with us; and negatively impact our business during the pendency of the Roche Tender Offer or any other
tender offer or other proposal by Roche or anytime thereafter. Additionally, we, members of our Board of Directors, and Roche entities have
been named in several purported stockholder class-action complaints related to the Roche Proposal and may be named in lawsuits related to
the Roche Tender Offer, which are more fully described in Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated
Financial Statements in Part II, Item 8 of this Form 10-K. These lawsuits or any future lawsuits may become burdensome and result in
significant costs of defense, indemnification, and liability. These consequences, alone or in combination, may harm our business and have a
material adverse effect on our results of operations. See also “RHI, 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 RHI” and “Our Affiliation Agreement with RHI
could adversely affect our cash position.”

RHI, 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 RHI.

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 of Directors until such time that RHI owns
less than five percent of our stock. In connection with the Roche Tender Offer, RHI stated that whether or not the tender offer is
consummated, RHI may exercise its rights to obtain proportional representation on our Board of Directors and take a more active role in
overseeing the management and policies of Genentech. Currently, three of our directors—Mr. William Burns, Dr. Erich Hunziker, and Dr.
Jonathan K. C. Knowles—also serve as officers and employees of

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Roche. As long as RHI owns more than 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 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.

Our Affiliation Agreement with RHI could adversely affect our cash position.

Under our July 1999 Affiliation Agreement with RHI (Affiliation Agreement), we have established a stock repurchase program designed to
maintain RHI’s percentage ownership interest in our Common Stock based on an established Minimum Percentage. The Affiliation Agreement
provides that the percentage of our Common Stock owned by RHI could be up to 2% below the Minimum Percentage (subject to certain
conditions). However, it also provides that, upon RHI’s request, we will repurchase shares of our Common Stock to increase RHI’s ownership
to the Minimum Percentage. Such a request by RHI may adversely affect our cash position. Based on the trading price of our Common Stock
and RHI’s approximate ownership percentage as of December 31, 2008, to raise RHI’s percentage ownership to the Minimum Percentage would
require us to spend approximately $3 billion for share repurchases. Limitations in our ability to repurchase shares could result in further
dilution, which could increase the number of shares required to be repurchased in order to raise RHI’s percentage ownership to the Minimum
Percentage. For more information on our stock repurchase program, see “Liquidity and Capital Resources—Cash Used in Financing
Activities,” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.
For information on the Minimum Percentage, see Note 10, “Relationship with Roche Holdings, Inc. and Related Party Transactions,” in the
Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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 3, “Retention Plans and Employee Stock-Based
Compensation,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K 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. As of
December 31, 2008, if all holders of exercisable in-the-money stock options had exercised their stock options, to offset dilution of such
exercises would require us to spend approximately $2 billion for share repurchases, net of the exercise price of the stock options. In the first
quarter of 2008, we received approximately four million shares under a $300 million prepaid share repurchase arrangement that we entered into
and funded in 2007. In the second quarter of 2008, we entered into another prepaid share repurchase arrangement with an investment bank
pursuant to which we delivered $500 million to the investment bank. Under this arrangement, the investment bank delivered approximately 5.5
million shares to us on September 30, 2008. As of December 31, 2008, there were in-the-money exercisable options outstanding for the
purchase of approximately 45 million shares of Common Stock. While the cash outflows associated with future stock repurchase programs are
uncertain, 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 RHI could limit our ability to make acquisitions or divestitures.

Our Affiliation Agreement with RHI contains provisions that:

ü Require the approval of the directors designated by RHI to make any acquisition that represents 10 percent or more of our assets, net
income, or revenue; 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.

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

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

Sales of our Common Stock by RHI could cause the price of our Common Stock to decline.

As of December 31, 2008, RHI owned 587,189,380 shares of our Common Stock, or 55.8% 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.

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 this revenue
include, but are not limited to:

ü 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.

ü 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.

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

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

ü The initiation of new contractual arrangements with other companies.

ü Whether and when contract milestones are achieved.

ü The failure or refusal of a licensee to pay royalties or to make other contractual payments, the termination of a contract under which
we receive royalties or other revenue, or changes to the terms of such a contract.

ü The expiration of, or an adverse legal decision or ruling with respect to, our patents or licensed intellectual property. See “Protecting
our proprietary rights is difficult and costly” and the Cabilly patent litigation and re-examination discussion in Note 9, “Leases,
Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

ü Variations in Roche’s or other licensees’ sales of their licensed products due to competition, manufacturing difficulties, licensees’
internal forecasts, or other factors that affect the sales of products.

ü Variations in the recognition of royalty revenue based on our estimates of our licensees’ sales, which are difficult to forecast because
of the number of products involved, the availability of licensee sales data, potential contractual and intellectual property disputes,
and the volatility of foreign exchange rates.

ü Fluctuations in foreign currency exchange rates and the effect of any hedging contracts that we have entered into under our hedging
policy.

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

Other factors could affect our product sales.

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

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

ü 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.

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

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

ü Our distribution strategy, including the termination of, or change in, an existing arrangement with any major wholesalers that supply
our products, and sales initiatives that we may undertake including product discounts.

ü Product returns and allowances greater than expected or historically experienced.

ü The inability of one or more of our major customers to maintain their ordering patterns or inventory levels, to efficiently and
effectively distribute our products, or to meet their payment obligations to us on a timely basis or at all.

ü The inability of patients to afford co-pay costs due to an economic contraction or recession, increases in co-pay costs, or for any
other reason.

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

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

The success of our business depends, in large part, on our continued ability to (1) attract and retain highly qualified management, scientific,
manufacturing, and sales and marketing personnel, (2) successfully integrate new employees into our corporate culture, and (3) develop and
maintain important relationships with leading research and medical institutions and key distributors. Competition for these types of personnel
and relationships is intense, and may intensify due to, among other reasons, uncertainty regarding the Roche Tender Offer or any other tender
offer or other proposal by Roche to acquire all of the outstanding shares of our Common Stock not owned by Roche. 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 business is affected by macroeconomic conditions.

Various macroeconomic factors could affect our business and the results of our operations. For instance, if inflation or other factors were to
significantly increase our business costs, it may not be feasible to pass significant price increases on to our customers due to the process by
which physician reimbursement for our products is calculated by

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the government. Interest rates and the ability to access credit markets could affect the ability of our customers/distributors to purchase, pay
for, and effectively distribute our products. Similarly, these macroeconomic factors could affect the ability of our sole-source or single-source
suppliers to remain in business or otherwise supply product; failure by any of them to remain a going concern could affect our ability to
manufacture products. Macroeconomic factors could also affect the ability of patients to pay for co-pay costs or otherwise pay for our
products. Interest rates and the liquidity of the credit markets could also affect the value of our investments. Foreign currency exchange rates
may affect our royalty revenue as well as the costs of R&D and manufacturing activities denominated in a currency other than the U.S. dollar.

We may incur material product liability costs.

The testing and marketing of medical products entails an inherent risk of product liability. Liability exposures for pharmaceutical products can
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 may be more difficult and costly to obtain or maintain.

We currently have a limited amount of insurance to minimize our direct exposure to certain business risks. In the future, we may be exposed to
an increase in premiums, a narrowing scope of coverage, and default risk from our underwriters. As a result, we may be required to assume
more risk 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 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, but not limited to, the following:

ü The overall competitive environment for our products, as described in “We face competition” above, factors affecting our royalty and
contract revenue and sales to collaborators, as described in “Our results of operations are affected by our royalty and contract
revenue, and sales to collaborators” above, and other factors that could affect our products sales as described in “Other factors
could affect our product sales” above.

ü Increased COS, R&D, and marketing, general and administrative expenses; stock-based or other compensation expenses; litigation-
related expenses; asset impairments; and equity securities write-downs.

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ü Changes in the economy, the credit markets, increased counterparty performance risks, interest rates, credit ratings, and the liquidity
of our investments, and the effects that such changes or volatility may have on the value of our interest-bearing or equity
investments.

ü Changes in foreign currency exchange rates, the effect of any hedging contracts that we have entered into under our policy and the
effects that they may have on our royalty revenue, contract revenue, R&D expenses and foreign-currency-denominated investments.

ü The availability and extent of government and private third-party reimbursements for the cost of our products.

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

Fluctuation in our operating results due to factors described above or for any other reason could affect the price of our Common Stock.

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

Most biotechnology companies, including Genentech, have historically used, and continue to use, bovine source raw materials to support cell
growth in certain 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 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 could experience disruptions to our internal operations due to information system problems, which could decrease revenue and increase
expenses.

Portions of our information technology infrastructure, and those of our service providers, may experience interruptions, delays, or cessations
of service, or produce errors. Any disruptions that may occur to our current or future systems, could adversely affect our ability to report in an
accurate 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. Among other factors, the following may
have a significant effect on the market price of our Common Stock:

ü The Roche Tender Offer or any other tender offer or other proposal by Roche to acquire all of the outstanding shares of our Common
Stock not owned by Roche. In addition, other future developments and announcements related to the Roche Tender Offer or any
other tender offer or other proposal by Roche to acquire all of the outstanding shares of our Common Stock not owned by Roche may
result in further volatility in the price of our Common Stock.

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

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

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ü Our financial results or the guidance we provide relating to our financial results.

ü Concerns about our pricing initiatives and distribution strategy, and the potential effect of such initiatives and strategy on the
utilization of our products or our product sales.

ü Developments or outcomes of litigation, including litigation regarding proprietary and patent rights (including, for example, the
Cabilly patent discussed in Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in
Part II, Item 8 of this Form 10-K), and governmental investigations.

ü Regulatory developments or delays affecting our products in the U.S. and other countries.

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

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

ü New proposals to change or reform the U.S. healthcare system, including, but not limited to, new regulations concerning
reimbursement or follow-on biologics.

Our effective income tax rate may vary.

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; the results of any tax examinations; changing interpretations of existing
tax laws or regulations; changes in estimates of prior years’ items; past and future levels of R&D spending; acquisitions; changes in our
corporate structure; and changes in overall levels of income before taxes—all of which may result in periodic revisions to our effective income
tax rate.

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

As of December 31, 2008, we had $2.0 billion of long-term debt and $500 million of commercial paper notes payable. Our ability to make
payments on or to refinance our indebtedness, and to fund planned capital expenditures and R&D, as well as stock repurchases and expansion
efforts, will depend on our ability to generate cash in the future. This ability, 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.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our headquarters are located in a research and industrial area in South San Francisco, California, where we currently occupy 35 owned and 15
leased buildings that house our R&D, marketing and administrative activities, as well as bulk manufacturing facilities, a fill/finish facility, and a
warehouse. We have made and will continue to make improvements to these properties to accommodate our growth. In addition, we own other
properties in South San Francisco that we may utilize for future expansion.

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We own a manufacturing facility in Vacaville, California, that is licensed to produce commercial materials for select products. We expanded our
Vacaville site by constructing an additional manufacturing facility adjacent to the existing facility as well as office buildings to support the
added manufacturing capacity. We expect qualification and licensure of our new Vacaville plant by the end of 2009. We also own a biologics
manufacturing facility in Oceanside, California.

In September 2006, we acquired land in Hillsboro, Oregon for the construction of a new fill/finish, warehousing, distribution and related office
facility. We completed construction and began warehousing and distribution operations in 2008. We expect FDA licensure of the fill/finish
operation in late 2010.

We have an agreement with Lonza Group Ltd under which we can elect to purchase Lonza’s manufacturing facility currently under
construction in Singapore. The facility is expected to be licensed for the production of Avastin bulk drug substance in 2010.

In May 2007, we acquired land in Dixon, California and began the construction of a research support facility. We expect completion in late
2009.

In June 2007, we began construction of a new E. coli manufacturing facility in Singapore to produce bulk drug substance of Lucentis and other
E. coli derived products for the U.S. market. We anticipate FDA licensure of the site in the first half of 2010.

In connection with our acquisition of Tanox, Inc. in August 2007, we acquired a lease for a manufacturing plant in San Diego, California that
has been certified by the FDA for clinical use.

We lease small facilities as regional offices for sales and marketing and other functions in several locations throughout the U.S., as well as in
London, United Kingdom. We also lease a lab facility and an office facility in Singapore.

In general, our existing facilities, owned or leased, are in good condition and are adequate for all present and near-term uses, and we believe
that our capital resources are sufficient to purchase, lease, or construct any additional facilities required to meet our long-term growth needs.

Item 3. LEGAL PROCEEDINGS

We are a party to various legal proceedings, including patent litigations, 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. Through counsel we are
having discussions with government representatives about the status of their investigation and Genentech’s views on this matter, including
potential resolution. Previously, the investigation had been both criminal and civil in nature. We were informed in August 2008 by the criminal
prosecutor who handled this matter that the government had decided to decline to prosecute the company criminally in connection with this
investigation. The civil matter is still ongoing. 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 that are referred to as the “Riggs/Itakura Patents.” Subsequently,
we entered into license agreements with various companies to manufacture, use, and sell the products covered by the Riggs/Itakura Patents.
On August 13, 1999, COH filed a complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties
to 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 COH approximately $300 million in compensatory damages. On June 24, 2002, a
jury voted to award COH an additional $200 million in punitive

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damages. Such amounts were accrued as an expense in the second quarter of 2002. Included within current liabilities in “Accrued litigation” in
the accompanying Consolidated Balance Sheet at December 31, 2007 was $776 million, which represented our estimate of the costs for the
resolution of the COH matter as of that reporting date. We filed a notice of appeal of the verdict and damages awards with the California Court
of Appeal, and in subsequent proceedings the California Court of Appeal affirmed the verdict and damages awards in all respects. Following
the decision of the Court of Appeal, we filed a petition seeking review by the California Supreme Court which was granted, and on April 24,
2008 the California Supreme Court overturned the award of $200 million in punitive damages to COH but upheld the award of $300 million in
compensatory damages. We paid $476 million to COH in the second quarter of 2008, reflecting the amount of compensatory damages awarded
plus interest thereon from the date of the original decision, June 10, 2002.

As a result of the April 24, 2008 California Supreme Court decision, we reversed a $300 million net litigation accrual related to the punitive
damages and accrued interest, which we recorded as “Special items: litigation-related” in our Consolidated Statements of Income in 2008. In
2007, we recorded accrued interest and bond costs on both compensatory and punitive damages totaling $54 million. In conjunction with the
COH judgment in 2002, we posted a surety bond and were required to pledge cash and investments of $788 million to secure the bond, and this
balance was reflected in “Restricted cash and investments” in the accompanying Consolidated Balance Sheet as of December 31, 2007. During
the third quarter of 2008, the court completed certain administrative procedures to dismiss the case. As a result, the restrictions were lifted from
the restricted cash and investments accounts, which consisted of available-for-sale investments, and the funds became available for use in our
operations. We and COH are in discussions, but have not reached agreement, regarding additional royalties and other amounts that
Genentech owes COH under the 1976 agreement for third-party product sales and settlement of a third-party patent litigation that occurred
after the 2002 judgment. We recorded additional costs of $40 million as “Special items: litigation-related” in 2008 based on our estimate of our
range of liability in connection with the resolution of these issues.

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 related 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 have paid royalties to us under these licenses. The lawsuit included claims
for violation of anti-trust, patent, and unfair competition laws. MedImmune sought a ruling that the Cabilly patent was invalid and/or
unenforceable, a determination that MedImmune did 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 June 11, 2008, we
announced that we settled this litigation with MedImmune. Pursuant to the settlement agreement, the U.S. District Court dismissed all of the
claims against us in the lawsuit. The litigation has been fully resolved and dismissed, and the settlement did not have a material effect on our
operating results in 2008.

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 Patent Office ordered reexamination of the Cabilly patent.
On September 13, 2005, the Patent Office mailed an initial non-final Patent Office action rejecting all 36 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
all 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 the 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. On February 25, 2008, the Patent Office mailed a final Patent Office
action rejecting all the claims of the Cabilly patent. We filed our response to that final Patent Office action on June 6, 2008. On July 19, 2008,
the Patent Office mailed an advisory action replying to our response and confirming the rejection of all claims of the Cabilly patent. We filed a
notice of appeal challenging the rejection on August 22, 2008. Our opening appeal brief was filed on December 9, 2008. Subsequent to the
filing of our appeal brief, the Patent Office continued the reexamination. On February 12 and 13, 2009, we filed further responses with the Patent
Office that included our proposed amendments to three claims of the patent (claims 21, 27, and 32). The Cabilly patent, which expires in

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2018, relates to methods that we and others use to make certain antibodies or antibody fragments, as well as cells and deoxyribonucleic acid
(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. 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 Inc., 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 to proceed with further trials of certain humanized anti-CD20 antibodies, but Biogen Idec disagreed with our
position. The disputed issues have been submitted to arbitration. 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 clinical trials in order to obtain Biogen Idec’s
approval. Each party is also seeking monetary damages from the other. The arbitrators held hearings on this matter, and we expect a final
decision from the arbitrators by no later than July 2009. The outcome of this matter cannot be determined at this time.

On June 28, 2003, Mr. Ubaldo Bao Martinez filed a lawsuit against the Porriño Town Council and Genentech España S.L. in the Contentious
Administrative Court Number One of Pontevedra, Spain. The lawsuit challenges the Town Council’s decision to grant licenses to Genentech
España S.L. for the construction and operation of a warehouse and biopharmaceutical manufacturing facility in Porriño, Spain. On January 16,
2008, the Administrative Court ruled in favor of Mr. Bao on one of the claims in the lawsuit and ordered the closing and demolition of the
facility, subject to certain further legal proceedings. On February 12, 2008, we and the Town Council filed appeals of the Administrative Court
decision at the High Court in Galicia, Spain. In addition, through legal counsel in Spain we are cooperating with Lonza to pursue additional
licenses and permits for the facility. We sold the assets of Genentech España S.L., including the Porriño facility, to Lonza in December 2006,
and Lonza has operated the facility since that time. Under the terms of that sale, we retained control of the defense of this lawsuit and agreed
to indemnify Lonza against certain contractually defined liabilities up to a specified limit, which is currently estimated to be approximately $100
million. The outcome of this matter and our indemnification obligation to Lonza, if any, cannot be determined at this time.

On May 30, 2008, Centocor, Inc. filed a patent lawsuit against Genentech and COH in the U.S. District Court for the Central District of
California. The lawsuit relates to the Cabilly patent that we co-own with COH and under which Centocor and other companies have been
licensed and have paid royalties to us under these licenses. The lawsuit seeks a declaratory judgment of patent invalidity and unenforceability
with regard to the Cabilly patent and of patent non-infringement with regard to Centocor’s marketed product ReoPro® (Abciximab) and its
unapproved product CNTO 1275 (Ustekinumab). Centocor originally sought to recover the royalties that it has paid to Genentech for ReoPro ®
and the monies it alleges that Celltech has paid to Genentech for Remicade® (infliximab), a product marketed by Centocor (a wholly-owned
subsidiary of Johnson & Johnson) under an agreement between Centocor and Celltech, but Centocor withdrew those claims in connection
with its first amended complaint filed on September 3, 2008. Genentech answered the complaint on September 19, 2008 and also filed
counterclaims against Centocor alleging that four Centocor products infringe certain Genentech patents. Genentech filed an amendment to
those counterclaims on October 10, 2008 and Centocor answered these counterclaims on November 26, 2008. The outcome of this matter
cannot be determined at this time.

On May 8, June 11, August 8, and September 29 of 2008, Genentech was named as a defendant, along with InterMune, Inc. and its former chief
executive officer, W. Scott Harkonen, in four originally separate class-action complaints filed in the U.S. District Court for the Northern District
of California on behalf of plaintiffs who allegedly paid part or all of the purchase price for Actimmune ® for the treatment of idiopathic
pulmonary fibrosis. Actimmune ® is an interferon-gamma product that was licensed by Genentech to Connectics Corporation and was
subsequently assigned to InterMune. InterMune currently sells Actimmune ® in the U.S. The complaints are related in part to royalties that we
received in connection with the Actimmune® product. The May 8, June 11, and August 8 complaints have been consolidated into a single
amended complaint that claims and seeks damages for violations of

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federal racketeering laws, unfair competition laws, and consumer protection laws, and for unjust enrichment. The September 29 complaint
includes six claims, but only names Genentech as a defendant in one claim for damages for unjust enrichment. Genentech’s motion to dismiss
both complaints was heard on February 2, 2009. The outcome of these matters cannot be determined at this time.

Subsequent to the Roche Proposal, more than thirty shareholder lawsuits have been filed against Genentech and/or the members of its Board
of Directors, and various Roche entities, including RHI, Roche Holding AG, and Roche Holding Ltd. The lawsuits are currently pending in
various state courts, including the Delaware Court of Chancery and San Mateo County Superior Court, as well as in the United States District
Court for the Northern District of California. The lawsuits generally assert class-action claims for breach of fiduciary duty and aiding and
abetting breaches of fiduciary duty based in part on allegations that, in connection with Roche’s offer to purchase the remaining shares, some
or all of the defendants failed to properly value Genentech, failed to solicit other potential acquirers, and are engaged in improper self-dealing.
Several of the suits also seek the invalidation, in whole or in part, of the Affiliation Agreement, and an order deeming Articles 8 and 9 of the
company’s Amended and Restated Certificate of Incorporation invalid or inapplicable to a potential transaction with Roche. The outcome of
these matters cannot be determined at this time.

On October 27, 2008, Genentech and Biogen Idec Inc. filed a complaint against Sanofi-Aventis Deutschland GmbH (Sanofi), Sanofi-Aventis
U.S. LLC, and Sanofi-Aventis U.S. Inc. in the Northern District of California, seeking a declaratory judgment that certain Genentech products,
including Rituxan (which is co-marketed with Biogen Idec) do not infringe Sanofi’s U.S. Patents 5,849,522 (‘522 patent) and 6,218,140 (‘140
patent) and a declaratory judgment that the ‘522 and ‘140 patents are invalid. Also on October 27, 2008, Sanofi filed suit against Genentech and
Biogen Idec in the Eastern District of Texas, Lufkin Division, claiming that Rituxan and at least eight other Genentech products infringe the
‘522 and ‘140 patents. Sanofi is seeking preliminary and permanent injunctions, compensatory and exemplary damages, and other relief.
Genentech and Biogen Idec filed a motion to transfer this matter to the Northern District of California on January 22, 2009. In addition, on
October 24, 2008, Hoechst GmbH filed with the ICC International Court of Arbitration (Paris) a request for arbitration with Genentech, relating
to a terminated agreement between Hoechst’s predecessor and Genentech that pertained to the above-referenced patents and related patents
outside the U.S. Hoechst is seeking payment of royalties on sales of Genentech products, damages for breach of contract, and other relief.
Genentech intends to defend itself vigorously. The outcome of these matters cannot be determined at this time.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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Executive Officers of the Company

The executive officers of the company and their respective ages (as of December 31, 2008) and positions with the company are as follows:

Nam e Age Position


Arthur D. Levinson, Ph.D.* 58 Chairman and Chief Executive Officer
Susan D. Desmond-Hellmann, M.D., M.P.H.* 51 President, Product Development
Ian T. Clark* 48 Executive Vice President, Commercial Operations
David A. Ebersman* 39 Executive Vice President and Chief Financial Officer
Stephen G. Juelsgaard, D.V.M., J.D.* 60 Executive Vice President, Secretary and Chief Compliance Officer
Richard H. Scheller, Ph.D.* 55 Executive Vice President, Research and Chief Scientific Officer
Patrick Y. Yang, Ph.D.* 60 Executive Vice President, Product Operations
Marc Tessier-Lavigne, Ph.D. 49 Executive Vice President, Research Drug Discovery
Hal Barron, M.D., F.A.C.C. 46 Senior Vice President, Development, and Chief Medical Officer
Robert E. Andreatta 47 Vice President, Controller and Chief Accounting Officer
________________________
* Members of the Executive Committee of the company.

The Board of Directors appoints all executive officers annually. There is no family relationship between or among any of the executive officers
or directors.

Business Experience

Arthur D. Levinson, Ph.D. was appointed Chairman of the Board of Directors of Genentech, Inc. in September 1999 and was elected its Chief
Executive Officer and a director of the company in July 1995. Since joining the company in 1980, Dr. Levinson has been a Senior Scientist, Staff
Scientist and Director of the company’s Cell Genetics Department. Dr. Levinson was appointed Vice President of Research Technology in
April 1989, Vice President of Research in May 1990, Senior Vice President of Research in December 1992, and Senior Vice President of
Research and Development in March 1993. Dr. Levinson also serves as a member of the Board of Directors of Apple, Inc. and Google, Inc.

Susan D. Desmond-Hellmann, M.D., M.P.H. was appointed President, Product Development of Genentech in March 2004. She previously
served as Executive Vice President, Development and Product Operations from September 1999 to March 2004, Chief Medical Officer from
December 1996 to March 2004, and as Senior Vice President, Development from December 1997 to September 1999, among other positions,
since joining Genentech in March 1995 as a Clinical Scientist. Prior to joining Genentech, she held the position of Associate Director at Bristol-
Myers Squibb. Dr. Hellmann also serves as a member of the Board of Directors of Affymetrix, Inc.

Ian T. Clark was appointed Executive Vice President, Commercial Operations of Genentech in December 2005. He previously served as Senior
Vice President, Commercial Operations of Genentech from August 2005 to December 2005 and joined Genentech as Senior Vice President and
General Manager, BioOncology and served in that role from January 2003 through August 2005. Prior to joining Genentech, he served as
president for Novartis Canada from 2001 to 2003. Before assuming his post in Canada, he served as chief operating officer for Novartis United
Kingdom from 1999 to 2001. Mr. Clark also serves as a member of the Board of Directors of Vernalis plc.

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David A. Ebersman was appointed Executive Vice President of Genentech in January 2006 and Chief Financial Officer in March 2005.
Previously, he served as Senior Vice President, Finance from January 2005 through March 2005 and Senior Vice President, Product Operations
from May 2001 through January 2005. He joined Genentech in February 1994 as a Business Development Analyst and subsequently served as
Manager, Business Development from February 1995 to February 1996, Director, Business Development from February 1996 to March 1998,
Senior Director, Product Development from March 1998 to February 1999 and Vice President, Product Development from February 1999 to May
2001. Prior to joining Genentech, he held the position of Research Analyst at Oppenheimer & Company, Inc.

Stephen G. Juelsgaard, D.V.M., J.D. was appointed Chief Compliance Officer of Genentech in June 2005, Executive Vice President in
September 2002, and Secretary in April 1997. He joined Genentech in July 1985 as Corporate Counsel and subsequently served as Senior
Corporate Counsel from 1988 to 1990, Chief Corporate Counsel from 1990 to 1993, Vice President, Corporate Law from 1993 to 1994, Assistant
Secretary from 1994 to 1997, Senior Vice President from 1998 to 2002, and General Counsel from 1994 to January 2007.

Richard H. Scheller, Ph.D. was appointed Executive Vice President, Research of Genentech in September 2003 and Chief Scientific Officer in
June 2008. Previously, he served as Senior Vice President, Research from March 2001 to September 2003. Prior to joining Genentech, he served
as Professor of Molecular and Cellular Physiology and of Biological Sciences at Stanford University Medical Center from September 1982 to
February 2001 and as an Investigator at the Howard Hughes Medical Institute from September 1990 to February 2001. He received his first
academic appointment to Stanford University in 1982. He was appointed to the position of Professor of Molecular and Cellular Physiology in
1993 and as an Investigator in the Howard Hughes Medical Institute in 1994.

Patrick Y. Yang, Ph.D. was appointed Executive Vice President, Product Operations of Genentech in December 2005. Previously, he served as
Senior Vice President, Product Operations from January 2005 through December 2005 and Vice President, South San Francisco Manufacturing
and Engineering from December 2003 to January 2005. Prior to joining Genentech, he worked for General Electric from 1980 to 1992 in
manufacturing and technology and for Merck & Co. Inc. from 1992 to 2003 in manufacturing. At Merck, he held several executive positions
including Vice President, Supply Chain Management from 2001 to 2003 and Vice President, Asia/Pacific Manufacturing Operations from 1997
to 2000.

Marc Tessier-Lavigne, Ph.D. was promoted to Executive Vice President, Research Drug Discovery in June 2008. He previously served as
Senior Vice President from September 2003 to June 2008. Prior to joining Genentech, from 2001 to 2003, he served at Stanford University as the
Susan B. Ford Professor in the School of Humanities and Sciences, professor of Biological Sciences, and professor of Neurology and
Neurological Sciences. He was also an investigator with the Howard Hughes Medical Institute from 1994 to 2003.

Hal Barron, M.D., F.A.C.C. was named Senior Vice President, Development in January 2004 and Chief Medical Officer in March 2004. He
previously served as Vice President of Medical Affairs from May 2002 to January 2004, and as Senior Director of Specialty BioTherapeutics
from 2001 to 2002. Prior to that, he held positions as Associate Director and Director of Cardiovascular Research. Dr. Barron joined Genentech
as a clinical scientist in 1996.

Robert E. Andreatta, was appointed Controller of Genentech in June 2006, Chief Accounting Officer in April 2007, and Vice President,
Controller and Chief Accounting Officer in November 2008. Previously at Genentech, he served as Assistant Controller and Senior Director,
Corporate Finance from May 2005 to June 2006, Director of Corporate Accounting and Reporting from September 2004 to May 2005, and
Director of Collaboration Finance from June 2003 to September 2004. Prior to joining Genentech, he held various officer positions at HopeLink
Corporation, a healthcare information technology company, from 2000 to 2003 and was a member of the Board of Directors of HopeLink from
2002 to 2003. Mr. Andreatta worked for KPMG from 1983 to 2000, including service as an audit partner from 1995 to 2000.

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PART II

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

See “Liquidity and Capital Resources—Cash Used in Financing Activities” in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of this Form 10-K; Note 1, “Description of Business—Redemption of Our Special
Common Stock”; Note 10, “Relationship with Roche Holdings, Inc. and Related Party Transactions”; and Note 12, “Capital Stock,” in the
Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Stock Exchange Listing

Our Common Stock trades on the New York Stock Exchange under the symbol “DNA.” We have not paid dividends on our Common Stock.
We currently intend to retain all future income for use in the operation of our business and for future stock repurchases and, therefore, we
have no plans to pay cash dividends at this time.

Common Stockholders

As of December 31, 2008, there were approximately 2,100 stockholders of record of our Common Stock, one of which is Cede & Co., a nominee
for Depository Trust Company (DTC). All of the shares of Common Stock held by brokerage firms, banks and other financial institutions as
nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede &
Co. as one stockholder.

Stock Prices

C om m on S tock
2008 2007
High Low High Low
4th Quarter $ 89.77 $ 69.17 $ 78.61 $ 65.35
3rd Quarter 99.14 75.01 80.57 71.43
2nd Quarter 82.00 66.80 83.65 72.31
1st Quarter 82.20 65.60 89.73 80.12

Stock Repurchases

See “Liquidity and Capital Resources—Cash Used in Financing Activities” in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of this Form 10-K for information on our stock repurchases.

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Performance Graph

Below is a graph showing the cumulative total return to our stockholders during the period from December 31, 2003 through December 31, 2008
in comparison to the cumulative return on the Standard & Poor’s 500 Index, the Standard & Poor’s 500 Pharmaceuticals Index, and the
Standard & Poor’s 500 Biotechnology Index during that same period.(1) The results assume that $100 was invested on December 31, 2003.

Performance Graph

Base Pe riod Ye ars En ding


De ce m be r De ce m be r De ce m be r De ce m be r De ce m be r De ce m be r
C om pany / In de x 2003 2004 2005 2006 2007 2008
Genentech, Inc. $ 100 $ 116.36 $ 197.71 $ 173.41 $ 143.36 $ 177.21
S&P 500 Index 100 110.88 116.33 134.70 142.10 89.53
S&P 500 Pharmaceuticals Index 100 92.57 89.46 103.64 108.47 88.73
S&P 500 Biotechnology Index 100 107.61 127.27 123.78 119.55 131.88
________________________
(1)
T he total return on investment (the change in year-end stock price plus reinvested dividends) assumes $100 invested on December 31, 2003 in our
Common Stock, the Standard & P oor’s 500 Index, the Standard & P oor’s 500 P harmaceuticals Index and the Standard & P oor’s 500 Biotechnology Index.
At December 31, 2008, the Standard & Poor’s 500 P harmaceuticals Index comprised Abbott Laboratories; Allergan, Inc.; Bristol-Myers Squibb Company;
Forest Laboratories, Inc.; Johnson & Johnson; King P harmaceuticals, Inc.; Merck & Co., Inc.; Mylan Laboratories Inc.; Eli Lilly and Company; P fizer Inc.;
Schering-P lough Corporation; Watson P harmaceuticals, Inc.; and Wyeth. At December 31, 2008, the Standard & P oor’s 500 Biotechnology Index
comprised Amgen Inc.; Biogen Idec Inc.; Celgene Corporation; Cephalon, Inc.; Genzyme Corporation; and Gilead Sciences, Inc.

T he information under “ P erformance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any
filing of Genentech under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of
this 10-K and irrespective of any general incorporation language in those filings.

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Item 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data has been derived from our audited consolidated financial statements. The information
below is not necessarily indicative of the results of future operations and should be read in conjunction with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and Item 1A, “Risk Factors,” of this Form 10-K, and the
consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K, in order to fully understand factors that may
affect the comparability of the information presented below.

SELECTED CONSOLIDATED FINANCIAL DATA


(In millions, except per share amounts)

2008 2007 2006 2005 2004


Total operating revenue $ 13,418 $ 11,724 $ 9,284 $ 6,633 $ 4,621
Product sales 10,531 9,443 7,640 5,488 3,749
Royalties 2,539 1,984 1,354 935 641
Contract revenue 348 297 290 210 231

Net income $ 3,427 (1) $ 2,769 (1) $ 2,113 (1) $ 1,279 $ 785

Basic earnings per share $ 3.25 $ 2.63 $ 2.01 $ 1.21 $ 0.74


Diluted earnings per share 3.21 2.59 1.97 1.18 0.73

Total assets $ 21,787 $ 18,940 $ 14,842 $ 12,147 $ 9,403 (2)


Long-term debt 2,329 (2) 2,402 (2) 2,204 (2) 2,083 (2) 412 (2)
Stockholders’ equity 15,671 11,905 9,478 7,470 6,782
________________________
We have not paid any dividends.
All per share amounts reflect the two-for-one stock split that was effected in 2004.

(1)
Net income in 2008, 2007, and 2006 included employee stock-based compensation costs of $262 million, $260 million, and $182 million, net of tax,
respectively, due to our adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Paym ent,” on a modified prospective basis on
January 1, 2006. No employee stock-based compensation expense was recognized in reported amounts in any period prior to January 1, 2006. Net income
in 2008 also included (i) a benefit of $(158) million, net of tax, related to the net settlement of the City of Hope National Medical Center (COH) litigation
and additional royalties and other amounts owed by us to COH for third-party product sales and settlement of a third-party patent litigation that occurred
after the 2002 judgment and (ii) $93 million, net of tax, of charges related to the unsolicited proposal from Roche to acquire all of the outstanding shares of
our Common Stock not owned by Roche (the Roche P roposal), including costs related to the retention programs and third-party legal and advisory costs.
Net income in 2007 also included certain items associated with the acquisition of T anox, including a charge for in-process research and development
expense of $77 million and a gain pursuant to Emerging Issues T ask Force (EIT F) Issue No. 04-1, “Accounting for Preexisting Business Relationships
between the Parties to a Business Com bination” (EIT F 04-1), of $73 million, net of tax.
(2)
Long-term debt in 2008, 2007, 2006, and 2005 included $2 billion related to our debt issuance in July 2005, and included $306 million in 2008, $399
million in 2007, $216 million in 2006, and $94 million in 2005 in construction financing obligations related to our agreements with Health Care P roperties
(HCP , formerly Slough SSF, LLC) and Lonza. Long-term debt in 2008 was reduced by a $200 million financing payment to Lonza related to a the
construction of a manufacturing facility in Singapore. Long-term debt in 2005 was also reduced by the repayment of $425 million to extinguish the
consolidated debt and noncontrolling interest of a synthetic lease obligation related to our manufacturing facility located in Vacaville, California. Upon
adoption of the Financial Accounting Standards Board Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” in 2003, we
consolidated the entity from which we lease our manufacturing facility located in Vacaville, California. Accordingly, we included in property, plant and
equipment assets with net book values of $326 million at December 31, 2004. We also consolidated the entity’s debt of $412 million and noncontrolling
interest of $13 million, which amounts are included in long-term debt and litigation-related and other long-term liabilities, respectively, at December 31,
2004.

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

Overview

The Company

Genentech is a leading biotechnology company that discovers, develops, manufactures, and commercializes medicines for patients with
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 2008

We primarily earn revenue and income, and generate cash from product sales and royalty revenue. Our total operating revenue in 2008 was
$13.42 billion, an increase of 14% from $11.72 billion in 2007. Product sales in 2008 were $10.53 billion, an increase of 12% from $9.44 billion in
2007. Product sales represented 78% of our operating revenue in 2008 and 81% in 2007. Royalty revenue was $2.54 billion in 2008, an increase
of 28% from $1.98 billion in 2007. Royalty revenue represented 19% of our operating revenue in 2008 and 17% in 2007. Our net income in 2008
was $3.43 billion, an increase of 24% from $2.77 billion in 2007.

Avastin

On February 12, 2008, we announced that AVADO, Roche’s study evaluating two doses of Avastin in first-line metastatic breast cancer (BC),
met its primary endpoint of prolonging progression-free survival (PFS). Both doses of Avastin in combination with chemotherapy showed
statistically significant improvement in the time patients lived without their disease advancing compared to chemotherapy and placebo.

On February 22, 2008, we received accelerated approval from the U.S Food and Drug Administration (FDA) to market Avastin in combination
with paclitaxel chemotherapy for the treatment of patients who have not received prior chemotherapy for metastatic human epidermal growth
factor receptor 2 (HER2)-negative BC. As a condition of the accelerated approval, we are required to make future submissions to the FDA,
including the final study reports for two Phase III studies, AVADO and RIBBON I, which are studies of Avastin in first-line metastatic HER2-
negative BC. Based on the FDA’s review of our future submissions, the FDA may decide to withdraw or modify the accelerated approval,
request additional post-marketing studies, or grant full approval.

On April 20, 2008, we announced an update to the previously reported Roche-sponsored international Phase III clinical study of Avastin
(AVAiL) in combination with gemcitabine and cisplatin chemotherapy in patients with advanced, non-squamous, non-small cell lung cancer
(NSCLC). The update confirmed the statistically significant improvement in the primary endpoint of PFS for the two different doses of Avastin
studied in the trial (15 mg/kg/every-three-weeks and 7.5 mg/kg/every-three-weeks) compared to chemotherapy alone. The study did not
demonstrate a statistically significant prolongation of overall survival, a secondary endpoint, for either dose of Avastin in combination with
gemcitabine and cisplatin chemotherapy compared to chemotherapy alone. Median survival of patients in all arms of the study exceeded one
year, longer than previously reported survival times in this indication.

On November 3, 2008, we announced that we submitted a supplemental Biologic License Application (sBLA) to the FDA for Avastin as a
therapy for patients with previously treated glioblastoma. If accepted by the FDA, the application would be considered for an accelerated
approval that allows provisional approval of medicines for cancer or other life-threatening diseases based on preliminary evidence suggesting
clinical benefit. We plan to initiate a global Phase III study in the first half of 2009 in patients with newly diagnosed glioblastoma multiforme
that will evaluate Avastin with standard of care chemotherapy and radiation.

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On November 23, 2008, we announced that a Phase III study (RIBBON I) of Avastin, in combination with taxane, anthracycline-based or
capecitabine chemotherapies for first-line treatment of metastatic HER2-negative BC, met its primary endpoint of increasing the time patients
lived without their disease advancing, compared to the chemotherapies alone. The primary endpoint of PFS was assessed by the treating
physicians in the study (investigator-assessed). The safety profile of Avastin was consistent with previous experience and no new safety
signals were observed.

The National Surgical Adjuvant Breast and Bowel Project (NSABP) is sponsoring an ongoing Phase III study (NSABP C-08) of Avastin plus
chemotherapy in patients with early-stage colon cancer. During 2008, we announced that the NSABP informed us that the trial would continue,
based on recommendations from an independent data monitoring committee after planned interim analyses and that the final efficacy and
safety results were expected to be available in 2009 rather than 2010 as was previously anticipated. We also announced that the interim
analyses showed no new or unexpected safety events in the Avastin arm. On January 21, 2009, we announced that the NSABP informed us
that the results of the study could be known and communicated as early as mid-April 2009. The exact timing of data availability will depend on
the timing of disease progression events. If the required number of disease progression events as defined by the study’s statistical analytical
plan has not occurred as of mid-April, then the NSABP will continue the study and we anticipate that the final results will most likely be known
later in the second quarter of 2009.

Rituxan

On April 14, 2008, we and Biogen Idec announced that OLYMPUS, a Phase II/III study of Rituxan for primary-progressive multiple sclerosis
(PPMS), did not meet its primary endpoint as measured by the time to confirmed disease progression during the 96-week treatment period.

On April 29, 2008, we announced that the Phase II/III study of Rituxan for systemic lupus erythematosus (SLE, commonly called lupus) did not
meet its primary endpoint, defined as the proportion of Rituxan treated patients who achieved a major clinical response or partial clinical
response measured by British Isles Lupus Assessment Group, a lupus activity response index, compared to placebo at 52 weeks.

On October 6, 2008, we and Biogen Idec announced that a global Phase III study of Rituxan in combination with fludarabine and
cyclophosphamide chemotherapy met its primary endpoint of improving PFS, as assessed by investigators, in patients with previously treated
CD20-positive chronic lymphocytic leukemia (CLL) compared to chemotherapy alone. There were no new or unexpected safety signals
reported in the study. An independent review of the primary endpoint is being conducted for United States (U.S.) regulatory purposes. Earlier
in 2008, Roche announced that another Phase III study of Rituxan, CLL-8, showed that a similar treatment combination improved PFS in
patients with CLL who had not previously received treatment.

On December 18, 2008 we and Biogen Idec announced that a Phase III clinical study of Rituxan (IMAGE) in patients with early rheumatoid
arthritis (RA) who were not previously treated with methotrexate met its primary endpoint.

Other Products and Pipeline

On October 2, 2008, we announced that we issued a Dear Healthcare Provider letter to inform physicians of a case of progressive multifocal
leukoencephalopathy (PML) in a 70-year-old patient who had received Raptiva for more than four years for treatment of chronic plaque
psoriasis. The patient subsequently died. On October 16, 2008, revised prescribing information for Raptiva was approved by the FDA. A
boxed warning was added that includes the recently reported case of PML and updated information on the risk of serious infections leading to
hospitalizations and death in patients receiving Raptiva. The updated label also includes a warning about certain neurologic events as well as
precautions regarding immunizations and pediatric use. A Dear Healthcare Provider letter was issued to communicate this updated prescribing
information to physicians. On November 17, 2008, we announced that we issued a Dear Healthcare Provider letter to inform physicians of a
second case of PML that resulted in the death of a

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73-year old patient who had received Raptiva for approximately four years for treatment of chronic plaque psoriasis. On February 10, 2009, a
Dear Healthcare Provider letter was sent to physicians to inform them of a third case of PML in a 47-year-old patient who had received Raptiva
for more than three years for the treatment of chronic plaque psoriasis. On February 19, 2009, our collaborator, Merck Serono, and separately
the European Medicines Agency (EMEA), announced that the EMEA recommended the suspension of the marketing authorization for Raptiva
from Merck Serono, and that the EMEA’s Committee for Medicinal Products for Human Use (CHMP) has concluded that the benefits of
Raptiva no longer outweigh its risks because of safety concerns, including the occurrence of PML in patients taking the medicine. Also on
February 19, 2009, the FDA issued a public health advisory regarding Raptiva, which provided warnings about PML and the use of Raptiva,
and advised physicians to periodically re-evaluate patients treated with Raptiva and to consider other approved therapies to control patients’
psoriasis. Based on the medical information available for the PML cases, we believe that Raptiva increases the risk of PML and that prolonged
exposure to Raptiva or older age may further increase this risk. We have submitted updated labeling to the FDA, and are working with the
FDA to determine the appropriate next steps, which may include, among other things, significant restrictions in use of or suspension or
withdrawal of regulatory approval for Raptiva.

On October 2, 2008, we announced that we entered into a collaboration agreement with Roche and GlycArt Biotechnology AG (wholly-owned
by Roche) in September for the joint development and commercialization of GA101, a humanized anti-CD20 monoclonal antibody for the
potential treatment of hematological malignancies and other oncology-related B-cell disorders such as non-Hodgkin’s lymphoma (NHL).
GA101 is currently in Phase I/II clinical trials for CD20-positive B-cell malignancies, such as NHL and CLL. On October 28, 2008, Biogen Idec
exercised their right under our collaboration agreement with them to opt in to this agreement and paid us an up-front fee as part of the opt-in.

On October 5, 2008, we and OSI Pharmaceuticals announced that a randomized Phase III study (BeTa Lung) evaluating Avastin in combination
with Tarceva in patients with advanced NSCLC whose disease had progressed following platinum-based chemotherapy did not meet its
primary endpoint of improving overall survival compared to Tarceva in combination with a placebo. However, there was evidence of clinical
activity with improvements in the secondary endpoints of PFS and response rate when Avastin was added to Tarceva compared to Tarceva
alone. No new or unexpected safety signals for either Avastin or Tarceva were observed in the study, and adverse events were consistent
with those observed in previous NSCLC clinical trials evaluating the agents.

On November 6, 2008, we and OSI Pharmaceuticals announced that a global Phase III study (SATURN) met its primary endpoint and showed
that Tarceva significantly extended the time that patients with advanced NSCLC lived without their cancer getting worse when given Tarceva
immediately following initial treatment with platinum-based chemotherapy, compared to placebo. There were no new or unexpected safety
signals in the study and adverse events were consistent with those observed in previous NSCLC clinical trials evaluating Tarceva.

On February 2, 2009, we announced that a Phase III study (ATLAS) of Tarceva in combination with Avastin as maintenance therapy following
initial treatment with Avastin plus chemotherapy in advanced NSCLC met its primary endpoint. The study was stopped early on the
recommendation of an independent data safety monitoring board after a pre-planned interim analysis showed that combining Tarceva and
Avastin significantly extended the time patients lived without their disease advancing, as defined by PFS, compared to Avastin plus placebo.
A preliminary safety analysis showed that adverse events were consistent with previous Avastin or Tarceva studies, as well as trials
evaluating the two medicines together, and no new safety signals were observed.

Legal and Other Matters

On February 25, 2008, the U.S. Patent and Trademark Office (Patent Office) issued a final Patent Office action rejecting all 36 claims of the
Cabilly patent. We filed our response to that final Patent Office action on June 6, 2008. On July 19, 2008, the Patent Office mailed an advisory
action replying to our response and confirming the rejection of all claims of the Cabilly patent. We filed a notice of appeal challenging the
rejection on August 22, 2008. Our opening appeal brief was filed on December 9, 2008. Subsequent to the filing of our appeal brief, the Patent
Office continued the reexamination. On February 12 and 13, 2009, we filed further responses with the Patent Office that included our proposed
amendments to three claims of the patent (claims 21, 27, and 32). The claims of the patent remain valid and enforceable throughout the
reexamination and appeals processes.

On April 24, 2008, we announced that the California Supreme Court overturned the award of $200 million in punitive damages to the COH but
upheld the award of $300 million in compensatory damages resulting from a contract dispute brought by COH. The punitive damages were part
of a 2004 decision of the California Court of Appeal, which upheld a 2002 Los Angeles County Superior Court jury verdict awarding these
amounts. We paid $476 million to COH in the second quarter of 2008, reflecting the amount of compensatory damages awarded, plus interest
thereon from the date of the original decision in 2002. We recorded a favorable litigation settlement as a result of the California Supreme Court
decision.

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On June 11, 2008, we announced that we settled the patent litigation with MedImmune involving the Cabilly patent. The settlement resolved
disputed issues with respect to MedImmune’s marketed product Synagis ® as well as a related product for which MedImmune is seeking
regulatory approval. The settlement also permits MedImmune to obtain licenses for certain additional pipeline products under the Cabilly
patent family.

On July 21, 2008, we announced that we received an unsolicited proposal from Roche to acquire all of the outstanding shares of our Common
Stock not owned by Roche at a price of $89 in cash per share (the Roche Proposal) and on July 24, 2008 we announced that a special
committee of our Board of Directors composed of our independent directors (the Special Committee) was formed to review and consider the
terms and conditions of the Roche Proposal, any business combination with Roche or any offer by Roche to acquire our securities,
negotiate as appropriate, and, in the Special Committee’s discretion, recommend or not recommend the acceptance of the Roche Proposal by
the minority shareholders. On August 13, 2008, we announced that the Special Committee had unanimously concluded that the Roche
Proposal substantially undervalues the company, but that the Special Committee would consider a proposal that recognizes the value of the
company and reflects the significant benefits that would accrue to Roche as a result of full ownership. On January 30, 2009, Roche announced
that it intended to commence a cash tender offer which would replace the Roche Proposal that was announced on July 21, 2008. On January 30,
2009, in response to the announcement by Roche, the Special Committee urged shareholders to take no action with respect to the
announcement by Roche and that the Special Committee will announce a formal position within 10 business days following the commencement
of such a tender offer by Roche. On February 9, 2009, Roche commenced a cash tender offer for all of the outstanding shares of our Common
Stock not owned by Roche for $86.50 per share (the Roche Tender Offer). Also on February 9, 2009, the Special Committee urged shareholders
to take no action with respect to the Roche Tender Offer. The Special Committee announced that it intended to take a formal position within 10
business days of the commencement of the Roche Tender Offer, and would explain in detail its reasons for that position by filing a Statement
on Schedule 14D-9 with the U.S. Securities and Exchange Commission (SEC).

On August 18, 2008, the Special Committee adopted two retention plans and two severance plans that together cover substantially all
employees of the company, including our named executive officers. The two retention plans were implemented in lieu of our 2008 annual stock
option grant, and the aggregate cost is currently estimated to be approximately $375 million payable in cash.

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

Economic and Industry-wide 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.

ü We face significant competition in the diseases of interest to us from pharmaceutical and biotechnology companies. The introduction
of new competitive products or follow-on biologics, new information about existing products, and pricing and distribution 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. We monitor the competitive landscape and develop strategies in response to
new information.

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ü Our long-term business growth depends on our ability to continue to successfully develop and commercialize important novel
therapeutics to treat unmet medical needs. We recognize that the successful development of pharmaceutical products 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 product recalls or
withdrawals.

ü Our business model requires appropriate pricing and reimbursement for our products to offset the costs and risks of drug
development. Some of the pricing and distribution of our products have received negative press coverage and public and
governmental scrutiny. We will continue to meet with patient groups, payers, and other stakeholders in the healthcare system to
understand their issues and concerns. The pricing and reimbursement environment for our products may change in the future and
become more challenging due to, among other reasons, policies of the new presidential administration or new healthcare legislation
passed by Congress.

ü As the Medicare and Medicaid programs are the largest payers for our products, rules related to the programs’ 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. In addition, regulations implemented as a result of the Deficit Reduction Act of 2005, the
Medicare, Medicaid, and State Children’s Health Insurance Program Extension Act of 2007, and the Medicare Improvements for
Patients and Providers Act of 2008 will continue to affect the reimbursement for our products paid by Medicare, Medicaid, and other
public payers. We consider these rules as we plan our business and as we work to present our point of view to legislators and
payers.

ü Intellectual property protection of our products is crucial to our business. Loss of effective intellectual property protection could
result in lost sales to competing products and loss of royalty payments (for example, royalty income associated with the Cabilly
patent) from licensees. 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.

ü Manufacturing pharmaceutical products is difficult and complex, and requires facilities specifically designed and validated to run
biotechnology production processes. Difficulties or delays in product manufacturing or in obtaining materials from our suppliers, or
difficulties in accurately forecasting manufacturing capacity needs or complying with regulatory requirements, could negatively affect
our business. Additionally, we have had, and may continue to have, an excess of available capacity, which could lead to idling of a
portion of our manufacturing facilities, during which time we would incur unabsorbed or idle plant charges or other excess capacity
charges, resulting in an increase in our cost of sales (COS).

ü 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, particularly in light of the Roche Tender Offer or any other tender offer or other proposal by Roche to acquire all of the
outstanding shares of our Common Stock not owned by Roche, 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.

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ü Since September 2008, the financial markets have experienced high volatility and significant price declines, and the availability of
credit has decreased significantly, making it more difficult for businesses to access capital. Various macroeconomic factors impacted
by the financial markets could affect our business and the results of our operations. Macroeconomic factors could affect the ability of
patients to pay for co-pay costs. Interest rates and the ability to access credit markets could affect the ability of our
customers/distributors to purchase, pay for, and effectively distribute our products. Similarly, these macroeconomic factors could
also affect the ability of our sole-source or single-source suppliers to remain in business or otherwise supply product; failure by any
of them to remain a going concern could affect our ability to manufacture products. In addition, if inflation or other factors were to
significantly increase our business costs, it may not be feasible to pass significant price increases on to our customers due to the
process by which physician reimbursement for our products is calculated by the government.

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 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 Consolidated Financial Statements requires management to make estimates, assumptions, and judgments that affect
the reported amounts in our Consolidated Financial Statements and accompanying notes. These estimates form the basis for 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 2009,
because these policies require management to make significant estimates, assumptions, and judgments about matters that are inherently
uncertain.

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
Consolidated Statements of Income as product sales allowances have been relatively consistent at approximately seven to eight percent of
gross sales. In order to prepare our Consolidated Financial Statements, we are required to make estimates regarding the amounts earned or to
be claimed on the related product sales.

Definitions for product sales allowance types are as follows:

ü Rebate allowances and accruals include 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.

ü Product returns 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.

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

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ü 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.

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

We believe that our estimates related to 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 and product returns allowances to be the only estimations
that involve material amounts and require a higher degree of subjectivity and judgment to account for the obligations. As a result of the
uncertainties involved in estimating rebate allowances and accruals and product returns allowances, there is a possibility 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). Direct rebates are accrued at the time of sale and
recorded as allowances against trade accounts receivable; indirect rebates (including Medicaid) 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. These rebates are
primarily estimated and evaluated using historical and other data, including patient usage, customer buying patterns, applicable contractual
rebate rates, contract performance by the benefit providers, changes to Medicaid legislation and 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 annual allowance amounts established. Annual provisions for rebates were approximately 2% of gross product sales
between 2006 and 2008. Based on our estimation, the changes in rebate allowances and accruals estimates related to prior years have not
exceeded 3% of the rebate allowances and accruals. To further illustrate our sensitivity to changes in the rebate allowances and accruals
process, a 10% change in our rebate allowances and accruals provision in 2008 (which is in excess of three times the level of variability that we
reasonably expect to observe for rebates) would have an approximately $20 million unfavorable effect on our results (or approximately
$0.01 per share). The total rebate allowances and accruals recorded in our Consolidated Balance Sheets were $85 million and $70 million as of
December 31, 2008 and 2007, respectively.

At the time of sale, we record product returns allowances based on our best estimate of the portion of sales that will be returned by our
customers in the future. Product returns allowances are established in accordance with our returns policy, which allows buyers to return our
products with two months or less remaining prior to product expiration and up to six months following product expiration. As part of the
estimation process, we compare historical returns data to the related sales on a production lot basis. Historical rates of return are then
determined by product and may be adjusted for known or expected changes in the marketplace. Actual annual product returns processed were
less than 0.5% of gross product sales between 2006 and 2008, while annual provisions for expected future product returns were less than 1%
of gross product sales in all such periods. Although product returns allowances are recorded at the time of sale, the majority of the returns are
expected to occur within two years of sale. Therefore, our provisions for product returns allowances may include changes in the estimate for a
prior period due to the lag time. However, to date such changes have not been material. For example, in 2008, changes in estimates for product
returns allowances related to prior years were approximately 0.3% of 2008 gross product sales. To illustrate our sensitivity to changes in the
product returns allowances, if we were to experience an adjustment rate of 0.5% of 2008 gross product sales, which is nearly twice the level of
annual variability that we have historically observed for product returns, that change in estimate would likely have an unfavorable effect of
approximately $50 million (or approximately $0.03 per share) on our results of operations. Product returns allowances recorded in our
Consolidated Balance Sheets were $100 million and $60 million as of December 31, 2008 and 2007, respectively. The increase in product returns
allowances in 2008 was primarily due to the changes in estimates for product returns allowances related to prior years.

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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. Our
Consolidated Balance Sheets reflect estimated product sales allowance reserves and accruals totaling $234 million and $176 million as of
December 31, 2008 and 2007, respectively.

Royalties

For many of our agreements with licensees, we estimate royalty revenue and royalty receivables in the period that the royalties are earned,
which is in advance of collection. Royalties from Roche, which are approximately 60% of our total royalty revenue, are reported using actual
sales reports from Roche. Our royalty revenue and receivables from non-Roche licensees are determined based on communication with some
licensees, historical information, forecasted sales trends, and our assessment of collectibility. As all of these factors represent an estimation
process, there is inherent uncertainty and variability in our recorded royalty revenue. Differences between actual royalty revenue and
estimated royalty revenue are adjusted for in the period in which they become known, typically the following quarter. Since 2006, the
changes in estimates for our royalty revenue related to prior periods arising from this estimation process has not exceeded 1% of total annual
royalty revenue. To further illustrate our sensitivity to the royalty estimation process, a 1% adjustment to total annual royalty revenue, which
is at the upper end of the range of our historic experience, would result in an adjustment to our annual royalty revenue of approximately $25
million (or approximately $0.01 to $0.02 per share, net of any related royalty expenses).

For cases in which the collectibility of a royalty amount is not reasonably assured, royalty revenue is not recorded in advance of payment but
is recognized as cash is received. In the case of a receivable related to previously recognized royalty revenue that is subsequently determined
to be uncollectible, the receivable is reserved for by reversing the previously recorded royalty revenue in the period in which the
circumstances that make collectibility doubtful are determined, and future royalties from the licensee are recognized on a cash basis until it is
determined that collectibility is reasonably assured.

Royalties include royalty revenue from confidential licensing agreements related to our patents, including the Cabilly patent. The Cabilly
patent, which expires in December 2018, relates to methods that we and others use to make certain antibodies or antibody fragments, as well as
cells and DNA used in those methods. The Cabilly patent is the subject of litigation and a Patent Office reexamination proceeding. See also
Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for
more information on our Cabilly patent litigation and reexamination.

Cabilly patent royalties are generally due 60 days after the end of the quarter in which they are earned. During the fourth quarter of 2008, we
changed our process of recognizing royalty revenue from a number of our Cabilly licensees from an accrual basis to a cash basis based on our
assessment of collectibility. As a result of this change, royalty revenue decreased approximately $80 million in the fourth quarter of 2008
compared to the third quarter of 2008. As of December 31, 2008, our Consolidated Balance Sheet included no Cabilly patent royalty accounts
receivable, reflecting the fact that now all of our Cabilly patent royalties are recorded on a cash basis.

Income Taxes

Our income tax provision is computed using the liability method in accordance with Statement of Financial Accounting Standards (FAS) No.
109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on the difference between the financial statement
and tax basis of assets and 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, or the findings or expected results from any tax examinations. 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; the results of any tax examinations;

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changing interpretations of existing tax laws or regulations; changes in estimates of prior years’ items; past and future levels of R&D
spending; acquisitions; changes in our corporate structure; and changes in overall levels of income before taxes—all of which may result in
periodic revisions to our effective income tax rate. Uncertain tax positions are accounted for in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). We accrue tax-related interest and
penalties related to uncertain tax positions, and include these items with income tax expense in the Consolidated Statements of Income.

Loss Contingencies

We are currently, and have been, involved in certain legal proceedings, including licensing and contract disputes, stockholder lawsuits, and
other matters. See Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of
this Form 10-K for more 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. If only a range of the probable loss can be
reasonably estimated, we accrue a liability at the low end of that range. 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 differs from our current estimates could have a material effect on our
financial position or our results of operations in any one quarter.

Inventories

Inventories are stated at the lower of cost or market value. Determining market value requires judgment about the future demand for our
products and the likelihood of regulatory approval in the cases of currently marketed products manufactured under a new process or at
facilities awaiting regulatory licensure. We capitalize those inventories awaiting regulatory licensure if in our judgment at the time of
manufacture, near-term regulatory licensure is reasonably assured. We may be required to expense previously capitalized inventory costs
upon a change in our estimate due to, among other potential factors, (i) the denial or delay of approval of a product, (ii) the denial or delay of
approval of the licensure of either a manufacturing facility or a new manufacturing process by the necessary regulatory bodies, or (iii) new
information that suggests that the inventory will not be salable. As of December 31, 2008 our inventory balance included $133 million of
inventories manufactured under a process or at a facility that is awaiting regulatory licensure.

Further, the valuation of inventory requires us to estimate the market value of inventory that may expire prior to use based on our estimates of
future demand for our products. If inventory costs exceed expected market value due to obsolescence or lack of demand, reserves are recorded
for the difference between the cost and estimated market or recoverable value. These reserves are determined based on significant estimates,
particularly estimated future demand for our products. Future product demand estimates are based on management’s best estimates, after
evaluating numerous market conditions and product factors, including expected market penetration rates, competitive products entrants,
intellectual property matters, the reimbursement environment, pricing, our distribution strategy as well as those of our distribution partners,
efficacy and safety data from current and future clinical studies, and finalized regulatory actions with respect to product labeling and usage
guidelines, among other factors.

Between October 2, 2008 and February 10, 2009, we issued three Dear Healthcare Provider letters to inform physicians of three cases of PML
reported in Raptiva-treated patients. On February 19, 2009, the EMEA announced its recommendation to suspend the marketing authorization
held by our collaborator, Merck Serono, for Raptiva in the European Union. The EMEA’s announcement is not expected to result in an
impairment of the value of our Raptiva inventory. Also on February 19, 2009, the FDA issued a public health advisory regarding Raptiva,
which provided warnings about PML and the use of Raptiva, and advised physicians to periodically re-evaluate patients treated with Raptiva
and to consider other approved therapies to control patients’ psoriasis. We are currently in discussions with the FDA regarding potential label
changes and restrictions for the use of Raptiva that could potentially have a materially adverse effect on demand for the product in the U.S.
Our discussions with the FDA have not been finalized and we cannot yet reliably estimate the effect of any resultant changes on future
demand for Raptiva in the U.S. As of December 31, 2008, we held approximately $130 million of Raptiva work-in-process and finished goods
inventory. If future FDA actions or other events or decisions lead to a substantial decrease in expected demand for Raptiva in the U.S., we
could experience a material reduction in the market value of our Raptiva inventory and be required to write-down a portion, or all, of that
inventory. For example, if our current discussions with the FDA result in significant new regulatory requirements that affect how
physicians prescribe Raptiva or other labeling restrictions that would individually or collectively reduce demand for and use of the product to
a substantial extent, we believe that such actions would result in the vast majority of our Raptiva inventory value being impaired.

Employee Stock-Based Compensation

Under the provisions of FAS No. 123(R), “Share-Based Payment” (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

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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 as an option grant cycle lasts ten years. 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 post-
vesting forfeitures), the expected volatility, and a comparison to relevant peer group data. As required under GAAP, 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 Note 3, “Retention Plans and Employee Stock-Based Compensation,” in the Notes to Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K for more information.

Results of Operations
(In m illions, except per share am ounts)

An n u al Pe rce n tage C h an ge
2008 2007 2006 2008/2007 2007/2006
Product sales $ 10,531 $ 9,443 $ 7,640 12% 24%
Royalties 2,539 1,984 1,354 28 47
Contract revenue 348 297 290 17 2
Total operating revenue 13,418 11,724 9,284 14 26
Cost of sales 1,744 1,571 1,181 11 33
Research and development 2,800 2,446 1,773 14 38
Marketing, general and administrative 2,405 2,256 2,014 7 12
Collaboration profit sharing 1,228 1,080 1,005 14 7
Write-off of in-process research and development
related to acquisition – 77 – (100) –
Gain on acquisition – (121) – (100) –
Recurring amortization charges related to redemption
and acquisition 172 132 105 30 26
Special items: litigation-related (260) 54 54 (581) 0
Total costs and expenses 8,089 7,495 6,132 8 22

Operating income 5,329 4,229 3,152 26 34

Other income (expense):


Interest and other income, net 184 273 325 (33) (16)
Interest expense (82) (76) (74) 8 3
Total other income, net 102 197 251 (48) (22)

Income before taxes 5,431 4,426 3,403 23 30


Income tax provision 2,004 1,657 1,290 21 28
Net income $ 3,427 $ 2,769 $ 2,113 24 31
Earnings per share:
Basic $ 3.25 $ 2.63 $ 2.01 24 31
Diluted $ 3.21 $ 2.59 $ 1.97 24 31

Cost of sales as a % of product sales 17% 17% 15%


Research and development as a % of total operating
revenue 21 21 19
Marketing, general and administrative as a % of total
operating revenue 18 19 22
Pretax operating margin 40 36 34
Net income as a % of total operating revenue 26 24 23
Effective income tax rate 37 37 38
________________________
P ercentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.

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Total Operating Revenue

Total operating revenue increased 14% to $13,418 million in 2008 and increased 26% to $11,724 million in 2007. These increases were primarily
due to higher product sales and royalty revenue, and are further discussed below.

Total Product Sales


(In m illions)

An n u al Pe rce n tage C h an ge
Produ ct Sale s 2008 2007 2006 2008/2007 2007/2006
Net U.S. product sales
Avastin $ 2,686 $ 2,296 $ 1,746 17% 32%
Rituxan 2,587 2,285 2,071 13 10
Herceptin 1,382 1,287 1,234 7 4
Lucentis 875 815 380 7 114
Xolair 517 472 425 10 11
Tarceva 457 417 402 10 4
Nutropin products 358 371 378 (4) (2)
Thrombolytics 275 268 243 3 10
Pulmozyme 257 223 199 15 12
Raptiva 108 107 90 1 19
Total net U.S. product sales 9,503 8,540 7,169 11 19
Net product sales to collaborators 1,028 903 471 14 92
Total net product sales $ 10,531 $ 9,443 $ 7,640 12 24
________________________
T he totals shown above may not appear to sum due to rounding.

Total net product sales increased 12% to $10,531 million in 2008 and increased 24% to $9,443 million in 2007. Net U.S. sales increased 11% to
$9,503 million in 2008 and increased 19% to $8,540 million in 2007. These increases in U.S. sales were due to higher sales across almost all
products, in particular higher sales of our oncology products and sales resulting from the approval of Lucentis on June 30, 2006. Increased
U.S. sales volume accounted for 74%, or approximately $710 million, of the increase in U.S. net product sales in 2008, and 83%, or
approximately $1,100 million in 2007. Changes in net U.S. sales prices across the majority of products in the portfolio accounted for most of the
remainder of the increases in U.S. net product sales in 2008 and 2007.

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 the usage and buying patterns of the end-users of our products, and as indicative of the purchasing patterns of our wholesaler customers.
We use statistical analyses and management judgment to interpret the data that we obtain, and as such, the adoption, penetration, and patient
share data presented herein represent management’s best estimates. In general, we have rounded our percentage estimates to the nearest 5%
due to inherent margins of error that exist due to limitations in sample size and the timeliness in receiving and analyzing this data. We may
modify our market study methodology in response to changes in the marketplace and how we manage the business. If we have such a change,
we will provide comparative prior period data using the new methodology, if it is available.

Avastin

Net U.S. sales of Avastin increased 17% to $2,686 million in 2008 and 32% to $2,296 million in 2007. Net U.S. sales in 2008 excluded net revenue
of $5 million that was deferred in connection with our Avastin Patient Assistance Program, and net U.S. sales in 2007 included the net
recognition of $7 million of previously deferred revenue related to the program. The increase in sales in 2008 was primarily due to increased use
of Avastin for first-line treatment of metastatic BC, which received accelerated approval from the FDA on February 22, 2008, as well as from
increased use in metastatic NSCLC. The increase in sales in 2007 was primarily a result of increased use of Avastin in first-line metastatic
NSCLC, and in metastatic BC, an unapproved use of Avastin during 2007.

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Among the approximately 50% to 60% of patients in first-line metastatic lung cancer who are eligible for Avastin therapy, we estimate that
penetration in the fourth quarter of 2008 was approximately 65%, which is in-line with penetration throughout the year, but an increase relative
to in the fourth quarter of 2007. Use of the standard dose, defined as at least 5 mg/kg/weekly-equivalent, during the fourth quarter of 2008 was
approximately 75%, in-line with the third quarter of 2008. The labeled dose of Avastin in lung cancer is 15 mg/kg, administered intravenously
every three weeks. On April 20, 2008, we announced an update to the previously reported Roche-sponsored international Phase III clinical
study of Avastin (AVAiL) in combination with gemcitabine and cisplatin chemotherapy in patients with advanced, non-squamous, NSCLC.
The update confirmed the statistically significant improvement in the primary endpoint of PFS for the two different doses of Avastin studied in
the trial (15 mg/kg/every-three-weeks and 7.5 mg/kg/every-three-weeks) compared to chemotherapy alone. The study did not demonstrate a
statistically significant prolongation of overall survival, a secondary endpoint, for either dose in combination with gemcitabine and cisplatin
chemotherapy compared to chemotherapy alone. Median survival of patients in all arms of the study exceeded one year, longer than
previously reported survival times in this indication.

In first-line metastatic BC patients, we estimate Avastin penetration in the fourth quarter of 2008 was approximately 40%, which is consistent
with the prior quarter. With respect to dose, the percentage of metastatic BC patients receiving the standard dose of Avastin, defined as
5 mg/kg/weekly-equivalent, was in-line with that seen in previous quarters. The U.S. labeled dose of Avastin in metastatic BC is 10 mg/kg,
administered intravenously every two weeks. On November 23, 2008, we announced that the RIBBON I study of Avastin in combination with
taxane, anthracycline-based or capecitabine chemotherapies for first-line treatment of metastatic HER2-negative BC met its primary endpoint of
increasing the time that patients lived without their disease advancing, compared to chemotherapies alone. Data from RIBBON I along with
data from AVADO, the Roche-sponsored, placebo-controlled Phase III trial, which evaluated two dose levels of Avastin, a 7.5 mg/kg/every-
three-weeks dose and a 15 mg/kg/every-three-week dose, in combination with docetaxel chemotherapy, will be submitted to the FDA by mid-
2009, and are required for the FDA under the conditions of the accelerated approval we received on February 22, 2008. These data will be
reviewed by the FDA and may affect the Avastin approval in BC.

In both first-line and second-line metastatic colorectal cancer (CRC), penetration in the fourth quarter of 2008 was in-line with the third quarter
of 2008 and the fourth quarter of 2007.

On September 30, 2008, we announced that we submitted an sBLA to the FDA for Avastin as potential treatment for patients with advanced
renal cell carcinoma.

On November 3, 2008, we announced that we submitted an sBLA to the FDA for Avastin as a potential treatment for patients with previously
treated glioblastoma. If accepted by the FDA, the application would be considered for an accelerated approval that allows provisional
approval of medicines for cancer or other life-threatening diseases based on preliminary evidence suggesting clinical benefit. We plan to
initiate a global Phase III study in patients with newly diagnosed glioblastoma multiforme in the first half of 2009 that will evaluate Avastin
with standard of care chemotherapy and radiation.

The NSABP is sponsoring an ongoing Phase III study (NSABP C-08) of Avastin plus chemotherapy in patients with early-stage colon cancer.
During 2008, we announced that the NSABP informed us that the trial would continue, based on recommendations from an independent data
monitoring committee after planned interim analyses and that the final efficacy and safety results were expected to be available in 2009 rather
than 2010 as was previously anticipated. We also announced that the interim analyses showed no new or unexpected safety events in the
Avastin arm. On January 21, 2009, we announced that the NSABP informed us that the results of the study could be known and communicated
as early as mid-April 2009. The exact timing of data availability will depend on the timing of disease progression events. If the required number
of disease progression events as defined by the study’s statistical analytical plan has not occurred as of mid-April, then the NSABP will
continue the study and we anticipate that the final results will most likely be known later in the second quarter of 2009.

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Rituxan

Net U.S. sales of Rituxan increased 13% to $2,587 million in 2008 and 10% to $2,285 million in 2007. Sales growth in 2008 and 2007 resulted from
increased use of Rituxan in the oncology setting and in the RA setting, and from price increases in both years.

In the oncology setting, the increases were due to the use of Rituxan following chemotherapy in indolent NHL, including areas of unapproved
use, and CLL, an unapproved use. We estimate that Rituxan’s overall adoption rate in the combined markets of NHL and CLL was
approximately 85% for the fourth quarter of 2008, an increase compared to the fourth quarter of 2007.

Primary drivers of growth in the RA setting in 2008 were increased new patient starts and increased total numbers of prescribers to an
estimated 80% of targeted rheumatologists. 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, but we estimate that sales in the immunology setting
represented approximately 11% to 13% of total Rituxan sales for 2008 compared to our revised estimate of approximately 8% to 10% of total
Rituxan sales for 2007.

In January 2008, results from Rituxan Phase III SUNRISE trial met its primary endpoint. This study was a controlled retreatment study for
patients with RA who have had an inadequate response to previous treatment with one or more tumor necrosis factor (TNF) antagonist
therapies. A preliminary review of the safety data revealed no new safety signals.

On January 24, 2008 we announced that the SERENE Phase III clinical study of Rituxan in patients who have not been previously treated with
a biologic met its primary endpoint of a significantly greater proportion of Rituxan-treated patients achieving an American College of
Rheumatology (ACR) 20 response at week 24, compared to placebo. In this study, patients who received a single treatment course of two
infusions of either 500 milligrams or 1,000 milligrams of Rituxan in combination with a stable dose of methotrexate displayed a statistically
significant improvement in ACR20 scores compared to patients who received placebo in combination with methotrexate. Although the study
was not designed to compare the Rituxan doses, treatment efficacy appears to be similar between both Rituxan doses.

On January 25, 2008, the FDA approved our sBLA to expand the label for Rituxan to include slowing the progression of structural damage in
adult patients with moderate-to-severe RA who have failed TNF antagonist therapies.

On April 14, 2008, we and Biogen Idec announced that OLYMPUS, a Phase II/III study of Rituxan for PPMS, did not meet its primary endpoint
as measured by the time to confirmed disease progression during the 96-week treatment period.

On April 29, 2008, we announced that the Phase II/III study of Rituxan for SLE did not meet its primary endpoint defined as the proportion of
Rituxan treated patients who achieved a major clinical response or partial clinical response measured by British Isles Lupus Assessment
Group, a lupus activity response index, compared to placebo at 52 weeks.

On October 6, 2008, we and Biogen Idec announced that a global Phase III study of Rituxan in combination with fludarabine and
cyclophosphamide chemotherapy met its primary endpoint of improving PFS, as assessed by investigators, in patients with previously treated
CD20-positive CLL compared to chemotherapy alone. There were no new or unexpected safety signals reported in the study. An independent
review of the primary endpoint is being conducted for U.S. regulatory purposes. Earlier in 2008, Roche announced that another Phase III study
of Rituxan, CLL-8, showed that a similar treatment combination improved PFS in patients with CLL who had not previously received treatment.

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On December 18, 2008, we announced that the IMAGE trial, a Phase III study in patients with early RA who have not been previously treated
with methotrexate, met its primary endpoint. Patients in the study received two infusions of either 500 milligrams or 1,000 milligrams of Rituxan
or placebo in combination of methotrexate. At 52 weeks, patients in the 1,000 milligrams treatment group met the primary endpoint of
prevention of progression of structural damage. The safety data was consistent with previous studies and preliminary analysis did not reveal
any new or unexpected safety signals.

Herceptin

Net U.S. sales of Herceptin increased 7% to $1,382 million in 2008 and 4% to $1,287 million in 2007. The sales growth in 2008 and 2007 was
primarily due to price increases that occurred from 2006 through 2008, and increased use of Herceptin in the treatment of early-stage HER2-
positive BC. We estimate that Herceptin’s penetration in the adjuvant setting was approximately 75% for the fourth quarter of 2008, which was
in-line with the fourth quarter of 2007. In first-line HER2-positive metastatic BC patients, we estimate that Herceptin’s penetration was
approximately 75% for the fourth quarter of 2008, which was also in-line with the fourth quarter of 2007.

On January 18, 2008, the FDA expanded the Herceptin label, based on the HERA study, for the treatment of patients with early-stage HER2-
positive BC to include treatment for patients with node-negative BC.

On May 29, 2008, the FDA expanded the Herceptin label, based on the BCIRG 006 study, for the treatment of patients with early-stage HER2-
positive BC to include Herceptin given with docetaxel and carboplatin. Herceptin also may now be administered for one year in an every-three-
week dosing schedule, instead of weekly.

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 of Lucentis increased 7% to $875 million in 2008 and 114% to $815 million in 2007. The primary drivers of growth in 2008 were increased
dosing and an improving market environment. Our most recent market research on dosing has shown an increase in the number of Lucentis
injections in the patients’ first and second year of treatment. We believe that approximately 40% of newly diagnosed patients with wet AMD
were treated with Lucentis during the fourth quarter of 2008, which remained broadly stable throughout 2008, and decreased from
approximately 50% in the fourth quarter of 2007. We believe that key factors affecting Lucentis sales in 2008 and 2007 were the continued
unapproved use of Avastin and reimbursement concerns from retinal specialists. Lucentis received a permanent J-code classification from the
Centers for Medicare and Medicaid Services in January 2008, which we believe addressed some of the reimbursement concerns. The launch of
improved patient access programs in March 2008, a revised promotional campaign, and enhanced distribution options for Lucentis that began
in May 2008 also contributed to the sales growth in 2008. In October 2007 we announced that we planned to no longer allow compounding
pharmacies the ability to purchase Avastin directly from wholesale distributors, and this change in distribution was made effective on January
1, 2008. However, physicians can purchase Avastin from authorized distributors and ship to the destination of the physicians’ choice.

Although sales increased in 2008, the AMD market remains challenging with the continued unapproved use of Avastin and reimbursement
concerns of retinal specialists. We expect these factors to persist and limit Lucentis share growth.

In December, 2008, we issued a Dear Healthcare Provider letter to inform prescribing physicians that multiple cases of intraocular adverse
events, including serious intraocular inflammatory reactions, following injection with Avastin had been reported in Canada. A single lot of
Avastin which was distributed in Canada and 11 other countries outside the U.S. accounted for 25 of the 36 cases. We and Roche confirmed
that the Avastin production lot had passed all quality inspections for its approved intravenous use in oncology.

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Xolair

Net U.S. sales of Xolair increased 10% to $517 million in 2008 and 11% to $472 million in 2007. Sales growth in 2008 and 2007 was driven by
increased penetration in the asthma market and, to a lesser extent, price increases effective between 2006 and 2008. Increased sales in 2008
were consistent with our efforts to increase adoption of the National Heart, Lung, and Blood Institute asthma guidelines, which recommend
that physicians consider Xolair as a standard part of therapy. At the FDA’s request, we and Novartis Pharma AG and affiliates (Novartis), our
co-promotion collaborator, updated the Xolair product label in June 2007 with a boxed warning regarding the risk of anaphylaxis in patients
receiving Xolair. As part of our continuing discussions with the FDA, on January 29, 2009, the FDA requested that we, as the BLA holder,
submit a draft Risk Evaluation and Mitigation Strategy.

In the fourth quarter of 2008, we submitted an sBLA for Xolair to extend our current asthma indication to include children six years and older.

Tarceva

Net U.S. sales of Tarceva increased 10% to $457 million in 2008 and 4% to $417 million in 2007. The sales growth in 2008 was primarily due to
price increases in 2008 and 2007 and slightly lower return reserve requirements compared to 2007. We estimate that Tarceva’s penetration in
second-line NSCLC was approximately 25% for the fourth quarter of 2008, which was in-line with the fourth quarter of 2007. In the first-line
pancreatic cancer setting, we estimate that Tarceva’s penetration was approximately 40% in 2008, which was also in-line compared to the
fourth quarter of 2007.

Sales in 2007 were positively affected by price increases during 2007 and 2006. These increases, however, were partially offset by higher
product returns and return reserve requirements in the second and third quarters of 2007 and by modest decreases in volume in 2007.

On October 5, 2008, we and OSI Pharmaceuticals announced that a randomized Phase III study (BeTa Lung) evaluating Avastin in combination
with Tarceva in patients with advanced NSCLC whose disease had progressed following platinum-based chemotherapy did not meet its
primary endpoint of improving overall survival compared to Tarceva in combination with a placebo. However, there was evidence of clinical
activity with improvements in the secondary endpoints of PFS and response rate when Avastin was added to Tarceva compared to Tarceva
alone. No new or unexpected safety signals for either Avastin or Tarceva were observed in the study, and adverse events were consistent
with those observed in previous NSCLC clinical trials evaluating the agents.

On November 6, 2008, we and OSI Pharmaceuticals announced that a global Phase III study (SATURN) met its primary endpoint and showed
Tarceva significantly extended the time patients with advanced NSCLC lived without their cancer getting worse when given immediately
following initial treatment with platinum-based chemotherapy, compared to placebo. There were no new or unexpected safety signals in the
study and adverse events were consistent with those observed in previous NSCLC clinical trials evaluating Tarceva. We and
OSI Pharmaceuticals will discuss a potential U.S. filing based on SATURN with the FDA in 2009.

On February 2, 2009, we announced that a Phase III study (ATLAS) of Tarceva in combination with Avastin as maintenance therapy following
initial treatment with Avastin plus chemotherapy in advanced NSCLC met its primary endpoint. The study was stopped early on the
recommendation of an independent data safety monitoring board after a pre-planned interim analysis showed that combining Tarceva and
Avastin significantly extended the time patients lived without their disease advancing, as defined by PFS, compared to Avastin plus placebo.
A preliminary safety analysis showed that adverse events were consistent with previous Avastin or Tarceva studies, as well as trials
evaluating the two medicines together, and no new safety signals were observed.

Nutropin Products

Combined net U.S. sales of our Nutropin products decreased 4% to $358 million in 2008 and decreased 2% to $371 million in 2007.

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Thrombolytics

Combined net U.S. sales of our three thrombolytics products—Activase, Cathflo Activase, and TNKase—increased 3% to $275 million in 2008
and 10% to $268 million in 2007.

Pulmozyme

Net U.S. sales of Pulmozyme increased 15% to $257 million in 2008 and 12% to $223 million in 2007.

Raptiva

Net U.S. sales of Raptiva increased 1% to $108 million in 2008 and increased 19% to $107 million in 2007.

On October 2, 2008, we announced that we issued a Dear Healthcare Provider letter to inform physicians of a case of PML in a 70-year-old
patient who had received Raptiva for more than four years for treatment of chronic plaque psoriasis. The patient subsequently died. On
October 16, 2008, revised prescribing information for Raptiva was approved by the FDA. A boxed warning was added that includes the
recently reported case of PML and updated information on the risk of serious infections leading to hospitalizations and death in patients
receiving Raptiva. The updated label also includes a warning about certain neurologic events as well as precautions regarding immunizations
and pediatric use. A Dear Healthcare Provider letter was issued to communicate this updated prescribing information to physicians. On
November 17, 2008, we announced that we issued a Dear Healthcare Provider letter to inform physicians of a second case of PML that resulted
in the death of a 73-year old patient who had received Raptiva for approximately four years for treatment of chronic plaque psoriasis. On
February 10, 2009, a Dear Healthcare Provider letter was sent to physicians to inform them of a third case of PML in a 47-year-old patient who
had received Raptiva for more than three years for the treatment of chronic plaque psoriasis. On February 19, 2009, our collaborator, Merck
Serono, and separately the EMEA, announced that the EMEA recommended the suspension of the marketing authorization for Raptiva from
Merck Serono, and that the EMEA’s CHMP has concluded that the benefits of Raptiva no longer outweigh its risks because of safety
concerns, including the occurrence of PML in patients taking the medicine. Also on February 19, 2009, the FDA issued a public health
advisory regarding Raptiva, which provided warnings about PML and the use of Raptiva, and advised physicians to periodically re-evaluate
patients treated with Raptiva and to consider other approved therapies to control patients’ psoriasis. We believe that Raptiva increases the
risk of PML and that prolonged exposure to Raptiva or older age may further increase this risk. It is likely that this new safety information will
affect usage patterns of Raptiva and we will likely see a reduction in demand in the future. We have submitted updated labeling to the FDA,
and are working with the FDA to determine the appropriate next steps, which may include, among other things, significant restrictions in the
use of or suspension or withdrawal of regulatory approval for Raptiva.

Sales to Collaborators

Product sales to collaborators, which were for non-U.S. markets, increased 14% to $1,028 million in 2008 and 92% to $903 million in 2007. The
increase in 2008 was primarily due to increased sales of Avastin, Rituxan, and Herceptin to Roche. The increase in 2007 was primarily due to
more favorable Herceptin pricing terms that were part of the supply agreement with Roche signed in the third quarter of 2006 and increased
sales volume of Avastin and Herceptin. The favorable Roche Herceptin pricing terms concluded at the end of 2008.

For 2009, we expect sales to collaborators to decrease mainly due to lower volume and the conclusion of the favorable Roche Herceptin pricing
terms, but the timing and amount of these sales can vary based on the production and order plan and other contractual issues.

Royalties

Royalty revenue increased 28% to $2,539 million in 2008 and 47% to $1,984 million in 2007. The increases were due to higher sales by Roche of
Herceptin, Avastin, and Rituxan (which is marketed as MabThera® in most countries outside of the U.S.) in 2008 and 2007, and higher sales by
various other licensees, including increased sales by Novartis of Lucentis. The increase in 2007 was also due to an acceleration of royalties
during 2007, as discussed below. Approximately $115 million of the increase in 2008 was due to net foreign-exchange-related benefits from the
weaker U.S. dollar during the year compared to 2007. Of the overall royalties recognized, royalty revenue from Roche represented 61% in 2008
and 2007 and 62% in 2006.

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In June 2007, we entered into a transaction with an existing licensee to license from it 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 between January 2007 and 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 net earnings per share (EPS) effect of entering
into this new collaboration was not significant in 2007.

Royalties include royalty revenue from confidential licensing agreements related to our patents, including the Cabilly patent. The Cabilly
patent expires in December 2018, but is the subject of litigation and a Patent Office reexamination proceeding. During the fourth quarter of
2008, we changed our process of recognizing royalty revenue from a number of our Cabilly licensees from an accrual basis to a cash basis. As
a result of this change, royalty revenue decreased approximately $80 million in the fourth quarter of 2008 compared to the third quarter of 2008.
The contributions related to the Cabilly patent were as follows (in millions, except per share amounts):

2008 2007
Royalty revenue $ 298 $ 256

COH’s share of royalty revenue $ 61 $ 50

Net of tax effect of our Cabilly licensing agreements on diluted EPS(1) $ 0.14 $ 0.12
______________________
(1) In addition, we record royalty expense in our COS for Cabilly-related payments to COH based on our U.S. product sales. Including the effect of these COS
royalties, the net of tax effect of the Cabilly patent on diluted EP S was $0.09 and $0.08 in 2008 and 2007, respectively.

See also Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form
10-K for more information on our Cabilly patent reexamination and the Centocor, Inc. (a wholly-owned subsidiary of Johnson & Johnson)
lawsuit related to the Cabilly patent.

Cash flows from royalty income include revenue denominated in foreign currencies. We currently enter into foreign currency option contracts
(options) and forwards to hedge a portion of these foreign currency cash flows. These options and forwards are due to expire in 2009 and
2010. See also Note 2, “Summary of Significant Accounting Policies,” and Note 4, “Investment Securities and Financial
Instruments—Derivative Financial Instruments,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Royalties are difficult to forecast because of the number of products involved, ongoing licensing and intellectual property disputes, and the
volatility of foreign currency exchange rates. In 2009, we have the particular uncertainties associated with recent U.S. dollar volatility and the
unknown effect of the current macroeconomic environment on our licensees’ product sales. Roche’s royalty rate for Rituxan will decrease
during 2009 in a number of countries that make up a significant portion of European sales, which will cause a reduction in our 2009 royalties in
the range of $125 million to $150 million, offset by a corresponding decrease in our marketing, general and administrative (MG&A) expenses
based on a decrease in the royalty expense that we will pay Biogen Idec.

Contract Revenue

Contract revenue increased 17% to $348 million in 2008, and increased 2% to $297 million in 2007. The increase in 2008 was mainly due to
reimbursements from Roche related to R&D efforts, recognition of a portion of the previously deferred opt-in payment received from Roche
related to our trastuzumab drug conjugate products, and new product opt-ins from Roche. Contract revenue in 2008 also included our share of
European profits related to Xolair and manufacturing service payments related to Xolair, which Novartis pays us as a result of our acquisition
of Tanox in 2007. However, these increases were partially offset by lower reimbursements from Roche related to R&D efforts on Avastin and
the receipt of a milestone payment from Novartis in 2007 for European Union approval of

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Lucentis for the treatment of patients with AMD. Included in contract revenue in 2008 was $227 million of R&D expense reimbursements that
were received from certain collaborators. Included in contract revenue in 2007 was $196 million of R&D expense reimbursements that were
received from certain collaborators. The increase in 2007 was primarily due to the previously mentioned Lucentis milestone payment from
Novartis, higher reimbursements from Biogen Idec related to R&D efforts on ocrelizumab, and recognition of previously deferred revenue from
an opt-in payment from Roche on Rituxan. See “Related Party Transactions” below for more information on contract revenue from Roche.

Contract revenue varies each quarter and is dependent on a number of factors, including the timing and level of reimbursements from ongoing
development efforts, milestone and opt-in payments received, changes in the relationships we have with our partners, and new contract
arrangements.

Cost of Sales

Cost of sales (COS) as a percentage of net product sales was 17% in 2008 and 2007, and 15% in 2006. COS in 2008 included approximately $90
million in charges related to unexpected failed lots, delays from manufacturing start-up campaigns at one of our facilities, and excess capacity.
COS in 2008 also included employee stock-based compensation expense of $82 million.

The increase in COS as a percentage of sales in 2007 was due to the recognition of employee stock-based compensation expense of $71
million, related to products sold for which employee stock-based compensation expense was previously capitalized as part of inventory costs
in 2006, and a higher volume of lower margin sales to collaborators. COS in 2007 included a non-recurring charge of approximately $53 million,
resulting from our decision to cancel and buy out a future manufacturing obligation. However, COS as a percentage of product sales in 2007
was favorably affected by increased U.S. sales of our higher margin products, primarily Avastin, Lucentis, Rituxan, and Herceptin, and the
effects of a price increase on sales of Herceptin to Roche, which started in the third quarter of 2006 and concluded at the end of 2008.

Research and Development

Research and development (R&D) expenses increased 14% in 2008 and 38% in 2007 to $2,800 million and $2,446 million, respectively. R&D
expense as a percentage of total operating revenue was 21% in 2008 and 2007, and 19% in 2006.

The increase in 2008 was primarily due to (i) increased development expenses, resulting from increased spending on clinical programs, mainly
related to our GDC 0449 (Hedgehog Pathway Inhibitor) program, immunology programs, our drug conjugate products and other programs,
including those related to collaboration arrangements entered into in 2007, and early-stage projects, (ii) expenses related to the retention plans
approved by the Special Committee in 2008 of $66 million, and (iii) increased research costs, mainly due to increased internal personnel and
related expenses. R&D expense in 2008 also included $105 million of in-licensing expense related to our new collaboration entered into with
Roche and GlycArt for GA101.

The increase in 2007 was due to (i) increased development expenses resulting from increased activity across our entire product portfolio,
increased spending on clinical programs, early stage projects and higher clinical manufacturing expenses in support of our clinical trials, (ii)
increased research expenses, mainly due to increased internal personnel and related expenses, and (iii) increased in-licensing expense due to
new collaborations with Abbott for the global research, development, and commercialization of two of Abbott’s investigational anti-cancer,
small molecule compounds: ABT-263 and ABT-869; Seattle Genetics, Inc. for the development and commercialization of a humanized
monoclonal antibody clinical trials for multiple myeloma, CLL, NHL, and diffuse large B-cell lymphoma; BioInvent to co-develop and
commercialize a monoclonal antibody for the potential treatment of cardiovascular disease; and Altus related to a subcutaneously
administered, once-per-week formulation of human growth hormone. The collaboration with Altus was terminated in 2007.

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Marketing, General and Administrative

Overall marketing, general and administrative (MG&A) expenses increased 7% to $2,405 million in 2008 and 12% to $2,256 million in 2007.
MG&A as a percentage of total operating revenue was 18% in 2008, 19% in 2007 and 22% in 2006. The decline in this ratio primarily reflects the
increase in operating revenue and our efforts to manage our infrastructure and support costs.

The increase in 2008 expense relative to 2007 was primarily due to: (i) expenses related to retention plans approved by the Special Committee of
$69 million, (ii) an increase in royalty expense of $67 million, primarily to Biogen Idec resulting from higher sales of Rituxan by Roche, and (iii)
legal and advisory fees incurred on behalf of the Special Committee and by the company in connection with the Roche Proposal. These
increases were partially offset by lower property and equipment write-offs compared to 2007.

The increase in 2007 expense relative to 2006 was primarily due to: (i) an increase in royalty expense, primarily to Biogen Idec resulting from
higher sales of Rituxan by Roche, (ii) increases resulting from ongoing marketing efforts with established products, primarily Herceptin, and
newly launched products, including Rituxan for RA and Lucentis, (iii) increases in charitable contributions related to increased donations to
independent public charities that provide co-pay assistance to eligible patients, (iv) an increase related to post-acquisition costs for Tanox,
and (v) an increase related to property and equipment write-offs.

Collaboration Profit Sharing

Collaboration profit sharing expenses increased 14% to $1,228 million in 2008 and 7% to $1,080 million in 2007 primarily due to higher sales of
Rituxan as well as higher U.S. sales of Tarceva and Xolair. The increase in 2007 was partially offset by a decrease in profit sharing expense
related to Xolair operations outside the U.S.

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

An n u al Pe rce n tage C h an ge
2008 2007 2006 2008/2007 2007/2006
U.S. Rituxan profit sharing expense $ 848 $ 730 $ 672 16% 9%
U.S. Tarceva profit sharing expense 191 165 146 16 13
Xolair profit sharing expense 189 185 187 2 (1)
Total collaboration profit sharing expense $ 1,228 $ 1,080 $ 1,005 14 7

We and Novartis share the U.S. and European operating profits for Xolair according to prescribed profit sharing percentages. Generally, we
evaluate whether we are a net recipient or payer of funds on an annual basis in our cost and profit sharing arrangements. Net amounts
received on an annual basis under such arrangements are classified as contract revenue, and net amounts paid on an annual basis are
classified as collaboration profit sharing expense. With respect to the U.S. operating results, for the full years 2008, 2007 and 2006 we were a
net payer to Novartis. As a result, for 2008, 2007, and 2006 the portion of the U.S. operating results that we owed to Novartis was recorded as
collaboration profit sharing expense. With respect to the European operating results, for the full year of 2008, we were a net recipient from
Novartis and for the full years in 2007 and 2006 we were a net payer to Novartis. As a result, for 2008, the portion of the European operating
results that Novartis owed us was recorded as contract revenue. For the same periods in 2007 and 2006, however, our portion of the European
operating results was recorded as collaboration profit sharing expense. Effective with our 2007 acquisition of Tanox, Novartis also makes
additional profit sharing payments to us on U.S. sales of Xolair, which reduces our profit sharing expense.

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

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U.S. co-promotion profits of Rituxan, and we pay royalty expense based 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. In October 2008, Biogen Idec exercised their right under this
agreement to opt in to our collaboration agreement with Roche and GlycArt for the joint development and commercialization of GA101.

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 years ended December 31, 2008, 2007, and
2006, consisted of the following commercial activity (in millions):

An n u al Pe rce n tage C h an ge
2008 2007 2006 2008/2007 2007/2006
Product sales, net $ 2,587 $ 2,285 $ 2,071 13% 10%
Combined commercial costs and expenses 579 552 489 5 13
Combined co-promotion profits $ 2,008 $ 1,733 $ 1,582 16 10
Amount due to Biogen Idec for their share of co-
promotion profits–included in collaboration profit
sharing expense $ 848 $ 730 $ 672 16 9

In addition to Biogen Idec’s share of the combined co-promotion profits for Rituxan, collaboration profit sharing expense includes the
quarterly settlement of Biogen Idec’s portion of the combined commercial costs. Since we and Biogen Idec each individually incur commercial
costs related to Rituxan, and the spending mix between the parties can vary, collaboration profit sharing expense as a percentage of sales can
also vary accordingly.

Total revenue and expenses related to our collaboration with Biogen Idec included the following (in millions):

An n u al Pe rce n tage C h an ge
2008 2007 2006 2008/2007 2007/2006
Contract revenue from Biogen Idec (R&D
reimbursement) $ 122 $ 108 $ 79 13% 37%

Co-promotion profit sharing expense $ 848 $ 730 $ 672 16 9

Royalty expense on sales of Rituxan outside the U.S.


and other patent costs–included in MG&A
expense $ 294 $ 247 $ 175 19 41

Contract revenue from Biogen Idec primarily reflects the net reimbursement to us for development and post-marketing costs we incurred on
joint development projects less amounts owed to Biogen Idec on their development efforts on these projects.

Write-off of In-process Research and Development Related to Acquisition

In connection with the acquisition of Tanox in the third quarter of 2007, we recorded a $77 million charge for in-process research and
development. This charge primarily represents acquired R&D for label extensions for Xolair that have not yet been approved by the FDA and
require significant further development. We expect to continue further developing these label extensions until a decision is made to file for a
label extension or to discontinue development efforts. We expect these development efforts to be completed from 2009 to 2013, if they are not
abandoned sooner.

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Gain on Acquisition

The acquisition of Tanox is considered to include the settlement of our 1996 license arrangement of certain intellectual property and rights
thereon from Tanox. Under EITF 04-1, a business combination between parties with a preexisting relationship should be evaluated to determine
if a settlement of that preexisting relationship exists. We measured the amount that the license arrangement is favorable, from our perspective,
by comparing it to estimated pricing for current market transactions for intellectual property rights similar to Tanox’s intellectual property
rights related to Xolair. In connection with the settlement of this license arrangement, we recorded a gain of $121 million on a pretax basis, in
accordance with EITF 04-1.

Recurring Charges Related to Redemption and Acquisition

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 (see Note 1, “Description of Business—Redemption of Our Special
Common Stock,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K).

In the third quarter of 2007, we acquired Tanox. In connection with the acquisition, we recorded approximately $814 million of intangible assets,
representing developed product technology and core technology, which are being amortized over 12 years.

We recorded recurring charges related to the amortization of intangibles associated with the Redemption and push-down accounting and our
2007 acquisition of Tanox. These charges were $172 million in 2008, $132 million in 2007, and $105 million in 2006.

Special Items: Litigation-Related

The California Supreme Court heard our appeal on the COH matter on February 5, 2008, and on April 24, 2008 overturned the award of $200
million in punitive damages to COH but upheld the award of $300 million in compensatory damages. As a result of the California Supreme
Court decision, we reversed a $300 million net litigation accrual related to the punitive damages and accrued interest, which we recorded as
“Special items: litigation related” in our Consolidated Statements of Income for 2008. In 2007 and 2006, we recorded accrued interest and bond
costs on both the compensatory and punitive damages totaling $54 million. We and COH have had discussions, but have not reached
agreement, regarding additional royalties and other amounts owed by us to COH under the 1976 agreement for third-party product sales and
settlement of a third-party patent litigation that occurred after the 2002 judgment. We recorded additional costs of $40 million in 2008 as
“Special items: litigation-related” based on our estimate of our range of liability in connection with the resolution of these issues. See Note 9,
“Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further
information regarding our litigation.

Operating Income

Operating income increased 26% to $5,329 million in 2008 and increased 34% to $4,229 million in 2007. Our operating income as a percentage of
operating revenue (pretax operating margin) was 40% in 2008, 36% in 2007, and 34% in 2006.

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Other Income (Expense)

The components of “Other income (expense)” are as follows (in millions):

An n u al Pe rce n tage C h an ge
2008 2007 2006 2008/2007 2007/2006
Gains on sales of biotechnology equity securities,
net $ 109 $ 22 $ 93 395% (76) %
Write-downs of biotechnology debt and equity
securities (16) (20) (4) (20) 400
Interest income
Investment income 157 300 230 (48) 30
Impairment charges (67) (30) – 123 –
Interest expense (82) (76) (74) 8 3
Other miscellaneous income 1 1 6 0 (83)
Total other income, net $ 102 $ 197 $ 251 (48) (22)

Total other income, net, decreased 48% to $102 million in 2008, and decreased 22% to $197 million in 2007. For 2008, the decrease was driven
primarily by lower investment income due to lower yields, losses on the sale of investments and by unrealized losses on our trading portfolios.
In addition, we recorded impairment charges of $67 million in 2008 on certain U.S. government agency and financial institution securities
compared to a $30 million write-off of a fixed income investment in 2007. These losses and charges were partially offset by net gains on sales of
biotechnology equity securities.

For 2007, gains on sales of biotechnology equity securities, net, were lower compared to 2006, mainly due to 2006 gains on sales of
approximately $79 million related to Amgen’s acquisition of Abgenix, Pfizer’s acquisition of Rinat, Stiefel Laboratories’ acquisition of
Connetics Corporation, and AstraZeneca’s acquisition of Cambridge Antibody Technology. Investment income in 2007 was higher compared
to 2006 due to higher average cash balances, partially offset by lower yields.

Income Tax Provision

The effective income tax rate was 37% in 2008 and 2007, and 38% in 2006. The effective income tax rate in 2008 included a settlement with the
Internal Revenue Services (IRS) for an item related to prior years. The effective income tax rate in 2007 was lower than in 2006, primarily due to
the increase in the domestic manufacturing deduction.

We adopted the provisions of FIN 48 on January 1, 2007. Implementation of FIN 48 did not result in any adjustment to our Consolidated
Statements of Income or a cumulative adjustment to retained earnings. As a result of the implementation of FIN 48, we reclassified $147 million
of unrecognized tax benefits from current liabilities to long-term liabilities.

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, the results of any tax examinations, changing interpretations of existing tax
laws or regulations, changes in estimates to prior years’ items, past and future levels of R&D spending, acquisitions, changes in our corporate
structure, and changes in overall levels of income before taxes; all of which may result in periodic revisions to our effective income tax rate.

Relationship with Roche

As a result of the Redemption and subsequent public offerings, we amended our certificate of incorporation and bylaws, amended our
licensing and marketing agreement with Roche Holding AG and affiliates (Roche), and entered into or amended certain agreements with RHI,
which are discussed below.

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Affiliation Arrangements

Our Board of Directors consists of three RHI directors, three independent directors nominated by a nominating committee currently controlled
by RHI, and one Genentech employee. However, under our bylaws, RHI has the right to obtain proportional representation on our Board at
any time.

Except as follows, the affiliation arrangements do not limit RHI’s ability to buy or sell our Common Stock. If RHI and its affiliates sell their
majority ownership of shares of our Common Stock to a successor, RHI has agreed that it will cause the successor to agree to purchase all
shares of our Common Stock not held by RHI as follows:

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

ü in all other cases, with consideration that has a value per share not less than the weighted-average value per share received by RHI
and its affiliates as determined by a nationally recognized investment bank that will be appointed by a committee of our independent
directors.

If RHI owns more than 90% of our Common Stock for more than two months, RHI has agreed that it will, as soon as reasonably practicable,
effect a merger of Genentech with RHI or an affiliate of RHI in compliance with the terms of the Affiliation Agreement.

RHI has agreed, as a condition to any merger of Genentech with RHI or the sale of our assets to RHI:

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

ü in the event such a favorable vote is not obtained, the value of the consideration to be received by non-RHI stockholders would be
equal to or greater than the average of the means of the ranges of fair values for the Common Stock as determined by two nationally
recognized investment banks that will be appointed by a committee of our independent directors.

The July 1999 Affiliation Agreement with RHI (Affiliation Agreement) provides that without the prior approval of the directors designated by
RHI, we may not approve:

ü any acquisition, sale, or other disposal of all or a portion of our business representing 10% or more of our assets, net income, or
revenue;

ü any issuance of capital stock except under certain circumstances; or

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

Licensing Agreements Related to Genentech Products

We have a July 1999 amended and restated licensing and marketing agreement with Roche and its affiliates granting them an option to license,
use, and sell our products in non-U.S. markets. The major provisions of that agreement include the following:

ü Roche may exercise its option to license our products upon the occurrence of any of the following: (1) the filing of the first
Investigational New Drug Application (IND) for a product; (2) the date by which Genentech has clinical trial data and other
information sufficient to enable the first Phase III trial in the U.S. (Phase II Completion) for a product; or (3) provided Roche has paid
a fee of $10 million (Option Extension Fee) within a certain time following its decision not to exercise the option in (2) above, the date
by which the first Phase III Trial for a product is completed and the results are known, available, analyzed and, in Genentech’s
reasonable judgment, enable a U.S. BLA/NDA filing;

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ü Roche’s options expire on October 25, 2015 except that Roche maintains: (1) a Phase II Completion option for those products for
which Genentech has filed an IND prior to October 25, 2015, but which have not reached Phase II Completion; and (2) an option at
Phase III completion for those products for which Roche had paid the Option Extension Fee at the Phase II Completion prior to
October 25, 2015;

ü If Roche exercises its option to license a product, it has agreed to reimburse Genentech for development costs as follows: (1) if
exercise occurs upon the filing of an IND, Roche will pay 50% of development costs incurred prior to the filing and 50% of
development costs subsequently incurred; (2) if exercise occurs at the completion of the first Phase II trial, Roche will pay 50% of
development costs incurred through completion of the trial, 75% of development costs subsequently incurred for the initial
indication, and 50% of subsequent development costs for new indications, formulations or dosing schedules; (3) if the exercise
occurs at the completion of a Phase III trial, Roche will pay 50% of development costs incurred through completion of Phase II, 75%
of development costs incurred through completion of Phase III, and 75% of development costs subsequently incurred; and half of
the Option Extension Fee paid by Roche to preserve its right to exercise its option at the completion of a Phase III trial will be credited
against the total development costs payable to Genentech upon the exercise of the option; and (4) each of Genentech and Roche
have the right to “opt-out” of sharing development costs for an additional indication for a product for which Roche exercised its
option, but could “opt-back-in” within 30 days of the other party’s decision to file for approval of the indication by paying twice what
they would have owed for development of the indication if they had not opted out;

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

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

ü Roche will pay, for each product for which Roche exercises its licensing option after completion of a Phase III trial, a royalty of 15%
on its sales of that product until the later in each country of the expiration of our last relevant patent or 25 years from the first
commercial introduction of that product; however, the second half of the Option Extension Fee paid by Roche related to a product
will be credited against royalties payable to us in the first calendar year of sales by Roche in which aggregate sales of that product
exceed $100 million; and

ü For certain products for which Genentech is paying a royalty to Biogen Idec, including Rituxan, Roche shall pay Genentech a royalty
of 20% on sales of such product in Roche’s licensed territory. Once Genentech is no longer obligated to pay a royalty to Biogen Idec
on sales of such products in each country, Roche shall then pay Genentech a royalty on sales of 10% on the first $75 million on its
aggregate sales of that product and thereafter a royalty of 8% on its aggregate sales of that product in excess of $75 million until the
later in each country of the expiration of our last relevant patent or 25 years from the first commercial introduction of that product.
During the fourth quarter of 2008, our obligation to pay a royalty to Biogen Idec on sales of Rituxan ended in certain countries. The
shift from the 20% royalty on Rituxan to the lower 8% to 10% royalty rate will occur in certain countries during 2009 and beyond.

We have further amended this licensing and marketing agreement with Roche to delete or add certain Genentech products under Roche’s
commercialization and marketing rights for Canada.

We also have a July 1998 licensing and marketing agreement related to anti-HER2 antibodies (including Herceptin and pertuzumab) with
Roche, providing them with exclusive marketing rights outside of the U.S. Under the agreement, Roche funds one-half of the global
development costs incurred in connection with developing anti-HER2

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antibody products under the agreement. Either Genentech or Roche has the right to “opt-out” of developing an additional indication for a
product and would not share the costs or benefits of the additional indication, but could “opt-back-in” within 30 days of the other party’s
decision to file for approval of the indication by paying twice what would have been owed for development of the indication if no opt-out had
occurred. Roche has also agreed to make royalty payments of 20% on aggregate net sales of a product outside the U.S. up to $500 million in
each calendar year and 22.5% on such sales in excess of $500 million in each calendar year. In December 2007, Roche opted-in to our
trastuzumab drug conjugate products under terms similar to those of the existing anti-HER2 agreement (see also “Related Party Transactions”
below).

Licensing Agreements Related to Roche Products

We have entered into certain licensing agreements with Roche and its affiliates that grant us licenses to develop and commercialize products
discovered by Roche and its affiliates.

In May 2008, Roche acquired Piramed Limited (Piramed), a privately held entity based in the United Kingdom. Prior to the Roche acquisition of
Piramed, we had entered into a licensing agreement with Piramed related to molecules targeting the PI3 kinase pathway. As a result of Roche’s
acquisition of Piramed, we now are party to this agreement with Roche and Piramed. Under the terms of the agreement Genentech could make
future milestone and royalty payments to Roche. Roche retains the option to acquire rights to develop and commercialize certain products
outside of the United States at the end of Phase II in exchange for an opt-in fee, royalties and a potential share of future development costs.

In June 2008, we entered into a licensing agreement with Roche under which we obtained rights to a preclinical small-molecule drug
development program. The future R&D costs incurred under the agreement and any profit and loss from global commercialization are to be
shared equally with Roche.

In September 2008, we entered into a collaboration agreement with Roche and GlycArt for the joint development and commercialization of
GA101, a humanized anti-CD20 monoclonal antibody for the potential treatment of hematological malignancies and other oncology-related B-
cell disorders such as NHL. The future global R&D costs incurred under the agreement are to be shared equally with Roche. We received
commercialization rights in the U.S. and have the right to manufacture our own commercial requirements for the U.S. In October 2008, Biogen
Idec exercised the right under our collaboration agreement with them to opt in to this agreement.

Research Collaboration Agreement

We have an April 2004 research collaboration agreement with Roche that outlines the process by which Roche and Genentech may agree to
conduct and share in the costs of joint research on certain molecules. The agreement further outlines how development and commercialization
efforts will be coordinated with respect to select molecules, including the financial provisions for a number of different development and
commercialization scenarios undertaken by either or both parties.

Manufacturing Agreements

We signed two product supply agreements with Roche in July 2006, each of which was amended in November 2007. The Umbrella
Manufacturing Supply Agreement (Umbrella Agreement) supersedes our existing product supply agreements with Roche. The Short-Term
Supply Agreement (Short-Term Agreement) supplements the terms of the Umbrella Agreement. Under the Short-Term Agreement, Roche has
agreed to purchase specified amounts of Herceptin, Avastin and Rituxan through 2008. Under the Umbrella Agreement, Roche has agreed to
purchase specified amounts of Herceptin and Avastin through 2012 and, on a perpetual basis, either party may order other collaboration
products from the other party, including Herceptin and Avastin after 2012, pursuant to certain forecast terms. The Umbrella Agreement also
provides that either party may terminate its obligation to purchase and/or supply Avastin and/or Herceptin with six years notice on or after
December 31, 2007. To date, we have not provided to or received from Roche such notice of termination.

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In July 2008, we signed an agreement with Chugai Pharmaceutical Co., Ltd., a Japan-based entity and part of Roche, under which we agreed to
manufacture Actemra, a product of Chugai, at our Vacaville, California facility. After an initial term of five years, the agreement may be
terminated subject to certain terms and conditions under the contract.

Tax Sharing Agreement

We have a tax sharing agreement with RHI. If we and RHI elect to file a combined state and local tax return in certain states where we may be
eligible, our tax liability or refund with RHI for such jurisdictions will be calculated on a stand-alone basis.

RHI’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 below 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 December 31, 2008, RHI’s ownership percentage was 55.8%.

The Roche Proposal and the Roche Tender Offer

We announced on July 21, 2008 that we received the Roche Proposal and on July 24, 2008 we announced that the Special Committee was
formed to review and consider the terms and conditions of the Roche Proposal, any business combination with Roche or any offer by Roche
to acquire our securities, negotiate as appropriate, and, in the Special Committee’s discretion, recommend or not recommend the acceptance of
the Roche Proposal by the minority shareholders. On August 13, 2008, we announced that the Special Committee had unanimously concluded
that the Roche Proposal substantially undervalues the company, but that the Special Committee would consider a proposal that recognizes the
value of the company and reflects the significant benefits that would accrue to Roche as a result of full ownership. On January 30, 2009, Roche
announced that it intended to commence a tender offer which would replace the Roche Proposal that was announced on July 21, 2008. On
January 30, 2009, in response to the announcement by Roche, the Special Committee urged shareholders to take no action with respect to the
announcement by Roche and that the Special Committee will announce a formal position within 10 business days following the commencement
of such a tender offer by Roche. On February 9, 2009, Roche commenced the Roche Tender Offer. The Roche Tender Offer is conditional upon,
among other things, (i) a non-waivable condition that holders of at least a majority of the outstanding publicly-held Genentech shares tender
their shares in the Roche Tender Offer and (ii) a condition, which may be waived by Roche in its sole discretion, that Roche has obtained
sufficient financing to purchase all outstanding publicly-held Genentech shares and all Genentech shares issuable upon exercise of
outstanding options and to pay related fees and expenses. The Roche Tender Offer includes other conditions as identified in Roche’s
Schedule TO that was filed with the SEC on February 9, 2009. Also on February 9, 2009, the Special Committee urged shareholders to take no
action with respect to the Roche Tender Offer. The Special Committee also announced that it intended to take a formal position within 10
business days of the commencement of the Roche Tender Offer, and will explain in detail its reasons for that position by filing a Statement on
Schedule 14D-9 with the SEC.

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Roche Proposal-Related Costs

On August 18, 2008, we announced that the Special Committee adopted two retention plans that were implemented in lieu of our 2008 annual
stock option grant and two severance plans that were adopted in addition to our existing severance plans. See Note 3, “Retention Plans and
Employee Stock-Based Compensation,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for more
information on the retention plans. In addition, the Special Committee and the company have incurred and will continue to incur third-party
legal and advisory costs in connection with the Roche Proposal and the Roche Tender Offer that are included in the “Marketing, general and
administrative” expenses line of our Consolidated Statements of Income.

The cost of the retention plans adopted by the Special Committee on August 18, 2008 is estimated to be approximately $375 million payable in
cash. The cash amount is approximately equal to the value of the stock options that would have been granted in our 2008 option grant
program, calculated with the methodology used in our financial statements to value our options (Black-Scholes) and applying a discount rate.
The discount rate reflects the earlier payment dates of the retention bonus relative to the vesting schedule that would have applied to the
planned option grants. The timing of the payments related to these plans will depend on the outcome of the Roche Tender Offer or any other
tender offer or other proposal by Roche to acquire all of the outstanding shares of our Common Stock not owned by Roche. If a merger of
Genentech with Roche or an affiliate of Roche has not occurred on or before June 30, 2009, we will pay the retention bonus at that time, in
accordance with the terms of the plans. We are currently recognizing the retention plan costs in our financial statements ratably over the
period from August 18, 2008 to June 30, 2009. If a merger of Genentech with Roche or an affiliate of Roche has occurred on or before June 30,
2009, the timing of the payments and the recognition of the expense will depend upon the terms of the merger. During 2008, total costs for the
retention plans were $162 million, of which $135 million was recognized as expense and $27 million was capitalized into inventory, which will be
recognized as COS as products manufactured after the initiation of the retention plans are estimated to be sold.

In addition, the Special Committee and the company retained attorneys and third-party advisors in connection with the Roche Proposal and
the Roche Tender Offer. The amount and timing of the payment of the third-party legal and advisory costs also depends on the resolution of
matters relating to the Roche Proposal and the Roche Tender Offer. Third-party legal and advisory costs incurred in 2008 were $18 million.

The retention plan and third-party legal and advisory costs were as follows (in millions):

2008
Retention plan costs(1)
Research and development $ 66
Marketing, general and administrative 69
Total retention plan costs 135
Third-party legal and advisory costs incurred by us on behalf of the Special Committee 14
Other third-party legal and advisory costs 4
Total retention plan costs and legal and advisory costs 153
Tax effect related to Roche Proposal-related costs (60)
Roche Proposal-related costs, net of tax $ 93
Effect on earnings per share:
Basic $ 0.09
Diluted $ 0.09
_______________________
(1)
In 2008, an additional $27 million of retention plan costs were capitalized into inventory, which will be recognized as COS as products that were manufactured
after the initiation of the retention plans are estimated to be sold.

Related Party Transactions

We enter into transactions with our related parties, Roche and 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.

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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 the July 1999 amended and restated licensing and commercialization agreement, Roche has the right to opt in to development programs
that we undertake on our products at certain pre-defined stages of development. Previously, Roche also had the right to develop certain
products under the July 1998 licensing and commercialization agreement related to anti-HER2 antibodies (including Herceptin, pertuzumab, and
trastuzumab-DM1). When Roche opts in to a program, we generally record the opt-in payments that we receive as deferred revenue, which we
recognize over the expected development periods or product life, as appropriate. During 2008, we received approximately $110 million from
Roche related to opt-ins to various programs, most of which was recorded as deferred revenue. As of December 31, 2008, the amounts in short-
term and long-term deferred revenue related to opt-in payments received from Roche were $57 million and $214 million, respectively. In 2008,
2007, and 2006, we recognized $76 million, $40 million, and $27 million, respectively, as contract revenue related to opt-in payments previously
received from Roche.

In February 2008, Roche acquired Ventana Medical Systems, Inc., and as a result of the acquisition, Ventana is considered a related party. We
have engaged in transactions with Ventana prior to and since the acquisition.

In May 2008, Roche acquired Piramed. Prior to the Roche acquisition of Piramed, we had entered into a licensing agreement with Piramed
related to molecules targeting the PI3 kinase pathway.

In June 2008, we entered into a licensing agreement with Roche under which we obtained rights to a preclinical small-molecule drug
development program. We recorded $35 million in R&D expense in the second quarter of 2008 related to this agreement. The future R&D costs
incurred under the agreement and any profit and loss from global commercialization will be shared equally with Roche.

In July 2008, we signed an agreement with Chugai Pharmaceutical Co., Ltd., a Japan-based entity and part of Roche, under which we agreed to
manufacture Actemra, a product of Chugai, at our Vacaville, California facility. After an initial term of five years, the agreement may be
terminated subject to certain terms and conditions under the contract.

In August 2008, we entered into a Companion Diagnostics Master Agreement with Roche Molecular Systems (RMS) under which we have the
ability to work with RMS to develop companion diagnostics based on RMS’ polymerase chain reaction platform technology.

In September 2008, we entered into a collaboration agreement with Roche and GlycArt for the joint development and commercialization of
GA101, a humanized anti-CD20 monoclonal antibody for the potential treatment of hematological malignancies and other oncology-related B-
cell disorders such as NHL. We recorded $105 million in R&D expense in 2008 related to this collaboration. The future global R&D costs
incurred under the agreement will be shared equally with Roche. We received commercialization rights in the U.S. and have the right to
manufacture our own commercial requirements for the U.S. In October 2008, Biogen Idec exercised the right under our collaboration agreement
with them to opt in to this agreement and paid us an up-front fee of $32 million as part of the opt-in, which we will recognize ratably as contract
revenue over the future development period.

We currently have no commercialized products subject to profit sharing arrangements with Roche.

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

2008 2007 2006


Product sales to Roche $ 868 $ 768 $ 359

Royalties earned from Roche $ 1,544 $ 1,206 $ 846

Contract revenue from Roche $ 138 $ 95 $ 125

Cost of sales on product sales to Roche $ 472 $ 422 $ 268

R&D expenses incurred on joint development projects with Roche $ 336 $ 259 $ 213

In-licensing expenses to Roche $ 145 – –

Certain R&D expenses are partially reimbursable to us by Roche. Amounts that Roche owes us, net of amounts reimbursable to Roche by us
on those projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts we owe Roche for
R&D expenses that Roche incurred on joint development projects, less amounts reimbursable to us by Roche on these projects.

Novartis

Based on information available to us at the time of filing this Form 10-K, we believe that Novartis holds approximately 33.3% of the
outstanding voting shares of Roche. As a result of this ownership, Novartis is deemed to have an indirect beneficial ownership interest under
FAS No. 57, “Related Party Disclosures” (FAS 57), of more than 10% 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 share the cost of certain of our ongoing development expenses for Lucentis.

We and Novartis are co-promoting Xolair in the U.S and co-developing Xolair in both the U.S. and Europe. We record sales, COS, and
marketing and sales expenses in the U.S.; Novartis markets the product in and records sales, COS, and marketing and sales expenses in Europe
and also records marketing and sales expenses in the U.S. We and Novartis share the resulting U.S. and European operating profits according
to prescribed profit sharing percentages. Generally, we evaluate whether we are a net recipient or payer of funds on an annual basis in our cost
and profit sharing arrangements. Net amounts received on an annual basis under such arrangements are classified as contract revenue, and
net amounts paid on an annual basis are classified as collaboration profit sharing expense. With respect to the U.S. operating results, for the
full years of 2008, 2007, and 2006 we were a net payer to Novartis. As a result, for 2008, 2007, and 2006, the portion of the U.S. operating results
that we owed to Novartis was recorded as collaboration profit sharing expense. With respect to the European operating results, for the full
year of 2008, we were a net recipient from Novartis and for the full years of 2007 and 2006 we were a net payer to Novartis. As a result, for 2008,
the portion of the European operating results that Novartis owed us was recorded as contract revenue. For the same periods in 2007 and 2006,
however, our portion of the European operating results was recorded as collaboration profit sharing expense. Effective with our acquisition of
Tanox on August 2, 2007, Novartis also makes: (1) additional profit sharing payments to us on U.S. sales of Xolair, which reduces our profit
sharing expense; (2) royalty payments to us on sales of Xolair worldwide, which we record as royalty revenue; and (3) manufacturing service
payments related to Xolair, which we record as contract revenue.

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

2008 2007 2006


Product sales to Novartis $ 12 $ 10 $ 5

Royalties earned from Novartis $ 241 $ 95 $ 3

Contract revenue from Novartis $ 60 $ 70 $ 40

Cost of sales on product sales to Novartis $ 9 $ 10 $ 4

R&D expenses incurred on joint development projects with Novartis $ 43 $ 43 $ 38

Collaboration profit sharing expense to Novartis $ 189 $ 185 $ 187

Contract revenue in 2007 included a $30 million milestone payment from Novartis for European Union approval of Lucentis for the treatment of
neovascular (wet) AMD.

Certain R&D expenses are partially reimbursable to us by Novartis. The amounts that Novartis owes us, net of amounts reimbursable to
Novartis by us on those projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts we
owe Novartis for R&D expenses that Novartis incurred on joint development projects, less amounts reimbursable to us by Novartis on these
projects.

See Note 11, “Acquisition of Tanox, Inc.,” in Part II, Item 8 of this Form 10-K for information on Novartis’ share of the proceeds resulting from
our acquisition of Tanox.

Financial Assets and Liabilities

On January 1, 2008, we adopted FAS No. 157, “Fair Value Measurements” (FAS 157), which established a framework for measuring fair value
in GAAP and clarified the definition of fair value within that framework. FAS 157 also established a fair value hierarchy that prioritizes the use
inputs used in valuation techniques into the following three levels:

Level 1—quoted prices in active markets for identical assets and liabilities
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—unobservable inputs

A substantial majority of our financial instruments are Level 1 and Level 2 assets. As of December 31, 2008, the fair value of our Level 1 assets
was $3.9 billion consisting primarily of cash, money market instruments, U.S. Treasury securities and marketable equity securities in
biotechnology companies with which we have collaboration agreements. Included in this amount were gross unrecognized gains and losses of
approximately $257 million and $1 million respectively, primarily related to marketable equity securities.

Our Level 2 assets include corporate bonds, commercial paper, government and agency securities, municipal bonds, asset-backed securities,
preferred securities, and other derivatives. As of December 31, 2008, the fair value of our Level 2 assets was $5.6 billion, consisting primarily of
corporate bonds, commercial paper, government and agency securities, municipal bonds and bonds denominated in foreign currencies but
hedged to U.S. dollars. During 2008, we significantly reduced or eliminated our holdings in investments with a higher risk profile such as
commodities, non-investment grade debt, preferred and asset-backed securities. Asset-backed securities and preferred securities represented
about 1% of the total value of Level 2 assets as of December 31, 2008. Included in our Level 2 assets were gross unrecognized losses of
approximately $45 million primarily related to corporate bonds offset by approximately $45 million of gross unrecognized gains primarily related
to government-backed securities. In addition, the fair value of our Level 2 assets included approximately $45 million in gross unrecognized
gains related to foreign currency derivative contracts that are held to hedge forecasted foreign-currency-denominated royalty

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revenue and interest rate swaps used to hedge interest rate movements that impact the fair value of our Senior Notes. In 2008, the U.S.
Treasury announced actions that significantly reduced the value of U.S. government agency preferred securities, which we hold as
investments. As a result, we recorded an impairment charge of $46 million during 2008.

As of December 31, 2008, our Level 3 assets consisted of student loan auction-rate securities and the preferred securities of an insolvent
company. As of December 31, 2008, we held $145 million of investments, which were measured using unobservable (Level 3) inputs,
representing about 2% of the total fair value of our investment portfolio. Student loan auction-rate securities of $145 million were valued based
on broker-provided valuation models, which approximate fair value. In addition our Level 3 assets included preferred securities in a financial
institution that declared bankruptcy during 2008. We recorded an impairment charge of $21 million during 2008 to fully impair these preferred
securities, because we do not expect to recover the value of these assets during the bankruptcy proceedings. We also transferred the
preferred securities to Level 3 assets from Level 2 assets.

The following table sets forth the fair value of our financial assets and liabilities reported on a recurring basis, including those pledged as
collateral, or restricted (in millions).

De ce m be r 31, 2008 De ce m be r 31, 2007


Asse ts Liabilitie s Asse ts Liabilitie s
Cash and cash equivalents $ 4,533 $ – $ 2,514 $ –
Restricted cash – – 788 –
Short-term investments 1,665 – 1,461 –
Long-term marketable debt securities 3,060 – 1,674 –
Total fixed income investment portfolio 9,258 – 6,437 –

Long-term marketable equity securities 287 – 416 –


Total derivative financial instruments 83 31 30 19
Total $ 9,628 $ 31 $ 6,883 $ 19

Liquidity and Capital Resources

(In m illions) 2008 2007 2006


December 31:
Unrestricted cash, cash equivalents, short-term investments and long-term marketable
debt and equity securities $ 9,545 $ 6,065 $ 4,325
Net receivable—equity hedge instruments 40 24 50
Total unrestricted cash, cash equivalents, short-term investments, long-term marketable
debt and equity securities, and equity hedge instruments $ 9,585 $ 6,089 $ 4,375
Working capital $ 6,978 $ 4,835 $ 3,547
Current ratio 3.3:1 2.2:1 2.6:1
Year ended December 31:
Cash provided by (used in):
Operating activities $ 3,955 $ 3,230 $ 2,138
Investing activities (1,667) (1,865) (1,681)
Financing activities (269) (101) (432)
Capital expenditures (included in investing activities above) (751) (977) (1,214)

Total unrestricted cash, cash equivalents, short-term investments, and long-term marketable securities, including the estimated fair value of the
related equity hedge instruments, were $9.6 billion at December 31, 2008, an increase of $3.5 billion, or 57%, from December 31, 2007. This
increase primarily reflects cash generated from operations, increases from stock option exercises, and the release of restricted cash and
investments as a result of the COH litigation settlement; partially offset by cash used for the repurchase of our Common Stock, capital
expenditures, the COH litigation settlement payment, and a financing payment related to the construction of a manufacturing facility in

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Singapore. To mitigate the risk of market value fluctuations, one of our biotechnology equity securities is hedged with forward contracts,
which are carried at estimated fair value. See Note 2, “Summary of Significant Accounting Policies—Comprehensive Income,” in the Notes to
the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further information regarding activity in our marketable
investment portfolio and derivative instruments.

See “Our Affiliation Agreement with RHI could limit our ability to make acquisitions or divestitures” and “To pay our indebtedness will require
a significant amount of cash and may adversely affect our operations and financial results,” in Part I, Item 1A “Risk Factors,” and Note 9,
“Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for factors
that could negatively affect our cash position.

Cash Provided by Operating Activities

Cash provided by operating activities is primarily driven by 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 are as follows:

Changes in accounts payable, other accrued liabilities, and other long-term liabilities provided $62 million in 2008 mainly due to an increase in
accrued compensation, mainly as a result of the retention plans; accrued collaborations; and accrued royalties, mostly due to increased sales;
partially offset by the timing of payments.

Inventories decreased $209 million in 2008, as more products were sold than produced during the year. The decrease in inventories was due in
part to failed lots and delays in start-up campaigns that we experienced during 2008.

Receivables and other assets increased $132 million in 2008. Accounts receivable—product sales increased $192 million primarily due to timing
of sales to Roche in the fourth quarter of 2008. The average collection period of our accounts receivable—product sales as measured in days
sales outstanding (DSO) was 36 days as of December 31, 2008, 33 days as of December 31, 2007, and 46 days as of December 31, 2006. The
increase in DSO in 2008 over 2007 was primarily due to the timing of sales to Roche in the fourth quarter of 2008. The decrease in DSO in 2007
over 2006 was primarily due to the extended payment terms that we offered certain wholesalers in conjunction with the launch of Lucentis on
June 30, 2006. The extended payment terms for Lucentis were reduced in 2007, but are longer than the payment terms for most of our other
products.

As a result of the April 24, 2008 California Supreme Court ruling on the COH matter, we reversed a $300 million net litigation accrual related to
the punitive damages and accrued interest in 2008, and we paid COH $476 million in the second quarter of 2008 for compensatory damages
awarded plus interest, which reduced our cash from operations. We also recorded additional costs of $40 million as “Special items: litigation-
related” in the third quarter of 2008 related to the ongoing discussions with COH about additional royalties and other amounts owed by us to
COH under the 1976 agreement for third-party product sales and settlement of a third-party patent litigation that occurred after the 2002
judgment.

Cash Used in Investing Activities

Cash used in investing activities was primarily due to purchases, sales and maturities of investments and capital expenditures. Capital
expenditures were $751 million during 2008, excluding the $200 million construction financing payment made during the year, compared to $1.0
billion during 2007 and $1.2 billion during 2006. During 2008, capital expenditures were related to construction of our fill/finish facility in
Hillsboro, Oregon, our E. coli production facility in Singapore, our second manufacturing facility in Vacaville, California, and our research
support facility in Dixon, California; leasehold improvements for newly constructed buildings on our South San Francisco, California campus;
and purchases of equipment and information systems. During 2007, capital expenditures were related to ongoing construction of our second
manufacturing facility in Vacaville, leasehold improvements for newly constructed buildings on our South San Francisco campus, construction
of our fill/finish facility in Hillsboro, and purchases of equipment and information systems. In addition, we acquired Tanox during 2007, for
$833 million, net,

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which represents the purchase price of $925 million, plus $8 million in transaction costs, less approximately $100 million of Tanox’s cash and
cash equivalents that we acquired. Capital expenditures in 2006 included ongoing construction for the Vacaville facility; validation costs at our
manufacturing facility in Oceanside, California; the purchase of a second facility in Oceanside; the purchase of equipment and information
systems; and ongoing expenditures to support our corporate infrastructure needs.

Total cash and investments pledged to secure the COH surety bond were $788 million at December 31, 2007, and were reflected in the
Consolidated Balance Sheet in “Restricted cash and investments.” In connection with the California Supreme Court ruling on April 24,
2008, restrictions were lifted from the restricted cash and investments accounts, which consisted of available-for-sale investments, and the
funds became available for use in our operations. See “Contingencies” in Note 9, “Leases, Commitments, and Contingencies,” in the Notes to
Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further information regarding the COH litigation and related surety
bond.

We anticipate that the amount of our 2009 capital expenditures will be approximately $600 million.

Cash Used in Financing Activities

Cash used in financing activities includes activity under our stock repurchase program. our employee stock plans, our commercial paper
program, and construction financing payments. We received $680 million in 2008, $452 million during 2007, and $385 million during 2006 related
to stock option exercises and stock issuances under our employee stock purchase plan.

In November 2006, we entered into a series of agreements with Lonza Group Ltd, including a supply agreement to purchase products produced
by Lonza at their Singapore manufacturing facility, which is currently under construction, and a loan agreement to advance Lonza $290 million
for the construction of that facility. The construction of the facility reached mechanical completion in November 2008, and we advanced Lonza
$200 million of construction financing, pursuant to the loan agreement.

In 2007, we issued $600 million in unsecured commercial paper notes payable for funding general corporate purposes. In September 2008, we
stopped issuing commercial paper due to the state of the credit markets at that time and the resulting increase in the interest rates at which we
sold commercial paper. We fully paid the remaining commercial paper notes payable by October 2008. In December 2008, in response to
favorable changes in the credit markets, we recommenced this funding program and issued $500 million of commercial paper notes payable.

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2008, we are
authorized to repurchase up to 150 million shares of our Common Stock for an aggregate amount of up to $10.0 billion through June 30, 2009. 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, although as of December 31, 2008, we had not engaged in any such transactions.
We use the repurchased stock to offset dilution caused by the issuance of shares in connection with our employee stock purchase
plan. However, significant option exercises and stock purchases by employees could result in further dilution, and limitations in our ability to
enter into new share repurchase arrangements could negatively affect our ability to offset dilution. Although there are currently no specific
plans for the shares that may be purchased under the program, our goals for the program are: (1) to address provisions of our Affiliation
Agreement with RHI related to maintaining RHI’s minimum ownership percentage, (2) to make prudent investments of our cash resources, and
(3) to allow for an effective mechanism to provide stock for our employee stock purchase plans. See “Relationship with Roche” above for more
information on RHI’s minimum ownership percentage.

We enter into Rule 10b5-1 trading plans to repurchase shares in the open market during periods when trading in our stock is restricted under
our insider trading policy.

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Under our current stock repurchase program, we repurchased nine million shares for $780 million in 2008. In addition, in November 2007, we
entered into a prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $300 million to the investment
bank. The prepaid amount was reflected as a reduction of our stockholders’ equity as of December 31, 2007. There was no effect on EPS for the
year ended December 31, 2007 as a result of entering into this arrangement. Under this arrangement, the investment bank delivered
approximately four million shares to us on March 31, 2008. Under the stock repurchase program we repurchased 13 million shares for $1.0
billion in 2007, and 12 million shares for $1.0 billion in 2006.

In May 2008, we entered into a prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $500 million to
the investment bank. The investment bank delivered approximately 5.5 million shares to us on September 30, 2008.

Our shares repurchased during the following months of 2008 were as follows (shares in millions):

Total Num be r of Ave rage Price Paid


S h are s Purchase d pe r S h are
March 1–31 4.2 $ 72.00
April 1–30 0.9 74.76
May 1–31 1.5 68.77
June 1–30 1.2 73.68
September 1–30 5.5 90.24
October 1–31 0.3 80.80
Total 13.6 $ 79.62

As of December 31, 2008, 89 million shares have been purchased under our stock repurchase program for $6.5 billion, and a maximum of
61 million additional shares for amounts totaling up to $3.5 billion may be purchased under the program through June 30, 2009.

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 retained earnings
(accumulated deficit).

Off-Balance Sheet Arrangements

We have certain contractual arrangements that create potential risk for us and are not recognized in our Consolidated Balance Sheets.
Discussed below are off-balance sheet arrangements 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.

We lease various real properties under operating leases that generally require us to pay taxes, insurance, maintenance, and minimum lease
payments. Some of our leases have options to renew.

Commitments

In October 2007, we entered into a five-year, $1 billion revolving credit facility with various financial institutions. The credit facility is expected
to be used for general corporate and working capital purposes, including providing support for our commercial paper program. Of the $1 billion
commitment, $50 million was committed by an institution that is currently undergoing bankruptcy proceedings, and therefore we do not expect
to rely on this portion of the commitment. As of December 31, 2008, we did not have any borrowings under the credit facility.

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). See “RHI’s Ability to Maintain Percentage Ownership
Interest in Our Stock” in “Related Party” transactions for further discussion of our obligation to maintain RHI’s Minimum Percentage.

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In November 2006, we entered into a series of agreements with Lonza Group Ltd, including a supply agreement to purchase product produced
by Lonza at their Singapore manufacturing facility, which is currently under construction. For accounting purposes, due to the nature of the
supply agreement and our involvement with the construction of the buildings, we are considered the owner of the assets during the
construction period, even though the funds to construct the building shell and some infrastructure costs are paid by Lonza. As such, during
2008 and 2007, we capitalized $107 million and $141 million, respectively, in construction-in-progress and have also recognized a corresponding
amount as a construction financing obligation in “Long-term debt” in the accompanying Consolidated Balance Sheets. We also entered into a
loan agreement with Lonza to advance $290 million to Lonza for the construction of this facility and $9 million for a related land lease option. In
November 2008, the facility reached mechanical completion, and we advanced Lonza $200 million pursuant to the loan agreement. See Note 9,
“Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further
discussion of the agreements.

See also Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form
10-K.

Contractual Obligations

In the table below, we set forth our enforceable and legally binding obligations and future commitments, as well as obligations related to all
contracts that we are likely to continue, regardless of the fact that they were cancelable as of December 31, 2008. Some of the figures that we
include in this table are based on management’s estimate and assumptions about these obligations, including their duration, the possibility of
renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the
obligations we will actually pay in future periods may vary from those reflected in the table.

Paym e n ts Due by Pe riod (in m illions)


2014 an d
C on tractu al O bligation s Total 2009 2010 an d 2011 2012 an d 2013 Be yond
Operating lease and lease-related obligations(1) $ 257 $ 36 $ 70 $ 60 $ 91
HCP(2) (Financing lease) 491 36 76 81 298
Lonza(3) (Singapore facility agreement) 215 – 90 125 –
Purchase obligations(4) 1,057 702 279 76 –
Long-term debt(5) 2,000 – 500 – 1,500
Deferred tax liabilities(6) 46 46 – – –
Other long-term liabilities(7) 31 2 4 5 20
Interest expense on long-term debt(8) 1,022 85 151 148 638
Total $ 5,119 $ 907 $ 1,170 $ 495 $ 2,547
________________________
(1)
Operating lease obligations include Owner Association Fees on buildings that we own.
(2)
See further discussion related to the HCP lease above in “ Off-Balance Sheet Arrangements.”
(3)
Included in “ 2010 and 2011” is a manufacturing milestone payment. We also entered into a loan agreement, subject to certain mutually acceptable
conditions of securitization, with Lonza to advance up to $290 million to Lonza for the construction of their Singapore facility, and $9 million for a related
land lease option, of which $225 million was advanced as of December 31, 2008. If we exercise our option to purchase the facility, any outstanding
advances may be offset against the purchase price. If we do not exercise our purchase option, the advances will be offset against supply purchases. T he
supply purchases presented in the table above have been offset by the advances made to Lonza as of December 31, 2008. See further discussion of the
agreements with Lonza above in “ Off-Balance Sheet Arrangements” and in Note 9, “ Leases, Commitments, and Contingencies,” in the Notes to
Consolidated Financial Statements in P art II, Item 8 of this Form 10-K.
(4)
P urchase obligations include commitments related to capital expenditures, clinical development, manufacturing and research operations and other significant
purchase commitments. P urchase obligations exclude capitalized labor and capitalized interest on construction projects. Included in this line are our purchase
obligations under our contract manufacturing arrangements with Wyeth P harmaceuticals, a division of Wyeth, for bulk supply of Herceptin, and with
Novartis for the manufacture of Xolair and Lucentis. See also Note 9, “ Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K.
(5)
See also Note 8, “ Debt,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
(6)
Amount represents the current portion of our tax obligations and related interest under FIN 48. See also Note 13, “ Income T axes,” in the Notes to
Consolidated Financial Statements in P art II, Item 8 of this Form 10-K.
(7)
Other long-term liabilities primarily represent our post-retirement benefit obligations.
(8)
Interest expense includes the effects of an interest rate swap agreement. See also, Note 4 “ Investment Securities and Financial Instruments,” in the Notes to
Consolidated Financial Statements in P art II, Item 8 of this Form 10-K.

Excludes payment obligations associated with our commercial paper program.

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In addition to the above, we have committed to make potential future milestone payments to third parties as well as fund certain development,
manufacturing and commercialization efforts as part of in-licensing and joint product development programs. Milestone payments under these
agreements generally become due and payable only upon achievement of certain developmental, regulatory, and/or commercial milestones.
Because the achievement of these milestones is generally neither probable nor reasonably estimable, such contingencies have not been
recorded on our Consolidated Balance Sheets or in the table above. Further, our obligation to fund development, manufacturing and
commercialization efforts is contingent upon continued involvement in the programs and/or the lack of any adverse events that could cause
the discontinuance of the programs. Under certain of these arrangements, management can decide at any time to discontinue the joint
programs. Due to the risks associated with the development, manufacturing and commercialization processes, the payments under these
arrangements are not reasonably estimable, and such payments have not been recorded on our Consolidated Balance Sheets or in the table
above. See Note 9, “Leases, Commitments, and Contingencies,” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this
Form 10-K for further information on these matters.

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 almost all of these plans are still outstanding.

On August 18, 2008, the Special Committee adopted two retention plans that were implemented in lieu of our 2008 annual stock option grant,
which typically occurs in September. The plans cover substantially all of our employees, including our named executive officers. See
“Relationship with Roche Holdings, Inc.” for more information about the Roche Proposal, and see “Liquidity and Capital Resources” for more
information about the retention plans.

All stock option grants are made with the approval of the Compensation Committee of the Board of Directors or an authorized delegate. See
“Compensation Discussion and Analysis” appearing in our 2009 Proxy Statement for further information concerning the policies and
procedures of the Compensation Committee regarding the use of stock options.

General Option Information

Summary of Option Activity


(Shares in m illions)

O ptions O u tstan ding


S h are s W e ighte d
Available Nu m be r of Ave rage
for Gran t S h are s Exe rcise Price
December 31, 2006 70 88 $ 54.53
Grants (18) 18 79.40
Exercises – (10) 32.76
Cancellations 4 (4) 76.45
December 31, 2007 56 92 60.94
Grants (1) 1 79.23
Exercises – (13) 44.83
Cancellations 3 (3) 80.52
December 31, 2008 58 77 $ 63.06

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


(Shares in m illions)

Exe rcisable Un e xe rcisable Total


W td. Avg. W td. Avg. W td. Avg.
Exe rcise Exe rcise Exe rcise
As of De ce m be r 31, 2008 S h are s Price S h are s Price S h are s Price
In-the-money 45 $ 49.01 18 $ 79.01 63 $ 57.59
Out-of-the-money(1) 11 86.28 3 86.67 14 86.37
Total options outstanding 56 21 77
________________________
(1)
Out-of-the-money options are those options with an exercise price equal to or greater than the fair market value of Genentech Common Stock, which was
$82.91 at the close of business on December 31, 2008.

Distribution and Dilutive Effect of Options

Employee and Executive Officer Option Grants

2008 (1) 2007 (1) 2006 (1)


Grants, net of forfeitures, during the year as % of outstanding shares (0.20) % 1.36% 1.43%
Grants to Executive Officers during the period as % of outstanding shares –% 0.13% 0.14%
Grants to Executive Officers during the year as % of total options granted –% 7.41% 8.60%
________________________
(1)
Executive officers as of December 31 for the years presented.

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 new molecules into clinical development,
bringing major new products or indications onto the market, becoming the number one U.S. oncology company in sales, and achieving certain
financial growth measures; the initiation of a clinical study for Avastin; the availability and timing of data for clinical studies for Avastin;
Avastin regulatory filings; a Tarceva sNDA submission; share repurchases; the cost of the retention plans in response to the Roche proposal
to acquire all of the outstanding shares of our Common Stock not owned by Roche; label extensions for Xolair; Raptiva inventory impairment;
qualification and licensure of our Vacaville facility, licensure of our Hillsboro facility and Lonza’s and our Singapore facilities, and completion
of construction for our Dixon facility; liability with respect to COH; liability with respect to Lonza; the adequacy of our capital resources to
meet long-term growth; the timing of the Special Committee’s formal position with respect to the Roche Tender Offer; sales to collaborators;
contractual obligations; tax obligations and our effective income tax rate; capital expenditures; lease payments; and the effect of recent
accounting pronouncements on our financial statements.

These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in “Risk
Factors” in this Annual Report on Form 10-K 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; the need for
additional data, data analysis or clinical studies; BLA preparation and decision making; FDA actions or delays; failure to obtain or maintain, or
changes to, FDA or other regulatory approval; difficulty in obtaining materials from suppliers; unexpected safety, efficacy or manufacturing
issues for us or our contract/collaborator manufacturers; increased capital expenditures including greater than expected construction and
validation costs; product withdrawals or suspensions; competition; efficacy 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; 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 R&D, MG&A,
stock-based compensation, environmental and other expenses, inventory write-offs, and increased COS; variations in collaborator sales and
expenses; fluctuations in contract revenues and royalties; our indebtedness and ability to pay our indebtedness; actions by Roche that are
adverse to our interests; developments regarding the Roche Tender Offer; decreases in third party reimbursement rates; the ability of
wholesalers to effectively distribute our products; greater than expected income tax rate; and changes in accounting or tax laws or the
application or interpretation of such laws. We disclaim and do not undertake any obligation to update or revise any forward-looking statement
in this Annual Report on Form 10-K.

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including changes to interest rates, foreign currency exchange rates and equity investment prices. To reduce
the volatility related to these exposures, we enter into various derivative hedging transactions pursuant to our investment and risk
management policies and procedures. We do not enter into derivatives for speculative purposes. As part of our risk management procedures,
we use analytical techniques, including sensitivity analysis and market values, and there are inherent risks that may only be partially offset by
our hedging programs should there be unfavorable movements in interest rates, foreign currency exchange rates, or equity investment prices.

The estimated exposures discussed below are intended to measure the amount that we could lose from adverse market movements in interest
rates, foreign currency exchange rates, and equity investment prices, given a specified confidence level, over a given period of time. Loss is
defined in the value-at-risk (VAR) estimation as fair market value loss. Our VAR model utilizes historical simulation of daily market data over
the past three years and calculates market data changes using a 21-trading-day holding period to estimate expected loss in fair value at a 95%
confidence level. The VAR model is not intended to represent actual losses but is used as a risk estimation tool. The calculated VAR is
intended to measure the amount that we could lose from adverse market movements in interest rates, foreign currency exchange rates, and
equity investment prices, given a specified confidence level, over a given period of time. However, our VAR calculations are not designed to
fully factor in all potential future volatility because the calculations are based on historical results that may not be predictive of future results.

Actual future gains and losses associated with our investment portfolio and derivative positions may differ materially from the VAR analyses
performed due to the inherent limitations associated with predicting the timing and amount of changes to interest rates, foreign currency
exchanges rates, and equity investment prices, as well as our actual exposures and positions.

Interest Rate Risk

Our interest-bearing assets, or interest-bearing portfolio, consisted of cash, cash equivalents, restricted cash and investments, short-term
investments, marketable debt securities, long-term investments and interest-bearing forward contracts. The balance of our interest-bearing
portfolio, including restricted and unrestricted cash and investments, was $9,258 million, or 42% of total assets, at December 31, 2008; and
$6,437 million, or 34% of total assets, at December 31, 2007. Interest income related to this portfolio was $90 million in 2008 and $270 million in
2007. Our interest income is sensitive to changes in the general level of interest rates, credit ratings of our investments, and market liquidity for
the different types of interest-bearing assets.

Our short-term borrowings include unsecured commercial paper notes payable of $500 million at December 31, 2008 and $600 million at
December 31. 2007. These notes are not redeemable prior to maturity or subject to voluntary prepayment, and were issued on a discount basis.
At December 31, 2008 and 2007, outstanding commercial paper notes carried an effective interest yield of 0.8% and 4.46%, respectively.

Our long-term debt is made up of the following debt instruments: $500 million principal amount of 4.40% Senior Notes due 2010, $1.0 billion
principal amount of 4.75% Senior Notes due 2015, and $500 million principal amount of 5.25% Senior Notes due 2035. To hedge the fair value of
our 2010 Notes against fluctuations in the benchmark U.S. interest rates, we entered into a series of interest rate swap agreements with respect
to the 2010 Notes. See Note 8, “Debt,” and Note 4, “Investment Securities and Financial Instruments—Derivative Financial Instruments,” in
the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Based on our overall interest rate exposure, which includes the net effect of our interest rate exposures on our interest-bearing assets, our
Senior Note debt instruments, and our commercial paper, using a 21-trading-day holding period with a 95% confidence level, the potential loss
in estimated fair value of our interest rate-sensitive instruments was $22 million at December 31, 2008 and $20 million at December 31, 2007. A
significant portion of the potential loss in estimated fair value at both December 31, 2008 and 2007 was attributed to the longer duration of our
Senior Notes.

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Foreign Currency Exchange and Foreign Economic Conditions Risk

We receive royalty revenue from licensees selling products in countries throughout the world. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in
which our licensed products are sold. Our exposure to foreign exchange rates is most significant relative to the Swiss Franc, though we are
also exposed to changes in exchange rates elsewhere in Europe, Asia (primarily Japan), and Canada. When the dollar strengthens against the
currencies in these countries, the dollar value of foreign-currency-denominated revenue decreases; when the dollar weakens, the dollar value
of the foreign-currency-denominated revenue increases. Accordingly, changes in exchange rates, and in particular a strengthening of the
dollar, may adversely affect our royalty revenue as expressed in dollars. Currently, our foreign-currency-denominated royalty revenues exceed
our foreign-currency-denominated expenses. In addition, as part of our overall investment strategy, a portion of our investment portfolio is in
non-U.S. dollar denominated investments. As a result, we are exposed to changes in the exchange rates of the currencies in which these non-
U.S. dollar investments are denominated.

To mitigate our net foreign exchange exposure, our policy allows us to hedge certain of our anticipated royalty revenue by entering into
forward contracts or options, including collars, with one- to five-year expiration dates and amounts of currency that are based on up to 90% of
forecasted future revenue so that the potential adverse effect of movements in currency exchange rates on the non-dollar denominated
revenue will be at least partly offset by an associated increase in the value of the option or forward. As of December 31, 2008, these options
and forwards are due to expire in 2009 and 2010.

Based on our overall currency rate exposure, using a 21-trading-day holding period with a 95% confidence level, the potential loss in the
estimated fair value of our foreign currency-sensitive instruments was $69 million at December 31, 2008 and $40 million at December 31, 2007.
Because we use foreign currency instruments to hedge anticipated future cash flows, losses incurred on those instruments are generally offset
by increases in the fair value of the underlying future cash flows that they were intended to hedge.

Equity Security Risks

As part of our strategic alliance efforts, we have invested and may, in certain circumstances, invest in publicly traded equity instruments of
biotechnology companies. Our biotechnology equity investment portfolio totaled $287 million, or 1% of total assets, at December 31, 2008 and
$416 million, or 2% of total assets, at December 31, 2007. The decrease during 2008 was mainly due to sales of securities and lower market
valuations. Impairment charges on our biotechnology equity investments were $16 million in 2008 and $20 million in 2007. These investments
are subject to fluctuations from market value changes in stock prices. To mitigate the risk of market value fluctuation, our policy allows us to
hedge certain equity securities by entering into forward or option contracts. Depending on market conditions, we may determine that in future
periods certain of our other unhedged equity security investments are impaired, which would result in additional write-downs of those equity
security investments.

Based on our overall exposure to fluctuations from market value changes in marketable equity prices, using a 21-trading-day holding period
with a 95% confidence level, the potential loss in estimated fair value of our equity securities portfolio was $17 million at December 31, 2008
and $27 million at December 31, 2007.

Also, as part of our strategic alliance efforts, we invest in privately held biotechnology companies, some of which are in the start-up stage.
These investments are primarily carried at cost, which were $32 million at December 31, 2008 and $31 million at December 31, 2007, and are
recorded in “Other long-term assets” in the Consolidated Balance Sheets. Our determination of investment values in private companies is
based on the fundamentals of the businesses, including, among other factors, the nature and success of their R&D efforts.

Counterparty Credit Risks

As part of our derivative transactions, we are exposed to certain counterparty risks. We would experience a financial loss if the counterparties
to these transactions were to default and the derivative valuation is favorable to us. We attempt to mitigate these risks by adhering to a policy
that dictates a minimum counterparty credit rating of “A-” by Standard & Poor’s and “A3” by Moody’s Investor Services. As of December 31,
2008, our maximum risk of loss in the event of default by counterparties to the derivative instruments noted above would have been less than
$50 million.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Genentech, Inc.

We have audited the accompanying consolidated balance sheets of Genentech, Inc. as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008.
Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the
responsibility of Genentech, Inc.’s management. Our responsibility is to express an opinion on these financial statements and schedule based
on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Genentech, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Genentech,
Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 4, 2009 expressed an
unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, California


February 4, 2009,
except for the first paragraph of Note 3
and the thirteenth paragraph of Note 10,
as to which the date is
February 9, 2009

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CONSOLIDATED STATEMENTS OF INCOME


(In m illions, except per share am ounts)

Ye ar En de d De ce m be r 31,
2008 2007 2006
Revenue
Product sales (including amounts from related parties:
2008-$880; 2007-$778; 2006-$364) $ 10,531 $ 9,443 $ 7,640
Royalties (including amounts from related parties:
2008-$1,785; 2007-$1,301; 2006-$849) 2,539 1,984 1,354
Contract revenue (including amounts from related parties:
2008-$198; 2007-$165; 2006-$165) 348 297 290
Total operating revenue 13,418 11,724 9,284

Costs and expenses


Cost of sales (including amounts for related parties:
2008-$481; 2007-$432; 2006-$272) 1,744 1,571 1,181
Research and development (including amounts from programs where related parties
share costs:
2008-$379; 2007-$302; 2006-$251)
(including amounts for which reimbursement was recorded as contract revenue:
2008-$227; 2007-$196; 2006-$185) 2,800 2,446 1,773
Marketing, general and administrative 2,405 2,256 2,014
Collaboration profit sharing (including related party amounts:
2008-$189; 2007-$185; 2006-$187) 1,228 1,080 1,005
Write-off of in-process research and development related to acquisition – 77 –
Gain on acquisition – (121) –
Recurring amortization charges related to redemption and acquisition 172 132 105
Special items: litigation-related (260) 54 54
Total costs and expenses 8,089 7,495 6,132

Operating income 5,329 4,229 3,152


Other income (expense):
Interest and other income, net 184 273 325
Interest expense (82) (76) (74)
Total other income, net 102 197 251
Income before taxes 5,431 4,426 3,403
Income tax provision 2,004 1,657 1,290
Net income $ 3,427 $ 2,769 $ 2,113

Earnings per share


Basic $ 3.25 $ 2.63 $ 2.01
Diluted $ 3.21 $ 2.59 $ 1.97

Shares used to compute basic earnings per share 1,053 1,053 1,053
Shares used to compute diluted earnings per share 1,067 1,069 1,073

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS


(In m illions)

Ye ar En de d De ce m be r 31,
2008 2007 2006
Cash flows from operating activities
Net income $ 3,427 $ 2,769 $ 2,113
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 592 492 407
Employee stock-based compensation 399 403 309
Excess tax benefit from stock-based compensation arrangements (140) (193) (179)
Acquired in-process research and development – 77 –
Gain on acquisition – (121) –
Deferred income taxes 90 (234) (112)
Deferred revenue 41 (68) (3)
Litigation-related special items (260) 51 51
Gain on sales of securities available-for-sale and other (124) (27) (94)
Loss on sales and write-downs of securities available-for-sale and other 149 58 5
Loss on fixed asset dispositions 26 32 23
Changes in assets and liabilities:
Receivables and other assets (132) 38 (628)
Inventories 209 (310) (408)
Investments in trading securities 82 (360) (29)
Accounts payable, other accrued liabilities, and other long-term liabilities 72 623 683
Accrued litigation (476) – –
Net cash provided by operating activities 3,955 3,230 2,138
Cash flows from investing activities
Purchases of securities available-for-sale (2,980) (1,152) (1,036)
Proceeds from sales of securities available-for-sale 1,770 651 256
Proceeds from maturities of securities available-for-sale 279 486 357
Capital expenditures (751) (977) (1,214)
Change in other intangible and long-term assets 15 (40) 9
Acquisition and related costs, net – (833) –
Transfer to restricted cash, net – – (53)
Net cash used in investing activities (1,667) (1,865) (1,681)
Cash flows from financing activities
Stock issuances 680 452 385
Stock repurchases and prepaid share repurchase deposits (780) (1,345) (996)
Excess tax benefit from stock-based compensation arrangements 140 193 179
Proceeds from (maturities of) commercial paper, net (99) 599 –
Construction financing and other related payments (210) – –
Net cash used in financing activities (269) (101) (432)
Net increase in cash and cash equivalents 2,019 1,264 25
Cash and cash equivalents at beginning of year 2,514 1,250 1,225
Cash and cash equivalents at end of year $ 4,533 $ 2,514 $ 1,250
Supplemental cash flow data
Cash paid during the year for:
Interest $ 74 $ 60 $ 68
Income taxes 1,779 1,673 1,038
Non-cash investing and financing activities
Capitalization of construction in progress related to financing lease transactions 117 203 128
Sale of subsidiary in exchange for note receivable – – 135
Transfer of restricted cash to short-term investments 788 – –
Transfer of trading securities to available-for-sale 122 – –

See Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS


(In m illions, except par value)

De ce m be r 31,
2008 2007
Assets
Current assets
Cash and cash equivalents $ 4,533 $ 2,514
Short-term investments 1,665 1,461
Restricted cash and investments – 788
Accounts receivable—product sales (net of allowances:
2008-$157; 2007-$116; including amounts from related parties:
2008-$203; 2007-$2) 1,039 847
Accounts receivable—royalties (including amounts from related parties:
2008-$564; 2007-$463) 680 620
Accounts receivable—other (including amounts from related parties:
2008-$122; 2007-$233) 222 299
Inventories 1,299 1,493
Deferred tax assets 500 614
Prepaid expenses and other current assets 135 117
Total current assets 10,073 8,753
Long-term marketable debt and equity securities 3,347 2,090
Property, plant and equipment, net 5,404 4,986
Goodwill 1,590 1,577
Other intangible assets 1,008 1,168
Other long-term assets 365 366
Total assets $ 21,787 $ 18,940
Liabilities and stockholders’ equity
Current liabilities
Accounts payable (including amounts to related parties:
2008-$23; 2007-$2) 228 $ 420
Commercial paper 500 599
Deferred revenue (including amounts from related parties:
2008-$81; 2007-$63) 88 73
Accrued litigation – 776
Other accrued liabilities (including amounts to related parties:
2008-$180; 2007-$230) 2,279 2,050
Total current liabilities 3,095 3,918
Long-term debt 2,329 2,402
Deferred revenue (including amounts from related parties:
2008-$380; 2007-$384) 444 418
Other long-term liabilities 248 297
Total liabilities 6,116 7,035
Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred stock, $0.02 par value; authorized: 100 shares; none issued – –
Common Stock, $0.02 par value; authorized: 3,000 shares;
outstanding: 2008-1,053 shares; 2007-1,052 shares 21 21
Additional paid-in capital 12,044 10,695
Accumulated other comprehensive income 124 197
Retained earnings, since June 30, 1999 3,482 992
Total stockholders’ equity 15,671 11,905
Total liabilities and stockholders’ equity $ 21,787 $ 18,940

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(In m illions)

Re tain e d Accum u late d


Addition al Earn ings O the r
C om m on S tock Paid-in (Accu m u late d C om pre h e n sive
S h are s Am ou n ts C apital De ficit) Incom e Total
Balance December 31, 2005 1,054 $ 21 $ 9,263 $ (2,067) $ 253 $ 7,470
Comprehensive income
Net income – – – 2,113 – 2,113
Decrease in unrealized gain on
securities available-for-sale, net
of tax – – – – (16) (16)
Changes in fair value of cash flow
hedges, net of tax – – – – (27) (27)
Change in post-retirement benefit
obligation, net of tax – – – – (6) (6)
Comprehensive income 2,064
Issuance of stock upon exercise of options 9 – 288 – – 288
Income tax benefits realized from
employee stock option exercises – – 179 – – 179
Issuance of stock under employee stock
purchase plan 2 – 97 – – 97
Stock-based compensation expense – – 376 – – 376
Repurchase of Common Stock (12) – (112) (884) – (996)
Balance December 31, 2006 1,053 21 10,091 (838) 204 9,478
Comprehensive income
Net income – – – 2,769 – 2,769
Increase in unrealized gain on
securities available-for-sale, net
of tax – – – – 5 5
Changes in fair value of cash flow
hedges, net of tax – – – – (10) (10)
Change in post-retirement benefit
obligation, net of tax – – – – (2) (2)
Comprehensive income 2,762
Issuance of stock upon exercise of options 10 – 340 – – 340
Income tax benefits realized from
employee stock option exercises – – 177 – – 177
Issuance of stock under employee stock
purchase plan 2 – 112 – – 112
Stock-based compensation expense – – 407 – – 407
Cumulative effect of change in accounting
principle – – – (26) – (26)
Repurchase of Common Stock (13) – (132) (913) – (1,045)
Prepaid repurchase of Common Stock – – (300) – – (300)
Balance December 31, 2007 1,052 21 10,695 992 197 11,905
Comprehensive income
Net income – – – 3,427 – 3,427
Decrease in unrealized gain on
securities available-for-sale, net
of tax – – – – (79) (79)
Changes in fair value of cash flow
hedges, net of tax – – – – 5 5
Change in post-retirement benefit
obligation, net of tax – – – – 1 1
Comprehensive income 3,354
Issuance of stock upon exercise of options 13 – 572 – – 572
Income tax benefits realized from
employee stock option exercises – – 124 – – 124
Issuance of stock under employee stock
purchase plan 2 – 108 – – 108
Stock-based compensation expense – – 388 – – 388
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Repurchase of Common Stock and
settlement of prepaid stock repurchase
agreement (14) – 157 (937) – (780)
Balance December 31, 2008 1,053 $ 21 $ 12,044 $ 3,482 $ 124 $ 15,671

See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In this Annual 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 (the Redemption).

Note 1. DESCRIPTION OF BUSINESS

Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes medicines for patients with
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.

Redemption of Our Special Common Stock

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 a 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. The aggregate purchase price for the acquisition of all of
Genentech’s outstanding shares, including RHI’s estimated transaction costs of $10 million, was $6,605 million.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (FAS 141R), which
replaces FAS No. 141 (FAS 141). The statement retains the purchase method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired
and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred. FAS No. 141R became effective for us on January 1, 2009. The effect of the
adoption of FAS 141R will depend upon the nature of any future business combinations we undertake.

In December 2007, the FASB issued EITF 07-1, “Accounting for Collaborative Agreements” (EITF 07-1). EITF 07-1 provides guidance
regarding financial statement presentation and disclosure of collaborative arrangements, which includes arrangements entered into regarding
development and commercialization of products. It requires certain transactions between collaborators to be recorded in the income statement
on either a gross or net basis when certain characteristics exist in the collaborative relationship. EITF 07-1 became effective for us on January
1, 2009. The adoption of EITF 07-1 will not have an effect on our financial condition or our net income. However, the adoption of EITF 07-1
may have an effect on the presentation of collaborative arrangements in our income statements and could result in the reporting of lower
amounts of contract revenues, R&D expenses, and profit sharing expense.

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In February 2008, the FASB issued Statement of Financial Position (FSP) No. 157-2, which delays the effective date of FAS 157 for non-
financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (items that are
remeasured at least annually). The FSP deferred the effective date of FAS 157 for non-financial assets and non-financial liabilities until our
fiscal year beginning on January 1, 2009. We do not expect the adoption of FAS 157 for non-financial assets and non-financial liabilities to
have a material effect on our consolidated financial statements.

In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133” (FAS 161). FAS 161 requires us to provide greater transparency about how and why we use derivative instruments, how
the instruments and related hedged items are accounted for under FAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (FAS 133), and how the instruments and related hedged items affect our financial position, results of operations, and cash flows.
FAS 161 became effective for us on January 1, 2009. We do not expect the adoption of FAS 161 to have an effect on our financial condition or
results of operations, but we will be required to expand our disclosure regarding our derivative instruments.

Revenue Recognition

We recognize revenue from the sale of our products, royalties earned, and contract arrangements. Advance payments received in excess of
amounts earned are classified as deferred revenue until earned.

Product Sales

We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and
determinable, and collectibility is reasonably assured. Allowances are established for estimated rebates, healthcare provider contractual
chargebacks, prompt-pay sales discounts, product returns, and wholesaler and distributor inventory management allowances. In our domestic
commercial collaboration agreements, we have primary responsibility for U.S. product sales commercialization efforts, including selling and
marketing, customer service, order entry, distribution, shipping and billing. We record net product sales and related production and selling
costs in our income statement line items on a gross basis, since we have the manufacturing risk and/or inventory risk, and credit risk, and meet
the criteria as a principal under EITF 99-19.

Royalties

We recognize revenue from royalties based on licensees’ sales of our products or products using our technologies. Royalties are recognized
as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectibility is reasonably
assured. If the collectibility of a royalty amount is not reasonably assured, royalties are recognized as revenue when the cash is received. For
approximately half of our royalty revenue, estimates are made using historical and forecasted sales trends and used as a basis to record
amounts in advance of amounts collected.

Contract Revenue

Contract revenue generally includes up-front and continuing licensing fees, manufacturing fees, milestone payments and net reimbursements
from collaborators on development, post-marketing and commercial costs. Nonrefundable up-front fees, including product opt-ins, for which
no further performance obligations exist, are recognized as revenue on the earlier of when payments are received or collection is reasonably
assured. Fees associated with substantive milestones, which are contingent upon future events for which there is reasonable uncertainty as to
their achievement at the time the agreement was entered into, are recognized as revenue when these milestones, as defined in the contract, are
achieved.

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Certain of our revenue arrangements contain multiple deliverables. For those contract arrangements with multiple deliverables that were
entered into prior to the effective date of July 1, 2003 for EITF 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21), our
accounting policy on contract revenue is as follows:

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

ü ratably over the development period if development risk is significant, or

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

For those contract arrangements with multiple deliverables that were entered into subsequent to the effective date of July 1, 2003 for EITF 00-
21, our accounting policy is as follows:

ü We evaluate whether there is stand-alone value to the customer for the delivered elements and objective evidence of fair value to
allocate revenue to each element in multiple element agreements. When the delivered element does not have stand-alone value or
there is insufficient evidence of fair value for the undelivered element(s), we recognize the consideration for the combined unit of
accounting in the same manner as the revenue is recognized for the final deliverable, which is generally ratably over the longest
period of involvement.

Collaborations resulting in a net reimbursement of research, development, post-marketing, and/or commercial costs are recognized as revenue
as the related costs are incurred. The corresponding research, development and post-marketing expenses are included in R&D expenses and
the corresponding commercial costs are included in MG&A expenses in the Consolidated Statements of Income.

Product Sales Allowances

Revenue from product sales are recorded net of allowances for estimated rebates, healthcare provider contractual chargebacks, prompt-pay
sales discounts, product returns, and wholesaler and distributor inventory management allowances, all of which are established at the time of
sale. These allowances are based on estimates of the amounts earned or to be claimed on the related sales. These estimates take into
consideration our historical experience, current contractual and statutory requirements, specific known market events and trends such as
competitive pricing and new product introductions, and forecasted customer buying patterns and inventory levels, including the shelf life of
our products. Rebates, healthcare provider contractual chargebacks, inventory management allowances, prompt-pay sales discounts and
product returns are product-specific, which can be affected by the mix of products sold in any given period. All of our product sales
allowances are based on estimates. If actual future results vary, we may need to adjust these estimates, which could have an effect on earnings
in the period of the adjustment. Our product sales allowances and accruals are as follows:

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

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

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

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

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

Allowances against receivable balances primarily relate to product returns, wholesaler-related direct rebates, prompt-pay sales discounts, and
wholesaler inventory management allowances, and are recorded in the same period that the related revenue is recognized, resulting in a
reduction in product sales revenue and the reporting of product sales receivable net of allowances. Accruals related to indirect rebates and
contractual chargebacks for healthcare providers are recognized in the same period that the related revenue is recognized, resulting in a
reduction in product sales revenue, and are recorded as other accrued liabilities.

Commercial Collaboration Accounting

We have domestic commercial collaboration profit sharing agreements with Biogen Idec on Rituxan, with Novartis Pharma AG on Xolair, and
with OSI Pharmaceuticals on Tarceva. In these agreements, we have primary responsibility for U.S. commercialization, including sales and/or
marketing, customer support, order entry, distribution, shipping, and billing. In addition to being primarily responsible for providing the
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the customer, we have general inventory risk prior to the customer placing an order or upon customer return, and we are exposed to customer
credit risk. We record net product sales and related production and selling costs for our domestic collaborations in our Consolidated
Statements of Income on a gross basis since we are the principal in the sales transaction as defined under EITF 99-19. The collaboration profit
sharing expense line in our Consolidated Statements of Income includes the profit sharing results with Biogen Idec on Rituxan, with Novartis
Pharma AG on Xolair, and with OSI Pharmaceuticals on Tarceva.

We have a European commercial collaboration profit sharing agreement with Novartis Pharma AG on Xolair. We do not record the net product
sales and related production and selling costs for our European collaboration in our Consolidated Statements of Income on a gross basis since
we do not meet the criteria as a principal under EITF 99-19, and instead record our net share of the European collaboration profits as contract
revenue (or collaboration losses as collaboration profit sharing expense). See also Note 10, “Relationship with Roche Holdings, Inc. and
Related Party Transactions,” regarding Novartis-related collaboration costs and profit sharing expenses.

Research and Development Expenses

Research and development (R&D) expenses include salaries, benefits, and other headcount related costs; clinical trial and related clinical
manufacturing costs; contract and other outside service fees; employee stock-based compensation expense; and facilities and overhead costs.
R&D expenses consist of independent R&D costs and costs associated with collaborative R&D and in-licensing arrangements. In addition, we
acquire R&D services from other companies and fund research institutions under agreements that we can generally terminate at will. R&D
expenses also include post-marketing activities such as Phase IV and investigator-sponsored trials and product registries. R&D costs,
including up-front fees and milestones paid to collaborators, are expensed as incurred, if the underlying technology and/or intellectual
property rights acquired are determined not to have an alternative future use. The costs of the acquisition of technology are capitalized if they
have alternative future uses in other R&D projects or otherwise. R&D collaborations resulting in a net payment of development and post-
marketing costs to our collaborators are recognized as R&D expense as the related costs are incurred.

Royalty Expenses

Royalty expenses and milestones directly related to product sales are classified in COS. Other royalty expenses, related to royalty revenue, are
classified in MG&A expenses and totaled $379 million in 2008, $312 million in 2007, and $221 million in 2006.

Advertising Expenses

We expense the costs of advertising, which also include promotional expenses, as incurred. Advertising expenses were $371 million in 2008,
$400 million in 2007, and $439 million in 2006.

Research and Development Arrangements

To gain access to potential new products and technologies and to utilize other companies to help develop our potential new products, we
establish strategic alliances with various companies. These strategic alliances often include the acquisition of marketable and nonmarketable
equity investments or debt of companies developing technologies that complement or fall outside of our research focus and include
companies having the potential to generate new products through technology licensing and/or investments. Potential future payments may be
due to certain collaborators achieving certain benchmarks as defined in the collaborative agreements. We also entered into product-specific
collaborations to acquire development and marketing rights for products. See Note 9, “Leases, Commitments, and Contingencies,” and Note
10, “Relationship with Roche Holdings, Inc. and Related Party Transactions,” below for a discussion of our more significant collaborations.

Cash and Cash Equivalents

We consider all highly liquid available-for-sale debt securities purchased with an original maturity of three months or less to be cash
equivalents.

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Inventories

Inventories are stated at the lower of cost or market value. Cost is determined using a weighted-average approach, assuming full absorption of
direct and indirect manufacturing costs, based on normal product capacity utilization assumptions. Excess or idle capacity costs, resulting
from utilization below a plant’s normal capacity, are recognized as COS in the period in which they are incurred. If inventory costs exceed
expected market value due to obsolescence or insufficient forecasted demand, reserves are recorded for the difference between the cost and
the estimated market value. These reserves are determined based on significant estimates. Inventories may include currently marketed
products manufactured under a new process or at facilities awaiting regulatory licensure. These inventories are capitalized if, in our
judgment, at the time of manufacture near-term regulatory licensure is reasonably assured. In addition, inventories include employee stock-
based compensation expenses capitalized under FAS 123R and capitalized costs related to the retention plans approved in August 2008.

Investments in Marketable and Nonmarketable Securities

We hold investments in short-term and long-term marketable securities, consisting primarily of corporate bonds, commercial paper,
government and agency securities, municipal bonds and bonds denominated in foreign currencies but hedged to U.S. dollars. As part of our
strategic alliance efforts, we may also invest in equity securities, dividend-bearing convertible preferred stock, and interest-bearing debt of
other biotechnology companies. We record these investments under the cost method of accounting, as we hold less than a 20% ownership
position in all of these collaborator companies.

We classify marketable equity and debt securities into one of two categories: available-for-sale or trading. Trading securities are bought, held,
and sold with the objective of generating returns. We have established maximum amounts of our total investment portfolio that can be
included in our trading portfolio, the majority of which is managed by investment management firms that operate within investment policy
guidelines that we provide. Trading securities are classified as short-term investments and are carried at estimated fair market value. Unrealized
holding gains and losses on trading securities are included in “Interest and other income, net.” Debt securities and marketable equity
securities not classified as trading are considered available-for-sale. These securities are carried at estimated fair value (see Note 4,
“Investment Securities and Financial Instruments,” below) with unrealized gains and losses included in accumulated other comprehensive
income in stockholders’ equity. Unrealized losses are charged against “Interest and other income, net” when a decline in fair value is
determined to be other-than-temporary. We review several factors to determine whether a loss is other-than-temporary. These factors include
but are not limited to: (i) the extent to which the fair value is less than cost and the cause for the fair value decline, (ii) the financial condition
and near-term prospects of the issuer, (iii) the length of time a security is in an unrealized loss position and (iv) our ability to hold the security
for a period of time sufficient to allow for any anticipated recovery in fair value. Available-for-sale equity securities and available-for-sale debt
securities with remaining maturities of greater than one year are classified as long-term.

If the impairment is considered to be other-than-temporary, the security is written down to its estimated fair value. Other-than-temporary
declines in estimated fair value of all marketable securities are charged to “Interest and other income, net.” The cost of all securities sold is
based on the specific identification method. We recognized charges of $83 million in 2008, $50 million in 2007, and $4 million in 2006 related to
other-than-temporary declines in the estimated fair values of certain of our marketable equity and debt securities.

Nonmarketable equity securities are carried at cost, less any write-downs for impairment. We periodically monitor the liquidity and financing
activities and R&D progress of the respective issuers to determine if impairment write-downs to our nonmarketable equity securities are
necessary.

Derivative Instruments

We use derivatives to manage our market exposure to fluctuations in foreign currencies, U.S. interest rates and marketable equity investments.
We record all derivatives on the balance sheet at estimated fair value. For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the

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estimated fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the
derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in current earnings
during the period of the change in estimated fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e.,
hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss
on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The gain or loss on the derivative instruments in excess of the cumulative
change in the present value of future cash flows of the hedged transaction, if any, is recognized in current earnings during the period of
change. We do not use derivative instruments for speculative purposes. See Note 4, “Investment Securities and Financial
Instruments—Derivative Financial Instruments,” below for further information on our accounting for derivatives.

Property, Plant and Equipment

The costs of buildings and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, but not
more than:

Use ful Live s


Buildings 25 years
Certain manufacturing equipment 15 years
Other equipment 3 to 8 years
Leasehold improvements Length of applicable lease

Depreciation expense on biologics manufacturing facilities constructed or purchased begins once production activities have commenced at
the facility, which is generally at the point at which qualification lots are being successfully produced. The point at which depreciation is
commenced best represents the point at which the asset is ready for its intended use, and generally precedes FDA licensure of the facility.

FDA Validation Costs

FDA validation costs are capitalized as part of the effort required to acquire and construct long-lived assets, including readying them for their
intended use, and are amortized over the estimated useful life of the asset or the term of the lease, whichever is shorter, and charged to COS.
These costs are included in “Other long-term assets” in the accompanying Consolidated Balance Sheets.

Goodwill and Other Intangible Assets

Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired when accounted for by
the purchase method of accounting and arises from RHI’s purchases of our Special Common Stock and push-down accounting (refer to
“Redemption of Our Special Common Stock” in Note 1 above) as well as from our acquisition of Tanox in 2007. In accordance with FAS 142,
“Goodwill and Intangible Assets” (FAS 142), we do not amortize goodwill. Also in accordance with FAS 142, we perform an annual
impairment test of goodwill at the company level, which is the sole reporting unit, and have found no impairment. We will continue to evaluate
our goodwill for impairment annually and whenever events and changes in circumstances suggest that the carrying amount may not be
recoverable.

We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from five to 15 years, and
review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable.

Restricted Cash and Investments

We entered into an arrangement with third-party insurance companies to post a bond in connection with the COH trial judgment. As part of
this arrangement, we were required to pledge cash and investments to secure this bond. As of December 31, 2007, we held restricted cash and
investments of $788 million, related to the surety bond, and these

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amounts are reflected in the Consolidated Balance Sheet in “Restricted cash and investments.” As a result of the April 24, 2008 California
Supreme Court decision, we paid $476 million to COH in the second quarter of 2008, reflecting the amount of compensatory damages awarded
plus interest thereon from the date of the original decision, June 10, 2002. During the third quarter of 2008, the court completed certain
administrative procedures to dismiss the case. As a result, the restrictions were lifted from the restricted cash and investments accounts,
which consisted of available-for-sale investments, and the funds became available for use in our operations. See Note 9, “Leases,
Commitments, and Contingencies,” for further discussion of the COH litigation.

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows
are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Long-
lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to
sell.

Sabbatical Leave Benefits

On January 1, 2007, we adopted 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 of $26 million, net of tax, as a cumulative effect of a change in
accounting principle.

Accounting for Employee Stock-Based Compensation

We account for share-based payment under FAS 123R, which requires the recognition of compensation expense, using a fair-value based
method, for costs related to all share-based payments, including stock options and stock issued under our employee stock purchase plan
(ESPP). FAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing
model. We have adopted the simplified method to calculate the beginning balance of the additional paid-in-capital (APIC) pool of the excess
tax benefit, and to determine the subsequent effect on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of
employee stock-based compensation awards. See Note 3, “Retention Plans and Employee Stock-Based Compensation,” for further discussion
of employee stock-based compensation.

401(k) Plan and Other Postretirement Benefits

Our 401(k) Plan (the 401(k) Plan) covers substantially all of our employees. We match a portion of employee contributions, up to a maximum of
5% of each employee’s eligible compensation. The match is funded concurrently with a participant’s semi-monthly contribution to the 401(k)
Plan. Additionally, we contributed annually to every employee’s account 2% of his or her eligible compensation, regardless of whether the
employee actively participates in the 401(k) Plan. We recorded expense of $91 million in 2008, $85 million in 2007, and $68 million in 2006 for our
contributions under the Plan.

In addition, we provide certain postretirement benefits, primarily healthcare related, to employees who meet certain eligibility criteria. In
accordance with 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)” (FAS 158), we recognize the funded status of our postretirement benefit plan in the statement of
financial position. As of December 31, 2008 and 2007, our postretirement benefit plan was not funded. The accumulated postretirement benefit
obligation as of December 31, 2008 and 2007 was $30 million and $27 million, respectively, which was primarily included in “Other long-term
liabilities” in the Consolidated Balance Sheets.

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Stock Repurchases

The par value method of accounting is used for our 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 retained earnings.

Income Taxes

Our income tax provision is computed using the liability method in accordance with FAS No. 109, “Accounting for Income Taxes”. Deferred
tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our
provisions for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. We believe that our
estimates are reasonable and that our reserves for income tax-related uncertainties are adequate. 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; the results of any tax examinations; changing interpretations of existing tax laws or regulations; changes in estimates
of prior years’ items; past and future levels of R&D spending; acquisitions; changes in our corporate structure; and changes in overall levels
of income before taxes—all of which may result in periodic revisions to our effective income tax rate.

Effective with the consummation of the public offering of our Common Stock by RHI on October 26, 1999, we ceased to be a member of the
consolidated federal income tax group (and certain consolidated or combined state and local income tax groups) of which RHI is the common
parent. Accordingly, our tax sharing agreement with RHI now pertains only to the state and local tax returns in which we are consolidated or
combined with RHI. We will continue to calculate our tax liability or refund with RHI for these state and local jurisdictions as if we were a
stand-alone entity.

On January 1, 2007, we adopted the provisions of FIN 48. Implementation of FIN 48 did not result in a cumulative adjustment to retained
earnings. 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. See Note 13,
“Income Taxes,” for further discussion of FIN 48.

Earnings Per Share

Basic earnings per share (EPS) are computed based on the weighted-average number of shares of our Common Stock outstanding. Diluted EPS
is 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 EPS computations (in millions):

2008 2007 2006


Numerator:
Net income $ 3,427 $ 2,769 $ 2,113
Denominator:
Weighted-average shares outstanding used to compute basic EPS 1,053 1,053 1,053
Effect of dilutive stock options 14 16 20
Weighted-average shares outstanding and dilutive securities used to compute
diluted EPS 1,067 1,069 1,073

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Outstanding employee stock options to purchase approximately 47 million shares of our Common Stock for 2008 were excluded from the
computation of diluted EPS because the effect would have been anti-dilutive. See Note 3, “Retention Plans and Employee Stock-Based
Compensation,” for information on option exercise prices and expiration dates.

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, unrealized gains and losses on our available-for-sale securities, and 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. Comprehensive income for the years ended
December 31, 2008, 2007, and 2006 has been reflected in the Consolidated Statements of Stockholders’ Equity.

The components of accumulated other comprehensive income, net of taxes, at December 31, 2008 and 2007 were as follows (in millions):

2008 2007
Net unrealized gains on securities available-for-sale $ 140 $ 219
Net unrealized losses on cash flow hedges (9) (14)
Change in post-retirement benefit obligation (7) (8)
Accumulated other comprehensive income $ 124 $ 197

The activity in OCI was as follows (in millions):

2008 2007 2006


Decrease in unrealized gains on securities available-for-sale (net of tax: 2008-$(59); 2007-
$(7); 2006-$(11)) $ (83) $ (10) $ (13)
Reclassification adjustment for net losses (gains) on securities available-for-sale
included in net income (net of tax: 2008-$3; 2007-$10; 2006-$(2)) 4 15 (3)
Decrease in unrealized gains on cash flow hedges (net of tax: 2008-$(17); 2007-$(8); 2006-
$(12)) (26) (12) (18)
Reclassification adjustment for net losses (gains) on cash flow hedges included in net
income (net of tax: 2008-$20; 2007-$2; 2006-$(6)) 31 2 (9)
Change in post-retirement benefit obligation (net of tax: 2008-$0; 2007-$(1); 2006-$(4)) 1 (2) (6)
Other comprehensive loss $ (73) $ (7) $ (49)

Note 3. RETENTION PLANS AND EMPLOYEE STOCK-BASED COMPENSATION

Retention Plan Costs

On July 21, 2008, we announced that we received an unsolicited proposal from Roche to acquire all of the outstanding shares of our Common
Stock not owned by Roche at a price of $89 in cash per share (the Roche Proposal). On February 9, 2009, Roche commenced the Roche Tender
Offer which replaced the Roche Proposal that was announced on July 21, 2008. See also Note 10, “Relationship with Roche Holdings, Inc. and
Related Party Transactions,” for more information on the Roche Proposal and the Roche Tender Offer. On August 18, 2008, we announced that
the Special Committee approved the implementation of two retention plans that together cover substantially all employees of the company.
The plans are estimated to cost approximately $375 million, payable in cash, and were implemented in lieu of our 2008 annual stock option
grant. The timing of the payments related to these plans will depend on the outcome of the Roche Tender Offer or any other tender offer or
other proposal by Roche to acquire all of the outstanding shares of our Common Stock not owned by Roche. If a merger of Genentech

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with Roche or an affiliate of Roche has not occurred on or before June 30, 2009, we will pay the retention bonus at that time in accordance with
the terms of the plans. We are currently recognizing the retention plan costs in our financial statements ratably over the period from August
18, 2008 to June 30, 2009. If a merger of Genentech with Roche or an affiliate of Roche has occurred on or before June 30, 2009, the timing of the
payments and the recognition of the expense will depend on the terms of the merger.

Retention plan costs were as follows (in millions, except per share data):

2008
Research and development $ 66
Marketing, general and administrative 69
Total retention plan costs $ 135

In 2008, an additional $27 million of retention plan costs were capitalized into inventory, which will be recognized as COS as products that were
manufactured after the initiation of the retention plans are estimated to be sold.

Employee Stock Plans

Our ESPP was adopted in 1991 and amended thereafter. The ESPP allows eligible employees to purchase Common Stock at 85% of the lower of
the fair market value of the Common Stock on the grant date or the fair market value on the purchase date. The offering period under the ESPP
is currently 15 months, and the purchase price is established during each new offering period. Purchases are limited to 15% of each employee’s
eligible compensation and subject to certain IRS restrictions. In general, all of our regular full-time employees are eligible to participate in the
ESPP. Of the 62,400,000 shares of Common Stock reserved for issuance under the ESPP, 50,501,542 shares have been issued as of December 31,
2008.

We currently grant options under the Genentech, Inc. 2004 Equity Incentive Plan, which allows for the granting of non-qualified stock options,
incentive stock options and stock appreciation rights, restricted stock, performance units or performance shares to our employees, directors
and consultants. Incentive stock options may only be granted to employees under this plan. Generally, stock options granted to employees
have a maximum term of 10 years, and vest over a four year period from the date of grant; 25% vest at the end of one year, and 75% vest
monthly over the remaining three years. We may grant options with different vesting terms from time to time. Unless an employee’s
termination of service is due to retirement, disability, or death, upon termination of service, any unexercised vested options will be forfeited at
the end of three months or the expiration of the option, whichever is earlier.

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 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.

Employee stock-based compensation expense recognized under FAS 123R was as follows (in millions, except per share data):

2008 2007 2006


Cost of sales $ 82 $ 71 $ –
Research and development 152 153 140
Marketing, general and administrative 165 179 169
Total employee stock-based compensation expense 399 403 309
Tax benefit related to employee stock-based compensation expense (137) (143) (127)
Net effect on net income $ 262 $ 260 $ 182

Substantially all of the products sold during 2006 were manufactured in previous periods when we did not include employee stock-based
compensation expense in our production costs.

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The following pro forma net income and EPS were determined as if we had accounted for employee stock-based compensation expense for our
employee stock plans under the fair value method prescribed by FAS 123 prior to 2006 and had capitalized certain costs into inventory
manufactured in those prior periods, with the resulting effect on COS for 2006 when previously manufactured products were sold. (In millions,
except per share data):

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

Diluted—as reported $ 1.97


Diluted—pro forma $ 1.94

As of December 31, 2008, total compensation cost related to unvested stock options not yet recognized was $499 million, which is expected to
be allocated to expense and production costs over a weighted-average period of 26 months.

Valuation Assumptions

The employee stock-based compensation expense recognized under FAS 123R and presented in the pro forma disclosure required under FAS
123 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 are as follows:

2008 2007 2006


Risk-free interest rate 2.8% 4.3% 4.6%
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 24.1% 25.1% 27.2%
Expected term (years) 5.0 5.0 4.6

Due to the redemption of our Special Common Stock in June 1999 by RHI, there is limited historical information available to support our
estimate of certain assumptions required to value our employee stock options as an option grant cycle lasts ten years. In developing our
estimate of expected term, we have assumed that our recent historical stock option exercise experience is a relevant indicator of future exercise
patterns. We base our determination of expected volatility predominantly on the implied volatility of our traded options with consideration of
our historical volatilities and the volatilities of comparable companies.

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Stock Option Activity

The following is a summary of option activity (shares in millions):

O ptions O u tstan ding


S h are s W e ighte d-
Available for Nu m be r of Ave rage
Grant S h are s Exe rcise Price
December 31, 2005 84 83 $ 46.64
Grants (17) 17 79.85
Exercises – (9) 30.42
Cancellations 3 (3) 62.09
December 31, 2006 70 88 54.53
Grants (18) 18 79.40
Exercises – (10) 32.76
Cancellations 4 (4) 76.45
December 31, 2007 56 92 60.94
Grants (1) 1 79.23
Exercises – (13) 44.83
Cancellations 3 (3) 80.52
December 31, 2008 58 77 $ 63.06

The intrinsic value of options exercised during 2008, 2007, and 2006 was $514 million, $501 million, and $500 million, respectively. The estimated
fair value of shares vested during 2008, 2007, and 2006, was $388 million, $407 million, and $376 million, respectively. The weighted-average
estimated fair value of stock options granted during 2008, 2007, and 2006 was $21.19, $24.40, and $24.95 per option, respectively, based on the
assumptions in the Black-Scholes valuation model discussed above.

The following table summarizes outstanding and exercisable options at December 31, 2008 (in millions, except exercise price data):

Options Outstanding Options Exercisable


Weighted-Average Weighted-Average
Number Remaining Number Remaining
Range of of Shares Contractual Life Weighted-Average of Shares Contractual Life Weighted-Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable (in years) Exercise Price
$6.27 - $8.89 0.2 6.39 $ 6.81 0.2 6.39 $ 6.81
$10.00 - $14.35 6.2 2.85 $ 13.68 6.2 2.85 $ 13.68
$15.04 - $22.39 4.5 2.35 $ 20.89 4.5 2.35 $ 20.89
$22.88 - $33.00 0.1 2.52 $ 26.08 0.1 2.52 $ 26.08
$35.63 - $53.23 20.3 4.76 $ 47.11 20.3 4.76 $ 47.11
$53.95 - $75.90 2.0 7.85 $ 68.03 0.9 6.56 $ 63.31
$75.99 - $82.79 29.4 8.21 $ 79.48 12.6 8.06 $ 79.49
$83.02 - $98.80 14.7 6.82 $ 86.38 11.2 6.77 $ 86.28
77.4 56.0

At December 31, 2008, the aggregate intrinsic value of the outstanding options was $1,588 million, and the aggregate intrinsic value of the
exercisable options was $1,518 million.

Stock Repurchase Program

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2008, we are
authorized to repurchase up to 150 million shares of our Common Stock for an aggregate amount of up to $10.0 billion through June 30, 2009.
During 2008, we repurchased approximately nine

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million shares at an aggregate cost of $780 million. In addition, approximately four million shares were delivered to us on March 31, 2008 in
connection with a $300 million prepaid share repurchase arrangement that we entered into with an investment bank in November 2007. Since
the program’s inception, we have repurchased approximately 89 million shares at a total price of $6.5 billion. We intend to use the repurchased
stock to offset dilution caused by the issuance of shares in connection with our employee stock plans and also to maintain RHI’s minimum
percentage ownership interest in our stock. See Note 10, “Relationship with Roche Holdings, Inc. and Related Party Transactions,” for further
discussion about RHI’s minimum percentage ownership interest in our stock. See also Note 12, “Capital Stock,” for further discussion of our
stock repurchase program.

Note 4. INVESTMENT SECURITIES AND FINANCIAL INSTRUMENTS

Investment Securities

Securities classified as trading and available-for-sale at December 31, 2008 and 2007 are summarized below (in millions). Estimated fair value is
based on quoted market prices for the same or similar investments.

Gross Gross Estim ate d


Am ortiz e d Un re aliz e d Un re aliz e d Fair
De ce m be r 31, 2008 C ost Gain s Losse s Value
Total trading securities $ 889 $ 13 $ (105) $ 797
Securities available-for-sale:
Equity securities $ 31 $ 257 $ (1) $ 287
Preferred stock 30 – (7) 23
Debt securities maturing:
within 1 year 3,118 1 (5) 3,114
between 1-5 years 2,437 32 (26) 2,443
between 5-10 years 632 20 (35) 617
Total securities available-for-sale $ 6,248 $ 310 $ (74) $ 6,484

Gross Gross Estim ate d


Am ortiz e d Un re aliz e d Un re aliz e d Fair
De ce m be r 31, 2007 C ost Gain s Losse s Value
Total trading securities $ 984 $ 30 $ (13) $ 1,001
Securities available-for-sale:
Equity securities $ 33 $ 389 $ (6) $ 416
Preferred stock 162 1 (24) 139
Debt securities maturing:
within 1 year 1,171 – (1) 1,170
between 1-5 years 1,886 15 (11) 1,890
between 5-10 years 521 12 (3) 530
Total securities available-for-sale $ 3,773 $ 417 $ (45) $ 4,145

The gain or loss on derivative instruments designated as fair value hedges, as well as the offsetting loss or gain on the corresponding hedged
marketable equity investment, is recognized currently in earnings. As a result, the cost basis of our equity securities in the table above
includes adjustments related to gains and losses on fair value hedges.

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Unrealized loss positions for which other-than-temporary impairments have not been recognized at December 31, 2008 and 2007 are
summarized below (in millions):

Le ss Th an 12 Months 12 Months or Gre ate r Total


Fair Un re aliz e d Fair Un re aliz e d Fair Un re aliz e d
De ce m be r 31, 2008 Value Losse s Value Losse s Value Losse s
Equity securities $ 4 $ (1) $ – $ – $ 4 $ (1)
Preferred stock 1 (2) 14 (5) 15 (7)
Debt securities 1,164 (39) 422 (27) 1,586 (66)
Total $ 1,169 $ (42) $ 436 $ (32) $ 1,605 $ (74)

Le ss Th an 12 Months 12 Months or Gre ate r Total


Fair Un re aliz e d Fair Un re aliz e d Fair Un re aliz e d
De ce m be r 31, 2007 Value Losse s Value Losse s Value Losse s
Equity securities $ 20 $ (6) $ – $ – $ 20 $ (6)
Preferred stock 86 (18) 24 (6) 110 (24)
Debt securities 1,004 (12) 182 (3) 1,186 (15)
Total $ 1,110 $ (36) $ 206 $ (9) $ 1,316 $ (45)

Unrealized losses in the preferred stock and debt securities portfolios were related to various securities, including corporate bonds, U.S.
government agency bonds, municipal bonds and asset-backed securities, and investment-grade preferred securities. For these securities, the
unrealized losses are primarily due to the increase in overall interest rates including fixed income credit spreads. Because we have the ability
and intent to hold these investments until a forecasted recovery of fair value, which may be maturity or call date, we do not consider these
investments to be other-than-temporarily impaired as of December 31, 2008. See Note 2, “Summary of Significant Accounting
Policies—Investments in Marketable and Nonmarketable Securities,” for further discussion of the criteria used to determine impairment of our
equity and fixed income securities.

The carrying amount, which approximates fair value, of all cash, cash equivalents and investment securities held at December 31, 2008 and
2007 (see sections “Cash and Cash Equivalents” and “Investments in Marketable and Nonmarketable Securities” in Note 2, “Summary of
Significant Accounting Policies”) is summarized below (in millions):

S e cu rity 2008 2007


Cash $ 2,264 $ 1,706
Cash equivalents 2,269 808
Total cash and cash equivalents $ 4,533 $ 2,514

Trading securities $ 797 $ 1,001


Securities available-for-sale maturing within one year 845 321
Preferred stock 23 139
Total short-term investments $ 1,665 $ 1,461

Securities available-for-sale maturing after one year $ 3,060 $ 1,674


Equity securities 287 416
Total long-term marketable debt and equity securities $ 3,347 $ 2,090

Cash $ – $ 1
Securities available-for-sale maturing within one year – 41
Securities available-for-sale maturing between 1-10 years – 746
Total restricted cash and investments $ – $ 788

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In 2008, proceeds from the sales and maturities of available-for-sale securities totaled $2.0 billion. Gross realized gains totaled $118 million and
gross realized losses totaled $63 million. In 2007, proceeds from the sales and maturities of available-for-sale securities totaled $1.1 billion, of
which $300 million was reinvested in our trading securities. Gross realized gains totaled $26 million and gross realized losses totaled $8 million.
In 2006, proceeds from the sales and maturities of available-for-sale securities totaled $613 million and gross realized gains totaled $61 million.

Net change in unrealized holding (losses) gains on trading securities included in net income totaled $(109) million in 2008, $15 million in 2007,
and $5 million in 2006.

The marketable debt securities that we hold are issued by a diversified selection of corporate and financial institutions with strong credit
ratings. Our investment policy limits the amount of credit exposure with any one institution. Other than asset-backed and mortgage-backed
securities, these debt securities are generally not collateralized. In 2008, we recorded a $67 million impairment charge on certain U.S.
government agency and financial institution securities. In 2007, we recorded a $30 million impairment charge to reduce the carrying value of a
fixed income investment. In 2006, there were no charges for credit impairment on marketable debt securities.

Our nonmarketable investment securities were based on cost less write-downs for impairments, which approximates fair value. Our
nonmarketable investment securities were $32 million at December 31, 2008 and $31 million at December 31, 2007, and are classified as “Other
long-term assets” on our Consolidated Balance Sheets.

Derivative Financial Instruments

Foreign Currency Instruments

We have an established foreign currency hedging program to protect against currency risks, primarily driven by forecasted foreign-currency-
denominated royalties from licensees’ product sales over a five-year period. Other foreign currency exposures include collaboration
development expenses. We hedge portions of our forecasted foreign currency revenue with forward contracts or options, including collars.
When the dollar strengthens significantly against the foreign currencies, the decline in value of future foreign currency revenue or expenses is
offset by gains or losses, respectively, in the value of the option or forward contracts designated as hedges. Conversely, when the dollar
weakens, the increase in the value of future foreign currency revenue or expenses is offset by losses or gains, respectively, in the value of the
forward contracts. In accordance with FAS 133, hedges related to anticipated transactions are designated and documented at the hedge’s
inception as cash flow hedges and evaluated for hedge effectiveness at least quarterly.

During the years ended December 31, 2008, 2007, and 2006, we had no material amounts of ineffectiveness with respect to our foreign currency
hedging instruments. Gains and losses related to option and forward contracts that hedge future cash flows are classified in the same manner
as the underlying hedged transaction in the Consolidated Statements of Income.

At December 31, 2008, net losses on derivative instruments expected to be reclassified from accumulated other comprehensive income to
earnings during the next 12 months due to the receipt of the related net revenue denominated in foreign currencies were $33 million.

Interest Rate Swaps

In July 2005, we entered into a series of interest rate swap agreements with a total notional value of $500 million to protect the 4.40% Senior
Notes due 2010 against changes in estimated fair value due to changes in U.S. interest rates. In these swaps, we pay a floating rate and receive
a fixed rate that matches the coupon rate of the five-year Notes due in 2010. See also Note 8, “Debt” below.

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Equity Instruments

Our marketable equity securities portfolio consists primarily of investments in biotechnology companies whose risk of market fluctuations is
greater than the stock market in general. To manage a portion of this risk, we enter into derivative instruments such as zero-cost collar
instruments and equity forward contracts to hedge equity securities against changes in market value. A zero-cost collar is a purchased put
option and a written call option on a specific equity security such that the cost of the purchased put and the proceeds of the written call offset
each other; therefore, there is no initial cost or cash outflow for these instruments. Our zero-cost collars expired in 2007.

As part of our fair value hedging strategy, we have also entered into equity forward contracts that mature in 2009. An equity forward is a
derivative instrument in which we pay the counterparty the total return of the security above the current spot price and receive interest income
on the notional amount for the term of the equity forward. A forward contract is a derivative instrument in which we lock in the termination
price that we receive from the sale of stock based on a pre-determined spot price. The forward contract protects us from a decline in the market
value of the security below the spot price and limits our potential benefit from an increase in the market value of the security above the spot
price. Throughout the life of the contract, we receive interest income based on the notional amount and a floating-rate index.

During the years ended December 31, 2008, 2007, and 2006, we had no material amounts of ineffectiveness with respect to our equity hedging
instruments. Gains and losses related to zero-cost collar instruments that hedge future cash flows are recorded against the gains or losses from
the sale of the underlying hedged marketable equity investment in the Consolidated Statements of Income.

As part of our hedging transactions, we have entered, and may in the future enter, into security lending agreements with our counterparties.
For an equity forward contract, in exchange for lending the hedged shares to the counterparty, we receive additional interest income
throughout the life of the agreement based on the notional amount and a floating-rate index. For an equity collar, the benefit is embedded in
the call strike price. The total estimated fair value of the securities lent under these agreements was $167 million at December 31, 2008 and
$161 million at December 31, 2007.

Estimated Fair Value

The estimated fair value of the foreign exchange options and forwards was based on the forward exchange rates as of December 31, 2008 and
2007. The estimated fair value of the equity forward contracts was determined based on the closing market prices of the underlying securities
at each year-end. The estimated fair value of our interest rate swap agreements was based on forward interest rates at each year-end and does
not include accrued interest. The table below summarizes the estimated fair value, which is also the carrying value, of our financial instruments
at December 31, 2008 and 2007 (in millions):

2008 2007
Assets:
Foreign exchange options $ 20 $ –
Equity forwards 40 24
Interest rate swap agreements 23 6
Liabilities:
Foreign exchange options 31 14
Foreign exchange forward contracts – 5

The financial instruments that we hold are entered into with a diversified selection of institutions. Credit exposure is limited to the unrealized
gains on our contracts. We have not experienced any material losses due to credit impairment of our financial instruments.

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Note 5. FAIR VALUE MEASUREMENTS

On January 1, 2008, we adopted FAS 157, which established a framework for measuring fair value under GAAP and clarified the definition of
fair value within that framework. FAS 157 also established a fair value hierarchy that prioritizes the inputs used in valuation techniques into the
following three levels:

Level 1—quoted prices in active markets for identical assets and liabilities
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—unobservable inputs

A substantial majority of our financial instruments are Level 1 and Level 2 assets.

The following table sets forth the fair value of our financial assets and liabilities measured on a recurring basis, including those that are
pledged as collateral or are restricted. Assets and liabilities are measured on a recurring basis if they are remeasured at least annually.

De ce m be r 31, 2008 De ce m be r 31, 2007


(In m illions) Asse ts Liabilitie s Asse ts Liabilitie s
Cash and cash equivalents $ 4,533 $ – $ 2,514 $ –
Restricted cash – – 788 –
Short-term investments 1,665 – 1,461 –
Long-term marketable debt securities 3,060 – 1,674 –
Total fixed income investment portfolio 9,258 – 6,437 –

Long-term marketable equity securities 287 – 416 –


Total derivative financial instruments 83 31 30 19
Total $ 9,628 $ 31 $ 6,883 $ 19

The following table sets forth the fair value of our financial assets and liabilities, allocated into Level 1, Level 2, and Level 3 that were measured
on a recurring basis as of December 31, 2008 (in millions).

Le ve l 1 Le ve l 2 Le ve l 3 Total
Assets
Cash and cash equivalents $ 2,876 $ 1,657 $ – $ 4,533
Trading securities 170 627 – 797
Securities available-for-sale 515 3,268 145 3,928
Equity securities 287 – – 287
Derivative financial instruments 40 43 – 83
Total $ 3,888 $ 5,595 $ 145 $ 9,628

Liabilities
Derivative financial instruments(1) $ – $ 31 $ – $ 31
________________________
(1)
Our Level 2 liabilities consisted of derivative financial instruments including currency forward contracts and currency option contracts.

As of December 31, 2008, the fair value of our Level 1 assets was $3.9 billion, consisting primarily of cash, money market instruments, U.S.
Treasury securities and marketable equity securities in biotechnology companies with which we have collaboration agreements. Included in
this amount were gross unrecognized gains and losses of approximately $257 million and $1 million, respectively, primarily related to
marketable equity securities.

As of December 31, 2008, the fair value of our Level 2 assets was $5.6 billion consisting primarily of corporate bonds, commercial paper,
government and agency securities, municipal bonds and bonds denominated in foreign currencies but hedged to U.S. dollars. During 2008, we
significantly reduced or eliminated our holdings in

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investments with a higher risk-profile such as commodities, non-investment grade debt, preferred and asset-backed securities. Asset-backed
securities and preferred securities represented about 1% of the total value of Level 2 assets as of December 31, 2008. Included in our Level 2
assets were gross unrecognized losses of approximately $45 million primarily related to corporate bonds offset by approximately $45 million of
gross unrecognized gains primarily related to government-backed securities. In addition, the fair value of our Level 2 assets included
approximately $45 million in gross unrecognized gains related to foreign currency derivative contracts which are held to hedge forecasted
foreign-currency-denominated royalty revenue and interest rate swaps used to hedge interest rate movements that impact the fair value of our
Senior Notes. In 2008, the U.S. Treasury announced actions that significantly reduced the value of U.S. government agency preferred
securities that we hold as investments. As a result, we recorded an impairment charge of $46 million during 2008.

As of December 31, 2008, our Level 3 assets consisted of student loan auction-rate securities and the preferred securities of an insolvent
company. As of December 31, 2008, we held $145 million of investments, which were measured using unobservable (Level 3) inputs,
representing about 2% of the total fair value investment portfolio. Student loan auction-rate securities of $145 million were valued based on
broker-provided valuation models, which approximate fair value. In addition, our Level 3 assets included preferred securities in a financial
institution that declared bankruptcy during 2008. We recorded an impairment charge of $21 million during 2008 to fully impair these preferred
securities, because we do not expect to recover the value of these assets during the bankruptcy proceedings. We also transferred the
preferred securities to Level 3 assets from Level 2 assets.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial assets, which were measured at fair value on a
recurring basis as December 31, 2008 (in millions).

De ce m be r 31, 2008
S tru ctu re d
Inve stm e n t
Ve h icle Au ction -Rate Pre fe rre d
S e cu ritie s S e cu ritie s S e cu ritie s
Beginning balance December 31, 2007 $ 7 $ – $ –
Transfer into Level 3 – 174 21
Impairment charges – – (21)
Unrealized losses(1) (1) (26) –
Purchases, issuances, settlement (6) (3) –
Ending balance $ – $ 145 $ –
________________________
(1)
T he unrealized losses of $27 million in 2008 were included in OCI as of December 31, 2008.

Note 6. CONSOLIDATED FINANCIAL STATEMENT DETAIL

Inventories

Inventories at December 31 are summarized below (in millions):

2008 2007
Raw materials and supplies $ 122 $ 119
Work-in-process 937 1,062
Finished goods 240 312
Total $ 1,299 $ 1,493

Included in work-in-process as of December 31, 2008 were approximately $133 million of inventories manufactured under a process or at a
facility that is awaiting regulatory licensure.

The carrying value of inventory on our Consolidated Balance Sheets as of December 31, 2008 and 2007 included employee stock-based
compensation costs of $61 million and $72 million, respectively. The carrying value of inventory on our Consolidated Balance Sheets as of
December 31, 2008 also included retention plan costs of $27 million.

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Property, Plant and Equipment

Property, plant and equipment balances at December 31 are summarized below (in millions):

2008 2007
At cost:
Land $ 418 $ 418
Land improvements 50 48
Buildings 2,949 1,914
Equipment 2,803 2,318
Leasehold improvements 410 285
Construction-in-progress 834 1,675
7,464 6,658
Less: accumulated depreciation and amortization 2,060 1,672
Net property, plant and equipment $ 5,404 $ 4,986

Included in construction-in-progress at December 31, 2007 was $542 million in capitalized costs pursuant to our Master Lease Agreement with
HCP (formerly Slough SSF, LLC) for the construction of buildings in South San Francisco, California. Construction of these buildings was
completed in 2008, and as of December 31, 2008, all of the buildings had been placed in service. Also included in construction-in-progress at
December 31, 2008 and 2007 are $107 million and $141 million, respectively, in capitalized costs pursuant to our Lonza agreements. See Note 9,
“Leases, Commitments, and Contingencies,” for further discussion of the HCP Master Lease Agreement and the Lonza agreements.

Depreciation expense was $393 million in 2008, $334 million in 2007, and $279 million in 2006.

Other Accrued Liabilities

Other accrued liabilities at December 31 were as follows (in millions):

2008 2007
Accrued compensation $ 634 $ 450
Accrued royalties 283 270
Accrued clinical and other studies (including to related parties:
2008-$94; 2007-$106) 303 357
Accrued marketing and promotion costs 175 181
Taxes payable 180 173
Accrued collaborations (including to a related party:
2008-$57; 2007-$50) 313 267
Other (including to related parties:
2008-$29; 2007-$74) 391 352
Total other accrued liabilities $ 2,279 $ 2,050

As of December 31, 2008, accrued compensation included $162 million related to the retention plans.

Interest and Other Income, Net

Interest and other income, net for the years ended December 31 were as follows (in millions):

2008 2007 2006


Gains on sales of biotechnology equity securities, net $ 109 $ 22 $ 93
Write-downs of biotechnology debt and equity securities (16) (20) (4)
Interest income
Investment income 157 300 230
Impairment charges (67) (30) –
Other miscellaneous income 1 1 6
Total interest and other income, net $ 184 $ 273 $ 325

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Investment income and gains on sales of biotechnology equity securities, net were partially offset in 2008 by impairment charges of $67 million
for preferred securities and in 2007 by a $30 million write-down of a fixed-income investment. Gains on sales of biotechnology equity securities
included $30 million related to the sale of a biotechnology equity investment and $13 million in 2008 and $79 million in 2006 in gains that were
recognized upon the acquisition of companies in which we owned equity securities.

Note 7. OTHER INTANGIBLE ASSETS

The components of our other intangible assets, including those arising from the Redemption and push-down accounting and our acquisition
of Tanox at December 31, were as follows (in millions):

2008 2007
W e ighte d
Ave rage Gross Ne t Gross Ne t
Use ful C arrying Accum u late d C arrying C arrying Accum u late d C arrying
Life Am ou n t Am ortiz ation Am ou n t Am ou n t Am ortiz ation Am ou n t
Developed product
technology 12 years $ 1,974 $ 1,248 $ 726 $ 1,974 $ 1,106 $ 868
Core technology 12 years 478 437 41 478 414 64
Trade names 12 years 144 105 39 144 98 46
Patents and other intangible
assets 12 years 370 168 202 331 141 190
Total $ 2,966 $ 1,958 $ 1,008 $ 2,927 $ 1,759 $ 1,168

Amortization expense of our other intangible assets was as follows (in millions):

2008 2007 2006


Acquisition-related intangible assets amortization $ 172 $ 132 $ 105
Patents and other intangible assets amortization 27 26 23
Total amortization expense $ 199 $ 158 $ 128

The expected future annual amortization expense of our other intangible assets is as follows (in millions):

For th e Ye ar En ding De ce m be r 31,


2009 $ 152
2010 102
2011 101
2012 100
2013 98
Thereafter 455
Total expected future annual amortization $ 1,008

Note 8. DEBT

Commercial Paper Program

In October 2007, we issued $600 million in unsecured commercial paper notes payable for funding general corporate purposes. These notes are
not redeemable prior to maturity or subject to voluntary prepayment, and are issued on a discount basis. We stopped issuing commercial
paper in September 2008 in response to unfavorable changes in the credit markets, and our commercial paper obligations were fully paid by
October 2008. In December 2008, we recommenced this funding program and issued $500 million of commercial paper in response to favorable
changes in those markets. At December 31, 2008 and 2007, outstanding commercial paper notes carried an effective interest yield of 0.8% and
4.46%, respectively. Interest expense related to the commercial paper program was $13 million in 2008 and $5 million in 2007.

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Long-Term Debt

On July 18, 2005, we completed a private placement of the following debt instruments: $500 million principal amount of 4.40% Senior Notes due
2010, $1.0 billion principal amount of 4.75% Senior Notes due 2015 and $500 million principal amount of 5.25% Senior Notes due 2035
(collectively, the Notes). Interest on each series of the Notes is payable on January 15 and July 15 of each year, beginning on January 15, 2006.
Net proceeds resulting from issuance of the Notes, after debt discount and issuance costs, were approximately $1.99 billion. The Notes contain
certain restrictive covenants on incurring property liens and entering into sale and lease-back transactions, all of which we were in compliance
with at December 31, 2008. Interest expense related to the debt issuance, net of amounts capitalized of $39 million in 2008 and $41 million in
2007, was $54 million in 2008 and $60 million for 2007. As of December 31, 2008, the future minimum principal payments under the Notes are as
follows (in millions):

2010 $ 500
2011 –
Thereafter 1,500
Total $ 2,000

At December 31, 2008 and 2007, the carrying value of the Notes was $2.0 billion, and the estimated fair value was $1.86 billion and $1.94 billion,
respectively. The fair value of debt was estimated based on the then current rates offered to us for debt instruments with the same remaining
maturities. In July 2005, we entered into a series of interest rate swap agreements, related to debt maturing in 2010. See “Derivative Financial
Instruments” in Note 4, “Investment Securities and Financial Instruments” for further discussion of the interest rate swaps.

Long-term debt at December 31, 2008 and 2007 included $306 million and $399 million, respectively, in construction in progress financing
obligations related to our agreements with HCP and Lonza. Long-term debt as of December 31, 2008, was reduced by a $200 million financing
payment related to the construction of a manufacturing facility in Singapore. See Note 9, “Leases, Commitments, and Contingencies,” for
further discussion of the Lonza agreements and HCP Master Lease Agreement.

Note 9. LEASES, COMMITMENTS, AND CONTINGENCIES

Leases

We lease various real properties under operating leases that generally require us to pay taxes, insurance, maintenance and minimum lease
payments. Some of our leases have options to renew.

In December 2004, we entered into a Master Lease Agreement with Slough SSF, LLC, which was subsequently acquired by HCP, for the lease
of property adjacent to our South San Francisco campus. The property was developed into eight buildings and two parking structures. For
accounting purposes, due to the nature of our involvement with the construction of the buildings subject to the Master Lease Agreement, we
are considered to be the owner of the assets. Construction of these buildings was completed in 2008, and as of December 31, 2008, all of the
buildings had been placed in service. As of December 31, 2008, we had capitalized $298 million of construction costs, including capitalized
interest, in property, plant and equipment. In addition, we separately capitalized $311 million of leasehold improvements that we had installed
at the property. We have recognized $274 million as a construction financing obligation, which is primarily included in “Long-term debt” in the
accompanying Consolidated Balance Sheets. Concurrent with the commencement of the rental period, during the third quarter of 2006, we
began repayment of the construction financing obligation. Included in these lease payments is interest expense of $15 million in 2008 and $10
million in 2007.

Future minimum lease payments under all leases, exclusive of the residual value guarantees and executory costs at December 31, 2008 are as
follows (in millions). These minimum lease payments were computed based on interest rates current at that time:

2009 2010 2011 2012 2013 Th e re afte r Total


Operating leases $ 27 $ 27 $ 25 $ 21 $ 21 $ 69 $ 190
HCP leases 36 37 39 40 41 298 491
Total $ 63 $ 64 $ 64 $ 61 $ 62 $ 367 $ 681

Rental expenses for our operating leases were $41 million in 2008, $37 million in 2007, and $33 million in 2006.

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Commitments

In October 2007, we entered into a five-year, $1 billion revolving credit facility with various financial institutions. The credit facility is expected
to be used for general corporate and working capital purposes, including providing support for our commercial paper program. Of the $1 billion
commitment, $50 million was committed by an institution that is currently undergoing bankruptcy proceedings, and therefore we do not expect
to rely on this portion of the commitment. As of December 31, 2008, we did not have any borrowings under the credit facility.

In December 2006, Lonza purchased all of the outstanding shares of Genentech España, our wholly-owned subsidiary, including the FDA-
licensed Porriño facility, which is currently dedicated to the production of Avastin. We also entered into a supply agreement with Lonza for
the manufacture of certain of our products at Lonza’s facility under construction in Singapore, which is currently expected to receive FDA
licensure in 2010. We are committed to funding the pre-commissioning production qualification costs at that facility, and, upon FDA licensure,
we are committed to purchasing 100 percent of products successfully manufactured at that facility for a period of three years after
commissioning of the facility. The total estimated cost of these pre- and post-commissioning commitments is approximately $440 million, the
majority of which will be paid in 2009 through 2012. We also received an exclusive option to purchase the Lonza Singapore facility during the
period from 2007 up to one year after FDA licensure for a purchase price of $290 million. Regardless of whether the purchase option is
exercised, we will be obligated to make a milestone payment of approximately $70 million if certain performance milestones are met in
connection with the construction of the facility. As of December 31, 2008, we had not exercised our option to purchase.

In addition, we entered into a loan agreement with Lonza to advance up to $290 million to Lonza for the construction of the Singapore
facility, subject to certain mutually acceptable conditions of securitization, and approximately $9 million for a related land lease option. In
November 2008, the facility reached mechanical completion, and we advanced Lonza $200 million pursuant to the loan agreement. If we exercise
our option to purchase the facility, any outstanding advances may be offset against the purchase price. If we do not exercise our purchase
option, the advances will be offset against supply purchases.

In September 2004, we entered into a non-exclusive, long-term manufacturing agreement for the production of Herceptin bulk product with
Wyeth Pharmaceuticals, a division of Wyeth (Wyeth). Under this agreement, Wyeth will manufacture Herceptin bulk product for us for
approximately $251 million through 2009 at their production facility in Andover, Massachusetts. As of December 31, 2008, our remaining
purchase obligation to Wyeth was $84 million. In the third quarter of 2006, the FDA approved the manufacture of Herceptin bulk product at
Wyeth’s facility.

Contingencies

We are a party to various legal proceedings, including patent litigations, 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. Through counsel we are
having discussions with government representatives about the status of their investigation and Genentech’s views on this matter, including
potential resolution. Previously, the investigation had been both criminal and civil in nature. We were informed in August 2008 by the criminal
prosecutor who handled this matter that the government had decided to decline to prosecute the company criminally in connection with this
investigation. The civil matter is still ongoing. The outcome of this matter cannot be determined at this time.

We and the 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 that are referred to as the “Riggs/Itakura Patents.” Subsequently, we entered into license agreements with
various companies to manufacture, use, and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999, COH filed a
complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties to COH in connection with these
license agreements,

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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 COH approximately $300 million in compensatory damages. On June 24, 2002, a jury voted to award COH an additional $200 million in
punitive damages. Such amounts were accrued as an expense in the second quarter of 2002. Included within current liabilities in “Accrued
litigation” in the accompanying Consolidated Balance Sheet at December 31, 2007 was $776 million, which represented our estimate of the
costs for the resolution of the COH matter as of that reporting date. We filed a notice of appeal of the verdict and damages awards with the
California Court of Appeal, and in subsequent proceedings the California Court of Appeal affirmed the verdict and damages awards in all
respects. Following the decision of the Court of Appeal, we filed a petition seeking review by the California Supreme Court which was granted,
and on April 24, 2008 the California Supreme Court overturned the award of $200 million in punitive damages to COH but upheld the award of
$300 million in compensatory damages. We paid $476 million to COH in the second quarter of 2008, reflecting the amount of compensatory
damages awarded plus interest thereon from the date of the original decision, June 10, 2002.

As a result of the April 24, 2008 California Supreme Court decision, we reversed a $300 million net litigation accrual related to the punitive
damages and accrued interest, which we recorded as “Special items: litigation-related” in our Consolidated Statements of Income in 2008. In
2007, we recorded accrued interest and bond costs on both compensatory and punitive damages totaling $54 million. In conjunction with the
COH judgment in 2002, we posted a surety bond and were required to pledge cash and investments of $788 million to secure the bond, and this
balance was reflected in “Restricted cash and investments” in the accompanying Consolidated Balance Sheet as of December 31, 2007. During
the third quarter of 2008, the court completed certain administrative procedures to dismiss the case. As a result, the restrictions were lifted from
the restricted cash and investments accounts, which consisted of available-for-sale investments, and the funds became available for use in our
operations. We and COH are in discussions, but have not reached agreement, regarding additional royalties and other amounts that
Genentech owes COH under the 1976 agreement for third-party product sales and settlement of a third-party patent litigation that occurred
after the 2002 judgment. We recorded additional costs of $40 million as “Special items: litigation-related” in 2008 based on our estimate of our
range of liability in connection with the resolution of these issues.

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 related 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 have paid royalties to us under these licenses. The lawsuit included claims
for violation of anti-trust, patent, and unfair competition laws. MedImmune sought a ruling that the Cabilly patent was invalid and/or
unenforceable, a determination that MedImmune did 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 June 11, 2008, we
announced that we settled this litigation with MedImmune. Pursuant to the settlement agreement, the U.S. District Court dismissed all of the
claims against us in the lawsuit. The litigation has been fully resolved and dismissed, and the settlement did not have a material effect on our
operating results in 2008.

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 Patent Office ordered reexamination of the Cabilly patent.
On September 13, 2005, the Patent Office mailed an initial non-final Patent Office action rejecting all 36 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
all 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 the 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. On February 25, 2008, the Patent Office mailed a final Patent Office
action rejecting all the claims of the

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Cabilly patent. We filed our response to that final Patent Office action on June 6, 2008. On July 19, 2008, the Patent Office mailed an advisory
action replying to our response and confirming the rejection of all claims of the Cabilly patent. We filed a notice of appeal challenging the
rejection on August 22, 2008. Our opening appeal brief was filed on December 9, 2008. Subsequent to the filing of our appeal brief, the Patent
Office continued the reexamination. 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 deoxyribonucleic acid (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. 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 to proceed with further trials of certain humanized anti-CD20 antibodies, but Biogen Idec disagreed with our
position. The disputed issues have been submitted to arbitration. 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 clinical trials in order to obtain Biogen Idec’s
approval. Each party is also seeking monetary damages from the other. The arbitrators held hearings on this matter, and we expect a final
decision from the arbitrators by no later than July 2009. The outcome of this matter cannot be determined at this time.

On June 28, 2003, Mr. Ubaldo Bao Martinez filed a lawsuit against the Porriño Town Council and Genentech España S.L. in the Contentious
Administrative Court Number One of Pontevedra, Spain. The lawsuit challenges the Town Council’s decision to grant licenses to Genentech
España S.L. for the construction and operation of a warehouse and biopharmaceutical manufacturing facility in Porriño, Spain. On January 16,
2008, the Administrative Court ruled in favor of Mr. Bao on one of the claims in the lawsuit and ordered the closing and demolition of the
facility, subject to certain further legal proceedings. On February 12, 2008, we and the Town Council filed appeals of the Administrative Court
decision at the High Court in Galicia, Spain. In addition, through legal counsel in Spain we are cooperating with Lonza to pursue additional
licenses and permits for the facility. We sold the assets of Genentech España S.L., including the Porriño facility, to Lonza in December 2006,
and Lonza has operated the facility since that time. Under the terms of that sale, we retained control of the defense of this lawsuit and agreed
to indemnify Lonza against certain contractually defined liabilities up to a specified limit, which is currently estimated to be approximately $100
million. The outcome of this matter and our indemnification obligation to Lonza, if any, cannot be determined at this time.

On May 30, 2008, Centocor, Inc. filed a patent lawsuit against Genentech and COH in the U.S. District Court for the Central District of
California. The lawsuit relates to the Cabilly patent that we co-own with COH and under which Centocor and other companies have been
licensed and have paid royalties to us under these licenses. The lawsuit seeks a declaratory judgment of patent invalidity and unenforceability
with regard to the Cabilly patent and of patent non-infringement with regard to Centocor’s marketed product ReoPro® (Abciximab) and its
unapproved product CNTO 1275 (Ustekinumab). Centocor originally sought to recover the royalties that it has paid to Genentech for ReoPro ®
and the monies it alleges that Celltech has paid to Genentech for Remicade® (infliximab), a product marketed by Centocor (a wholly-owned
subsidiary of Johnson & Johnson) under an agreement between Centocor and Celltech, but Centocor withdrew those claims in connection
with its first amended complaint filed on September 3, 2008. Genentech answered the complaint on September 19, 2008 and also filed
counterclaims against Centocor alleging that four Centocor products infringe certain Genentech patents. Genentech filed an amendment to
those counterclaims on October 10, 2008 and Centocor answered these counterclaims on November 26, 2008. The outcome of this matter
cannot be determined at this time.

On May 8, June 11, August 8, and September 29 of 2008, Genentech was named as a defendant, along with InterMune, Inc. and its former chief
executive officer, W. Scott Harkonen, in four originally separate class-action complaints filed in the U.S. District Court for the Northern District
of California on behalf of plaintiffs who allegedly paid part or all of the purchase price for Actimmune ® for the treatment of idiopathic
pulmonary fibrosis. Actimmune ® is an interferon-gamma product that was licensed by Genentech to Connectics Corporation and was
subsequently assigned to InterMune. InterMune currently sells Actimmune ® in the U.S. The complaints are related in part to royalties that we
received in connection with the Actimmune® product. The May 8, June 11, and August 8

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complaints have been consolidated into a single amended complaint that claims and seeks damages for violations of federal racketeering laws,
unfair competition laws, and consumer protection laws, and for unjust enrichment. The September 29 complaint includes six claims, but only
names Genentech as a defendant in one claim for damages for unjust enrichment. Genentech’s motion to dismiss both complaints was heard
on February 2, 2009. The outcome of these matters cannot be determined at this time.

Subsequent to the Roche Proposal, more than thirty shareholder lawsuits have been filed against Genentech and/or the members of its Board
of Directors, and various Roche entities, including RHI, Roche Holding AG, and Roche Holding Ltd. The lawsuits are currently pending in
various state courts, including the Delaware Court of Chancery and San Mateo County Superior Court, as well as in the United States District
Court for the Northern District of California. The lawsuits generally assert class-action claims for breach of fiduciary duty and aiding and
abetting breaches of fiduciary duty based in part on allegations that, in connection with Roche’s offer to purchase the remaining shares, some
or all of the defendants failed to properly value Genentech, failed to solicit other potential acquirers, and are engaged in improper self-dealing.
Several of the suits also seek the invalidation, in whole or in part, of the Affiliation Agreement, and an order deeming Articles 8 and 9 of the
company’s Amended and Restated Certificate of Incorporation invalid or inapplicable to a potential transaction with Roche. The outcome of
these matters cannot be determined at this time.

On October 27, 2008, Genentech and Biogen Idec Inc. filed a complaint against Sanofi-Aventis Deutschland GmbH (Sanofi), Sanofi-Aventis
U.S. LLC, and Sanofi-Aventis U.S. Inc. in the Northern District of California, seeking a declaratory judgment that certain Genentech products,
including Rituxan (which is co-marketed with Biogen Idec) do not infringe Sanofi’s U.S. Patents 5,849,522 (‘522 patent) and 6,218,140 (‘140
patent) and a declaratory judgment that the ‘522 and ‘140 patents are invalid. Also on October 27, 2008, Sanofi filed suit against Genentech and
Biogen Idec in the Eastern District of Texas, Lufkin Division, claiming that Rituxan and at least eight other Genentech products infringe the
‘522 and ‘140 patents. Sanofi is seeking preliminary and permanent injunctions, compensatory and exemplary damages, and other relief.
Genentech and Biogen Idec filed a motion to transfer this matter to the Northern District of California on January 22, 2009. In addition, on
October 24, 2008, Hoechst GmbH filed with the ICC International Court of Arbitration (Paris) a request for arbitration with Genentech, relating
to a terminated agreement between Hoechst’s predecessor and Genentech that pertained to the above-referenced patents and related patents
outside the U.S. Hoechst is seeking payment of royalties on sales of Genentech products, damages for breach of contract, and other relief.
Genentech intends to defend itself vigorously. The outcome of these matters cannot be determined at this time.

Note 10. RELATIONSHIP WITH ROCHE HOLDINGS, INC. AND RELATED PARTY TRANSACTIONS

Licensing Agreements Related to Genentech Products

We have a July 1999 amended and restated licensing and marketing agreement with Roche and its affiliates granting them an option to license,
use, and sell our products in non-U.S. markets. The major provisions of that agreement include the following:

ü Roche may exercise its option to license our products upon the occurrence of any of the following: (1) the filing of the first IND for a
product; (2) the date by which Genentech has clinical trial data and other information sufficient to enable the first Phase III trial in the
U.S. (Phase II Completion) for a product; or (3) provided Roche has paid a fee of $10 million (Option Extension Fee) within a certain
time following its decision not to exercise the option in (2) above, the date by which the first Phase III Trial for a product is completed
and the results are known, available, analyzed and, in Genentech’s reasonable judgment, enable a U.S. BLA/NDA filing;

ü Roche’s options expire on October 25, 2015 except that Roche maintains: (1) a Phase II Completion option for those products for
which Genentech has filed an IND prior to October 25, 2015, but which have not reached Phase II Completion; and (2) an option at
Phase III completion for those products for which Roche had paid the Option Extension Fee at the Phase II Completion prior to
October 25, 2015;

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ü If Roche exercises its option to license a product, it has agreed to reimburse Genentech for development costs as follows: (1) if
exercise occurs upon the filing of an IND, Roche will pay 50% of development costs incurred prior to the filing and 50% of
development costs subsequently incurred; (2) if exercise occurs at the completion of the first Phase II trial, Roche will pay 50% of
development costs incurred through completion of the trial, 75% of development costs subsequently incurred for the initial
indication, and 50% of subsequent development costs for new indications, formulations or dosing schedules; (3) if the exercise
occurs at the completion of a Phase III trial, Roche will pay 50% of development costs incurred through completion of Phase II, 75%
of development costs incurred through completion of Phase III, and 75% of development costs subsequently incurred; and half of
the Option Extension Fee paid by Roche to preserve its right to exercise its option at the completion of a Phase III trial will be credited
against the total development costs payable to Genentech upon the exercise of the option; and (4) each of Genentech and Roche
have the right to “opt-out” of sharing development costs for an additional indication for a product for which Roche exercised its
option, but could “opt-back-in” within 30 days of the other party’s decision to file for approval of the indication by paying twice what
they would have owed for development of the indication if they had not opted out;

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

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

ü Roche will pay, for each product for which Roche exercises its licensing option after completion of a Phase III trial, a royalty of 15%
on its sales of that product until the later in each country of the expiration of our last relevant patent or 25 years from the first
commercial introduction of that product; however, the second half of the Option Extension Fee paid by Roche related to a product
will be credited against royalties payable to us in the first calendar year of sales by Roche in which aggregate sales of that product
exceed $100 million; and

ü For certain products for which Genentech is paying a royalty to Biogen Idec, including Rituxan, Roche shall pay Genentech a royalty
of 20% on sales of such product in Roche’s licensed territory. Once Genentech is no longer obligated to pay a royalty to Biogen Idec
on sales of such products in each country, Roche shall then pay Genentech a royalty on sales of 10% on the first $75 million on its
aggregate sales of that product and thereafter a royalty of 8% on its aggregate sales of that product in excess of $75 million until the
later in each country of the expiration of our last relevant patent or 25 years from the first commercial introduction of that product.
During the fourth quarter of 2008, our obligation to pay a royalty to Biogen Idec on sales of Rituxan ended in certain countries. The
shift from the 20% royalty on Rituxan to the lower 8% to 10% royalty rate will occur in certain countries during 2009 and beyond.

We have further amended this licensing and marketing agreement with Roche to delete or add certain Genentech products under Roche’s
commercialization and marketing rights for Canada.

We also have a July 1998 licensing and marketing agreement related to anti-HER2 antibodies (including Herceptin and pertuzumab) with
Roche, providing them with exclusive marketing rights outside of the U.S. Under the agreement, Roche funds one-half of the global
development costs incurred in connection with developing anti-HER2 antibody products under the agreement. Either Genentech or Roche has
the right to “opt-out” of developing an additional indication for a product and would not share the costs or benefits of the additional
indication, but could “opt-back-in” within 30 days of the other party’s decision to file for approval of the indication by paying twice what
would have been owed for development of the indication if no opt-out had occurred. Roche has also agreed to make royalty payments of 20%
on aggregate net sales of a product outside the U.S. up to $500 million in each calendar

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year and 22.5% on such sales in excess of $500 million in each calendar year. In December 2007, Roche opted-in to our trastuzumab drug
conjugate products under terms similar to those of the existing anti-HER2 agreement (see also “Related Party Transactions” below).

Licensing Agreements Related to Roche Products

We have entered into certain licensing agreements with Roche and its affiliates that grant us licenses to develop and commercialize products
discovered by Roche and its affiliates.

In May 2008, Roche acquired Piramed, a privately held entity based in the United Kingdom. Prior to the Roche acquisition of Piramed, we had
entered into a licensing agreement with Piramed related to molecules targeting the PI3 kinase pathway. As a result of Roche’s acquisition of
Piramed, we now are party to this agreement with Roche and Piramed. Under the terms of the agreement Genentech could make future
milestone and royalty payments to Roche. Roche retains the option to acquire rights to develop and commercialize certain products outside of
the United States at the end of Phase II in exchange for an opt-in fee, royalties and a potential share of future development costs.

In June 2008, we entered into a licensing agreement with Roche under which we obtained rights to a preclinical small-molecule drug
development program. The future R&D costs incurred under the agreement and any profit and loss from global commercialization are to be
shared equally with Roche.

In September 2008, we entered into a collaboration agreement with Roche and GlycArt for the joint development and commercialization of
GA101, a humanized anti-CD20 monoclonal antibody for the potential treatment of hematological malignancies and other oncology-related B-
cell disorders such as NHL. The future global R&D costs incurred under the agreement are to be shared equally with Roche. We received
commercialization rights in the U.S. and have the right to manufacture our own commercial requirements for the U.S. In October 2008, Biogen
Idec exercised the right under our collaboration agreement with them to opt in to this agreement.

Research Collaboration Agreement

We have an April 2004 research collaboration agreement with Roche that outlines the process by which Roche and Genentech may agree to
conduct and share in the costs of joint research on certain molecules. The agreement further outlines how development and commercialization
efforts will be coordinated with respect to select molecules, including the financial provisions for a number of different development and
commercialization scenarios undertaken by either or both parties.

Manufacturing Agreements

We signed two product supply agreements with Roche in July 2006, each of which was amended in November 2007. The Umbrella
Manufacturing Supply Agreement (Umbrella Agreement) supersedes our existing product supply agreements with Roche. The Short-Term
Supply Agreement (Short-Term Agreement) supplements the terms of the Umbrella Agreement. Under the Short-Term Agreement, Roche has
agreed to purchase specified amounts of Herceptin, Avastin and Rituxan through 2008. Under the Umbrella Agreement, Roche has agreed to
purchase specified amounts of Herceptin and Avastin through 2012 and, on a perpetual basis, either party may order other collaboration
products from the other party, including Herceptin and Avastin after 2012, pursuant to certain forecast terms. The Umbrella Agreement also
provides that either party may terminate its obligation to purchase and/or supply Avastin and/or Herceptin with six years notice on or after
December 31, 2007. To date, we have not provided to or received from Roche such notice of termination.

In July 2008, we signed an agreement with Chugai Pharmaceutical Co., Ltd., a Japan-based entity and part of Roche, under which we agreed to
manufacture Actemra, a product of Chugai, at our Vacaville, California facility. After an initial term of five years, the agreement may be
terminated subject to certain terms and conditions under the contract.

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Tax Sharing Agreement

We have a tax sharing agreement with RHI. If we and RHI elect to file a combined state and local tax return in certain states where we may be
eligible, our tax liability or refund with RHI for such jurisdictions will be calculated on a stand-alone basis.

RHI’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 December 31, 2008, RHI’s ownership percentage was 55.8%.

The Roche Proposal and the Roche Tender Offer

We announced on July 21, 2008 that we received the Roche Proposal and on July 24, 2008 we announced that the Special Committee was
formed to review and consider the terms and conditions of the Roche Proposal, any business combination with Roche or any offer by Roche
to acquire our securities, negotiate as appropriate, and, in the Special Committee’s discretion, recommend or not recommend the acceptance of
the Roche Proposal by the minority shareholders. On August 13, 2008, we announced that the Special Committee had unanimously concluded
that the Roche Proposal substantially undervalues the company, but that the Special Committee would consider a proposal that recognizes the
value of the company and reflects the significant benefits that would accrue to Roche as a result of full ownership. On January 30, 2009, Roche
announced that it intended to commence a tender offer which would replace the Roche Proposal that was announced on July 21, 2008. On
January 30, 2009, in response to the announcement by Roche, the Special Committee urged shareholders to take no action with respect to the
announcement by Roche and that the Special Committee will announce a formal position within 10 business days following the commencement
of such a tender offer by Roche. On February 9, 2009, Roche commenced the Roche Tender Offer. The Roche Tender Offer is conditional upon,
among other things, (i) a non-waivable condition that holders of at least a majority of the outstanding publicly-held Genentech shares tender
their shares in the Roche Tender Offer and (ii) a condition, which may be waived by Roche in its sole discretion, that Roche has obtained
sufficient financing to purchase all outstanding publicly-held Genentech shares and all Genentech shares issuable upon exercise of
outstanding options and to pay related fees and expenses. Also on February 9, 2009, the Special Committee urged shareholders to take no
action with respect to the Roche Tender Offer. The Special Committee also announced that it intended to take a formal position within 10
business days of the commencement of the Roche Tender Offer, and will explain in detail its reasons for that position by filing a Statement on
Schedule 14D-9 with the SEC.

On August 18, 2008, we also announced that the Special Committee adopted two retention plans that were implemented in lieu of our 2008
annual stock option grant and two severance plans that were adopted in addition to our existing severance plans. See Note 3, “Retention Plans
and Employee Stock-Based Compensation,” for more information on the retention plans. In addition, the Special Committee and the company
have incurred and will continue to incur third-party legal and advisory costs in connection with the Roche Proposal and the Roche Tender
Offer that are included in the “Marketing, general and administrative” expenses line of our Consolidated Statements of Income.

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The retention plan and third-party legal and advisory costs were as follows (in millions):

2008
Retention plan costs(1)
Research and development $ 66
Marketing, general and administrative 69
Total retention plan costs 135
Third-party legal and advisory costs incurred by us on behalf of the Special Committee 14
Other third-party legal and advisory costs 4
Total retention plan costs and legal and advisory costs $ 153
_______________________
(1)
In 2008, an additional $27 million of retention plan costs were capitalized into inventory, which will be recognized as COS as products that were manufactured
after the initiation of the retention plans are estimated to be sold.

Related Party Transactions

We enter into transactions with our related parties, Roche and 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 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 the July 1999 amended and restated licensing and commercialization agreement, Roche has the right to opt in to development programs
that we undertake on our products at certain pre-defined stages of development. Previously, Roche also had the right to develop certain
products under the July 1998 licensing and commercialization agreement related to anti-HER2 antibodies (including Herceptin, pertuzumab, and
trastuzumab-DM1). When Roche opts in to a program, we generally record the opt-in payments that we receive as deferred revenue, which we
recognize over the expected development periods or product life, as appropriate. During 2008, we received approximately $110 million from
Roche related to opt-ins to various programs, most of which was recorded as deferred revenue. As of December 31, 2008, the amounts in short-
term and long-term deferred revenue related to opt-in payments received from Roche were $57 million and $214 million, respectively. In 2008,
2007, and 2006, we recognized $76 million, $40 million, and $27 million, respectively, as contract revenue related to opt-in payments previously
received from Roche.

In February 2008, Roche acquired Ventana, and as a result of the acquisition, Ventana is considered a related party. We have engaged in
transactions with Ventana prior to and since the acquisition.

In May 2008, Roche acquired Piramed. Prior to the Roche acquisition of Piramed, we had entered into a licensing agreement with Piramed
related to molecules targeting the PI3 kinase pathway.

In June 2008, we entered into a licensing agreement with Roche under which we obtained rights to a preclinical small-molecule drug
development program. We recorded $35 million in R&D expense in the second quarter of 2008 related to this agreement. The future R&D costs
incurred under the agreement and any profit and loss from global commercialization will be shared equally with Roche.

In July 2008, we signed an agreement with Chugai Pharmaceutical Co., Ltd., a Japan-based entity and part of Roche, under which we agreed to
manufacture Actemra, a product of Chugai, at our Vacaville, California facility. After an initial term of five years, the agreement may be
terminated subject to certain terms and conditions under the contract.

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In August 2008, we entered into a Companion Diagnostics Master Agreement with RMS under which we have the ability to work with RMS to
develop companion diagnostics based on RMS’ polymerase chain reaction platform technology.

In September 2008, we entered into a collaboration agreement with Roche and GlycArt for the joint development and commercialization of
GA101, a humanized anti-CD20 monoclonal antibody for the potential treatment of hematological malignancies and other oncology-related B-
cell disorders such as NHL. We recorded $105 million in R&D expense in 2008 related to this collaboration. The future global R&D costs
incurred under the agreement will be shared equally with Roche. We received commercialization rights in the U.S. and have the right to
manufacture our own commercial requirements for the U.S. In October 2008, Biogen Idec exercised the right under our collaboration agreement
with them to opt in to this agreement and paid us an up-front fee of $32 million as part of the opt-in, which we will recognize ratably as contract
revenue over the future development period.

We currently have no commercialized products subject to profit sharing arrangements with Roche.

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

2008 2007 2006


Product sales to Roche $ 868 $ 768 $ 359

Royalties earned from Roche $ 1,544 $ 1,206 $ 846

Contract revenue from Roche $ 138 $ 95 $ 125

Cost of sales on product sales to Roche $ 472 $ 422 $ 268

R&D expenses incurred on joint development projects with Roche $ 336 $ 259 $ 213

In-licensing expenses to Roche $ 145 – –

Certain R&D expenses are partially reimbursable to us by Roche. Amounts that Roche owes us, net of amounts reimbursable to Roche by us
on those projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts we owe Roche for
R&D expenses that Roche incurred on joint development projects, less amounts reimbursable to us by Roche on these projects.

Novartis

Based on information available to us at the time of filing this Form 10-K, we believe that Novartis holds approximately 33.3% of the
outstanding voting shares of Roche. As a result of this ownership, Novartis is deemed to have an indirect beneficial ownership interest under
FAS 57, of more than 10% 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 share the cost of certain of our ongoing development expenses for Lucentis.

We and Novartis are co-promoting Xolair in the U.S and co-developing Xolair in both the U.S. and Europe. We record sales, COS, and
marketing and sales expenses in the U.S.; Novartis markets the product in and records sales, COS, and marketing and sales expenses in Europe
and also records marketing and sales expenses in the U.S. We and Novartis share the resulting U.S. and European operating profits according
to prescribed profit sharing percentages. Generally, we evaluate whether we are a net recipient or payer of funds on an annual basis in our cost
and profit sharing arrangements. Net amounts received on an annual basis under such arrangements are classified as contract revenue, and
net amounts paid on an annual basis are classified as collaboration profit sharing expense. With respect

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to the U.S. operating results, for the full years of 2008, 2007, and 2006 we were a net payer to Novartis. As a result, for 2008, 2007, and 2006, the
portion of the U.S. operating results that we owed to Novartis was recorded as collaboration profit sharing expense. With respect to the
European operating results, for the full year of 2008, we were a net recipient from Novartis and for the full years of 2007 and 2006 we were a net
payer to Novartis. As a result, for 2008, the portion of the European operating results that Novartis owed us was recorded as contract revenue.
For the same periods in 2007 and 2006, however, our portion of the European operating results was recorded as collaboration profit sharing
expense. Effective with our acquisition of Tanox on August 2, 2007, Novartis also makes: (1) additional profit sharing payments to us on U.S.
sales of Xolair, which reduces our profit sharing expense; (2) royalty payments to us on sales of Xolair worldwide, which we record as royalty
revenue; and (3) manufacturing service payments related to Xolair, which we record as contract revenue.

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

2008 2007 2006


Product sales to Novartis $ 12 $ 10 $ 5

Royalties earned from Novartis $ 241 $ 95 $ 3

Contract revenue from Novartis $ 60 $ 70 $ 40

Cost of sales on product sales to Novartis $ 9 $ 10 $ 4

R&D expenses incurred on joint development projects with Novartis $ 43 $ 43 $ 38

Collaboration profit sharing expense to Novartis $ 189 $ 185 $ 187

Contract revenue in 2007 included a $30 million milestone payment from Novartis for European Union approval of Lucentis for the treatment of
neovascular (wet) AMD.

Certain R&D expenses are partially reimbursable to us by Novartis. The amounts that Novartis owes us, net of amounts reimbursable to
Novartis by us on those projects, are recorded as contract revenue. Conversely, R&D expenses may include the net settlement of amounts we
owe Novartis for R&D expenses that Novartis incurred on joint development projects, less amounts reimbursable to us by Novartis on these
projects.

See Note 11, “Acquisition of Tanox, Inc.,” for information on Novartis’ share of the proceeds resulting from our acquisition of Tanox.

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Note 11. ACQUISITION OF TANOX, INC.

On August 2, 2007, we completed our acquisition of 100% of the outstanding shares of Tanox, a biotechnology company specializing in the
discovery and development of biotherapeutics based on monoclonal antibody technology, for $925 million in cash, plus $8 million in
transaction costs. The purchase price allocation is as follows:

(In m illions)
Assets
Cash $ 100
Investments 102
Working capital and other, net 54
In-process research and development 77
Developed product technology 780
Core technology 34
Goodwill 261
Deferred revenue (185)
Deferred tax liability, net (217)
Total acquisition consideration and gain $ 1,006

Consideration and gain


Consideration $ 925
Transaction costs 8
Gain on settlement of preexisting relationship, net of tax 73
$ 1,006

In the third quarter of 2008, we adjusted the purchase price allocation by recording a net increase to goodwill of $13 million, due to revised
estimates of certain restructuring liabilities and related deferred tax assets.

In accordance with FAS No. 141, “Business Combinations” (FAS 141), assets and liabilities acquired were valued at their fair values at the
date of acquisition. We recorded deferred revenue associated with Tanox’s intellectual property license with Novartis related to Xolair of $185
million, which will be recognized as additional royalty revenue over the duration of the estimated remaining patent lives of approximately 12
years.

In connection with our acquisition of Tanox, we terminated certain officers and employees of Tanox. The total amount of the severance
packages offered to these officers and employees was approximately $4 million.

We recorded a $77 million charge for in-process research and development. This charge primarily represents acquired R&D for label extensions
for Xolair that have not yet been approved by the FDA and require significant further development.

Under FAS 141, acquired identifiable intangible assets are measured and recognized apart from goodwill, even if it would not be practical to
sell or exchange the acquired intangible assets and any related license agreements apart from one another. In our accounting for our
acquisition of Tanox’s developed product technology and core technology in accordance with FAS 142, the fair value assigned to those
intangible assets was based on valuations using a present value technique referred to as the income approach, with estimates and
assumptions determined by management, including valuing Tanox’s intellectual property and rights thereon at assumed current fair values,
which, for developed product technology, were in excess of existing contractual rates. The developed product technology that we valued is
related to intellectual property and rights thereon primarily related to the Xolair molecule. The core technology asset that we valued represents
the value of Tanox’s intellectual property and rights thereon expected to be leveraged in the design and development of future products and
indications. The developed product technology and core technology, which totaled $814 million, are being amortized over 12 years. The excess
of purchase price over tangible assets, identifiable intangible assets, and assumed liabilities represents goodwill.

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The intangible assets and goodwill acquired are not deductible for income tax purposes. As a result, we recorded a net deferred tax liability of
$262 million, based on the tax effect of the amount of the acquired intangible assets other than goodwill with no tax basis. We also recorded a
net deferred tax asset of $45 million, primarily related to net operating loss carryforwards acquired in the transaction.

Under EITF 04-1, a business combination between parties with a preexisting relationship should be evaluated to determine if a settlement of a
preexisting relationship exists. The acquisition of Tanox is considered to include the settlement of our 1996 license of certain intellectual
property and rights thereon from Tanox. We measured the amount that the preexisting license arrangement is favorable, from our
perspective, by comparing it to estimated pricing for current market transactions for intellectual property rights similar to Tanox’s intellectual
property rights related to Xolair. In connection with the settlement of this license arrangement, we recorded a gain of $121 million, or $73
million net of tax, in accordance with EITF 04-1.

We understand that on August 2, 2007, Novartis owned approximately 14% of the outstanding shares of Tanox, representing approximately
$127 million of the total cash paid to acquire the outstanding shares of Tanox.

Assuming that the Tanox acquisition was consummated as of January 1, 2006, pro forma consolidated financial results of the company for the
year ended December 31, 2007 and 2006 would not have been materially different from the amounts reported.

Note 12. CAPITAL STOCK

Common Stock and Special Common Stock

On June 30, 1999, we redeemed all of our outstanding Special Common Stock held by stockholders other than RHI. Subsequently, in July and
October 1999, and March 2000, RHI consummated public offerings of our Common Stock. On January 19, 2000, RHI completed an offering of
zero-coupon notes that were exchanged prior to the April 5, 2004 expiration for an aggregate of approximately 26 million shares of our Common
Stock held by RHI. See Note 1, “Description of Business—Redemption of Our Special Common Stock” and Note 10, “Relationship with Roche
Holdings, Inc. and Related Party Transactions,” above for a discussion of the Redemption and the related transactions.

Stock Repurchase Program

Under a stock repurchase program approved by our Board of Directors in December 2003 and most recently extended in April 2008, we are
authorized to repurchase up to 150 million shares of our Common Stock for an aggregate price of up to $10.0 billion through June 30, 2009. 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, although as of December 31, 2008, we had 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.
However, significant option exercises and stock purchases by employees could result in further dilution, and limitations in our ability to enter
into new share repurchase arrangements could negatively affect our ability to offset dilution. 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 (see Note 10, “Relationship with Roche Holdings, Inc. and Related Party
Transactions” above), (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.

We enter into Rule 10b5-1 trading plans to repurchase shares in the open market during periods when trading in our stock is restricted under
our insider trading policy.

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In November 2007, we entered into a prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $300
million to the investment bank. The prepaid amount has been reflected as a reduction of our stockholders’ equity as of December 31, 2007.
Under this arrangement, the investment bank delivered approximately four million shares to us on March 31, 2008.

In May 2008, we entered into a prepaid share repurchase arrangement with an investment bank pursuant to which we delivered $500 million to
the investment bank. The investment bank delivered approximately 5.5 million shares to us on September 30, 2008.

Note 13. INCOME TAXES

The income tax provision consisted of the following amounts (in millions):

2008 2007 2006


Current:
Federal $ 1,744 $ 1,729 $ 1,306
State 170 162 96
Total current 1,914 1,891 1,402
Deferred:
Federal 84 (251) (155)
State 6 17 43
Total deferred 90 (234) (112)
Total income tax provision $ 2,004 $ 1,657 $ 1,290

Tax benefits of $140 million in 2008, $177 million in 2007, and $179 million in 2006 are related to employee stock options and stock purchase
plans. These amounts reduced current income taxes payable and deferred income taxes and were credited to stockholders’ equity.

A reconciliation between our effective tax rate and the U.S. statutory tax rate follows:

2008 2007 2006


Tax at U.S. statutory rate 35.0% 35.0% 35.0%
Research and other credits (1.7) (2.1) (2.3)
In-process research and development – 0.6 –
Prior years’ items 0.3 – 0.9
Export sales benefit – – (0.3)
State taxes 3.9 4.8 5.0
Deduction for qualified production activities (1.2) (1.2) (0.7)
Tax-exempt investment income (0.1) (0.2) (0.2)
Other 0.7 0.5 0.5
Effective tax rate 36.9% 37.4% 37.9%

Prior years’ items in 2008 include IRS audit adjustments related to research credits and foreign royalty income. Prior years’ items in 2006 related
to a decrease in research credits resulting from new income tax regulations issued by the U.S. Department of Treasury in 2006.

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The components of deferred taxes consisted of the following at December 31 (in millions):

2008 2007
Deferred tax liabilities:
Depreciation $ (241) $ (147)
Unrealized gain on securities available-for-sale (84) (136)
Intangibles—Roche transaction (34) (75)
Other intangible assets (325) (361)
Other (33) (14)
Total deferred tax liabilities (717) (733)
Deferred tax assets:
Capitalized R&D costs 8 11
State income taxes 51 –
Employee stock-based compensation costs 291 217
Expenses not currently deductible 419 598
Deferred revenue 208 195
Investment basis difference 217 204
Net operating loss carryforwards 13 33
Other – 5
Total deferred tax assets 1,207 1,263
Total net deferred tax assets $ 490 $ 530

Net operating loss carryforwards related to the Tanox acquisition of $36 million expire in the years 2023 through 2025.

We file income tax returns in the U.S. federal jurisdiction and various state and local and foreign jurisdictions. With few exceptions, we are no
longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for the years before 2002. The IRS has
concluded the examination of our U.S. income tax returns for 2002 through 2004. We have agreed to certain adjustments related to R&D credits
and foreign licensing income for which all related tax and interest was paid to the IRS in the fourth quarter of 2008. We will appeal one
proposed adjustment related to R&D credits in the first quarter of 2009. The IRS may also adjust R&D credits for 2002 through 2004 for the
flow-through effects of the IRS’ separate examinations of Roche’s R&D credits. The IRS is scheduled to begin the examination of our U.S.
income tax returns for 2005 through 2007 in the first quarter of 2009. Our income tax filings are also currently under examination by several state
jurisdictions and one foreign jurisdiction. As of December 31, 2008, no material adjustments had been proposed. We believe that we have
adequately provided for reasonably foreseeable outcomes related to tax audits, appeals, and flow-through effects of changes in Roche’s R&D
credits and that any settlements will not have material adverse effects on our consolidated financial position or results of operations. However,
there can be no assurances as to possible outcomes.

We adopted the provisions of FIN 48 on January 1, 2007. 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. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows (in millions):

2008 2007
Balance at beginning of year $ 153 $ 147
Additions based on tax positions related to the current year 9 1
Additions for tax positions of prior years 62 5
Reductions for tax positions of prior years (13) –
Settlements (75) –
Balance at end of year $ 136 $ 153

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The total amount of unrecognized tax benefits that, if recognized, would favorably affect our effective income tax rate in a future period was
$116 million as of December 31, 2008 and $127 million as of December 31, 2007. We accrue tax-related interest and penalties and include such
expenses with income tax expense in the Consolidated Statements of Income. We recognized approximately $14 million and $8 million in tax-
related interest expense and penalties during 2008 and 2007, respectively, and had approximately $22 million and $18 million of tax-related
interest and penalties accrued at December 31, 2008 and 2007, respectively. Interest amounts are net of tax benefit.

Note 14. SEGMENT, SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION

Our chief operating decision-makers (CODMs) are our executive management with the oversight of our Board of Directors. Our CODMs review
our operating results and operating plans, and make resource allocation decisions on a company-wide or aggregate basis. Accordingly, we
operate as one segment.

Information about our product sales, major customers, and material foreign sources of revenue is as follows (in millions):

Produ ct Sale s 2008 2007 2006


Net U.S. Product Sales
Avastin $ 2,686 $ 2,296 $ 1,746
Rituxan 2,587 2,285 2,071
Herceptin 1,382 1,287 1,234
Lucentis 875 815 380
Xolair 517 472 425
Tarceva 457 417 402
Nutropin products 358 371 378
Thrombolytics 275 268 243
Pulmozyme 257 223 199
Raptiva 108 107 90
Total net U.S. product sales $ 9,503 8,540 7,169

Net Product Sales to Collaborators


Avastin $ 222 $ 157 $ 107
Rituxan 264 230 181
Herceptin 437 417 96
Lucentis 12 10 1
Xolair – – 4
Nutropin products 17 12 8
Thrombolytics 11 20 16
Pulmozyme 48 43 45
Raptiva 17 12 14
Total net product sales to collaborators 1,028 903 471
Total net product sales $ 10,531 $ 9,443 $ 7,640
________________________
T he totals shown above may not appear to sum due to rounding.

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Three of our major customers—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health, Inc.—which are all national
wholesale distributors of all of our major product lines, each contributed 10% or more of our U.S. product sales in each of the last three years,
as presented in the following table.

2008 2007 2006


AmerisourceBergen Corporation 49% 55% 50%
McKesson Corporation 23% 17% 17%
Cardinal Health, Inc. 14% 13% 18%

The combined gross accounts receivable balance for our three major customers was $804 million as of December 31, 2008, $773 million as of
December 31, 2007, and $778 million as of December 31, 2006.

We currently sell primarily to distributors and healthcare companies throughout the U.S. under credit terms based on an assessment of each
customers’ financial condition. Trade credit terms are generally offered without collateral and may include a discount for prompt-payment for
specific customers. To manage our credit exposure, we perform ongoing evaluations of our customers’ financial condition and also participate
in third-party contracts to reduce the risk of financial loss. In 2008, 2007, and 2006, we did not record any material additions to, or losses
against, our allowance for bad debts.

Net foreign revenue, consisting of sales to collaborators, royalty revenue, and contract revenue, was as follows (in millions):

2008 2007 2006


Switzerland $ 1,129 $ 983 $ 561
Other foreign countries 2,241 1,327 885
Total net foreign revenue $ 3,370 $ 2,310 $ 1,446

Net property, plant and equipment by country was as follows (in millions):

2008 2007 2006


United States $ 4,959 $ 4,753 $ 4,153
Singapore 442 233 20
United Kingdom 3 – –
Total property, plant, and equipment, net $ 5,404 $ 4,986 $ 4,173

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QUARTERLY FINANCIAL DATA (unaudited)


(In m illions, except per share am ounts)

2008 Q u arte r En de d(1)


De ce m be r 31 S e pte m be r 30 Ju n e 30 March 31
Total operating revenue $ 3,707 $ 3,412 $ 3,236 $ 3,063
Product sales 2,981 2,634 2,536 2,379
Gross margin from product sales 2,478 2,225 2,095 1,990
Net income 931 731 782 983
Earnings per share:
Basic 0.88 0.69 0.74 0.93
Diluted 0.87 0.68 0.73 0.92

2007 Q u arte r En de d(1)


De ce m be r 31 S e pte m be r 30 Ju n e 30 March 31
Total operating revenue $ 2,970 $ 2,908 $ 3,004 $ 2,843
Product sales 2,349 2,321 2,443 2,329
Gross margin from product sales 2,005 1,915 2,014 1,937
Net income 632 685 747 706
Earnings per share:
Basic 0.60 0.65 0.71 0.67
Diluted 0.59 0.64 0.70 0.66
________________________
(1)
T he 2008 and 2007 amounts were computed independently for each quarter, and the sum of the quarters may not total the annual amounts.

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

Not applicable.

Item 9A. CONTROLS AND PROCEDURES

(a) 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-K. 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 we file under the Exchange Act.

(b) Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and
maintaining adequate internal control over our financial reporting. Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the assessment using those criteria,
management concluded that, as of December 31, 2008, our internal control over financial reporting was effective. Our independent registered
public accountants, Ernst & Young LLP, audited the consolidated financial statements included in this Annual Report on Form 10-K and have
issued an audit report on our internal control over financial reporting. The report on the audit of internal control over financial reporting
appears below.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Genentech, Inc.

We have audited Genentech, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Genentech, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, Genentech, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,
based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Genentech, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity
and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 4, 2009 (except for the first
paragraph of Note 3 and the thirteenth paragraph of Note 10, as to which the date is February 9, 2009) expressed an unqualified opinion
thereon.

/s/ Ernst & Young LLP

Palo Alto, California


February 4, 2009

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(c) Changes in Internal Controls over Financial Reporting: There were no changes in the Company’s internal control over financial reporting
that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Item 9B. OTHER INFORMATION

Not applicable.

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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

(a) The sections labeled “Nominees for Directors,” “Board Committees and Meetings,” “Audit Committee Matters,” “Corporate Governance,”
and “Section 16(a) Beneficial Ownership Reporting Compliance” of our Proxy Statement in connection with the 2009 Annual Meeting of
Stockholders are incorporated herein by reference.

(b) Information concerning our executive officers is set forth in Part I of this Form 10-K.

Item 11. EXECUTIVE COMPENSATION

The sections labeled “2008 Director Compensation,” “Compensation Discussion and Analysis,” “Compensation of Named Executive Officers,”
“Summary Compensation Table for 2008,” “Grants of Plan Based Awards in 2008,” “Outstanding Equity Awards at Fiscal Year End,” “Option
Exercises and Stock Vested,” “Non-Qualified Deferred Compensation for 2008,” and “Compensation Committee Interlocks and Insider
Participation” of our Proxy Statement in connection with the 2009 Annual Meeting of Stockholders are incorporated herein by reference.

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

The sections labeled “Relationship with Roche,” “Equity Compensation Plan Information” and “Beneficial Ownership of Principal
Stockholders, Directors and Management” of our Proxy Statement in connection with the 2009 Annual Meeting of Stockholders are
incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The sections labeled “Relationship with Roche,” “Certain Relationships and Related Person Transactions” and “Director Independence” of
our Proxy Statement in connection with the 2009 Annual Meeting of Stockholders is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The section labeled “Audit Committee Matters” and “Principal Accounting Fees and Services” of our Proxy Statement in connection with the
2009 Annual Meeting of Stockholders is incorporated herein by reference.

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PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

1. Index to Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income for the years ended December 31, 2008, 2007, and 2006

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006

Consolidated Balance Sheets at December 31, 2008 and 2007

Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2008, 2007, and 2006

Notes to Consolidated Financial Statements

Quarterly Financial Data (unaudited)

2. Financial Statement Schedule

The following schedule is filed as part of this Form 10-K:

Schedule II–Valuation and Qualifying Accounts for the years ended December 31, 2008, 2007, and 2006.

All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated
financial statements or the related notes.

3. Exhibits

The documents set forth below are filed herewith or incorporated by reference to the location indicated.

Exh ibit No. De scription Location


3.1 Amended and Restated Certificate of Incorporation Filed as an exhibit to our Current Report on Form 8-K filed with the
U. S. Securities and Exchange Commission (Commission) on July 28,
1999 and incorporated herein by reference.
3.2 Certificate of Amendment of Amended and Restated Filed as an exhibit to our Annual Report on Form 10-K for the year
Certificate of Incorporation ended December 31, 2000 filed with the Commission and
incorporated herein by reference.
3.3 Certificate of Amendment of Amended and Restated Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Certificate of Incorporation quarter ended June 30, 2001 filed with the Commission and
incorporated herein by reference.
3.4 Certificate of Third Amendment of Amended and Restated Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Certificate of Incorporation quarter ended June 30, 2004 filed with the Commission and
incorporated herein by reference.
3.5 Bylaws Filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 2005 filed with the Commission and
incorporated herein by reference.

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4.1 Indenture, dated as of July 18, 2005, between the Company Filed on a Current Report on Form 8-K with the Commission on
and Bank of New York, as trustee July 19, 2005 and incorporated herein by reference.
4.2 Officers’ Certificate of Genentech, Inc. dated July 18, 2005, Filed on a Current Report on Form 8-K with the Commission on
including forms of the Company’s 4.40% Senior Notes due July 19, 2005 and incorporated herein by reference.
2010, 4.75 Senior Notes due 2015 and 5.25% Senior Notes due
2035
4.3 Form of 4.40% Senior Note due 2010 Filed on a Current Report on Form 8-K with the Commission on
July 19, 2005 and incorporated herein by reference.
4.4 Form of 4.75% Senior Note due 2015 Filed on a Current Report on Form 8-K with the Commission on
July 19, 2005 and incorporated herein by reference.
4.5 Form of 5.25% Senior Note due 2035 Filed on a Current Report on Form 8-K with the Commission on
July 19, 2005 and incorporated herein by reference.
10.1 Form of Affiliation Agreement, dated as of July 22, 1999, Filed as an exhibit to Amendment No. 3 to our Registration
between Genentech and Roche Holdings, Inc. Statement (No. 333-80601) on Form S-3 filed with the
Commission on July 16, 1999 and incorporated herein by
reference.
10.2 Amendment No. 1, dated October 22, 1999, to Affiliation Filed as an exhibit to our Annual Report on Form 10-K for the year
Agreement between Genentech and Roche Holdings, Inc. ended December 31, 1999 filed with the Commission and
incorporated herein by reference.
10.3 Form of Amended and Restated Agreement, restated as of Filed as an exhibit to Amendment No. 3 to our Registration
July 1, 1999, between Genentech and F. Hoffmann-La Roche Statement (No. 333-80601) on Form S-3 filed with the
Commission on July 16, 1999 and incorporated herein by
Ltd regarding Commercialization of Genentech’s Products
reference.
outside the United States
10.4 Amendment dated March 10, 2000, to Amended and Restated Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Agreement between Genentech and F. Hoffmann-La Roche quarter ended June 30, 2004 filed with the Commission and
incorporated herein by reference.
Ltd regarding Commercialization of Genentech’s Products
outside the United States
10.5 Amendment dated June 26, 2000, to Amended and Restated Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Agreement between Genentech and F. Hoffmann-La Roche quarter ended June 30, 2004 filed with the Commission and
incorporated herein by reference.
Ltd regarding Commercialization of Genentech’s Products
outside the United States
10.6 Third Amendment dated April 30, 2004, to Amended and Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Restated Agreement between Genentech and F. Hoffmann-La quarter ended June 30, 2004 filed with the Commission and
incorporated herein by reference.
Roche Ltd regarding Commercialization of Genentech’s
Products outside the United States
10.7 Form of Tax Sharing Agreement, dated as of July 22, 1999, Filed as an exhibit to Amendment No. 3 to our Registration
between Genentech, Inc. and Roche Holdings, Inc. Statement (No. 333-80601) on Form S-3 filed with the
Commission on July 16, 1999 and incorporated herein by
reference.
10.8 Collaborative Agreement, dated April 13, 2004, among Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Genentech, F. Hoffmann-La Roche Ltd and Hoffmann-La quarter ended June 30, 2004 filed with the Commission and
incorporated herein by reference.
Roche Inc.
10.9 Genentech, Inc. Tax Reduction Investment Plan, as amended Filed herewith
and restated †

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10.10 Genentech, Inc. 1990 Stock Option/Stock Incentive Plan, as Filed as an exhibit to our Registration Statement (No. 333-83157)
amended effective October 16, 1996 † on Form S-8 filed with the Commission on July 19, 1999 and
incorporated herein by reference.
10.11 Genentech, Inc. 1994 Stock Option Plan, as amended effective Filed as an exhibit to our Registration Statement (No. 333-83157)
October 16, 1996 † on Form S-8 filed with the Commission on July 19, 1999 and
incorporated herein by reference.
10.12 Genentech, Inc. 1999 Stock Plan, as amended and restated as Filed as an exhibit to our Quarterly Report on Form 10-Q for the
of February 13, 2003 † quarter ended March 31, 2003 filed with the Commission and
incorporated herein by reference.
10.13 Genentech, Inc. 1999 Stock Plan, Form of Stock Option Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Agreement † quarter ended September 30, 2004 filed with the Commission and
incorporated herein by reference.
10.14 Genentech, Inc. 1999 Stock Plan, Form of Stock Option Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Agreement (Director Version) † quarter ended September 30, 2004 filed with the Commission and
incorporated herein by reference.
10.15 Genentech, Inc. 2004 Equity Incentive Plan † Filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 filed with the Commission and
incorporated herein by reference.
10.16 Form of Genentech, Inc. 2004 Equity Incentive Plan Filed as an exhibit to our Annual Report on Form 10-K for the year
Nonqualified Stock Option Grant Agreement (Employee ended December 31, 2007 filed with the Commission and
incorporated herein by reference.
Version) †
10.17 Form of Genentech, Inc. 2004 Equity Incentive Plan Filed on a Current Report on Form 8-K with the Commission on
Nonqualified Stock Option Grant Agreement (Director September 26, 2006, and incorporated herein by reference.
Version) †
10.18 Genentech, Inc. Supplemental Plan † Filed on a Current Report on Form 8-K with the Commission on
February 24, 2005 and incorporated herein by reference.
10.19 Amendment No. 1 to the Genentech, Inc. Supplemental Plan Filed herewith
10.20 Amendment No. 2 to the Genentech, Inc. Supplemental Plan Filed herewith
10.21 Amendment No. 3 to the Genentech, Inc. Supplemental Plan Filed herewith
10.22 Genentech, Inc. 1991 Employee Stock Plan, as amended Filed as an exhibit to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, filed with the Commission on August
5, 2008, and incorporated herein by reference.
10.23 Bonus Program † Incorporated by reference to the description under “ Bonus
P rogram” in the Current Report on Form 8-K filed with the
Commission on February 19, 2009.
10.24 Form of Indemnification Agreement for Directors and Officers Filed as an exhibit to our Quarterly Report on Form 10-Q for the
† quarter ended March 31, 2005 filed with the Commission and
incorporated herein by reference.
10.25 Genentech, Inc. Executive Retention Plan Filed on a Current Report on Form 8-K with the Commission on
August 21, 2008, and incorporated herein by reference.
10.26 Genentech, Inc. Executive Severance Plan Filed on a Current Report on Form 8-K with the Commission on
August 21, 2008, and incorporated herein by reference.
10.27 Master Lease Agreement dated as of November 1, 2004, Filed as an exhibit to our Annual Report on Form 10-K for the year
between Genentech and Slough SSF, LLC ended December 31, 2004 filed with the Commission and
incorporated herein by reference.

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10.28 First Amendment to Master Lease Agreement and First Filed as an exhibit to our Annual Report on Form 10-K for the year
Amendment to Building Leases between Genentech and ended December 31, 2006 filed with the Commission and
incorporated herein by reference.
Slough SSF, LLC, dated October 2, 2006
10.29 Second Amendment to Master Lease Agreement between Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Genentech and HCP SSF, LLC (formerly Slough SSF, LLC) quarter ended June 30, 2008, filed with the Commission on August
5, 2008, and incorporated herein by reference.
dated April 8, 2008
10.30 Amended and Restated Collaboration Agreement between Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Genentech, Inc. and Idec Pharmaceuticals Corporation dated quarter ended June 30, 2006, filed with the Commission on August 3,
2006, and incorporated herein by reference.
as of June 19, 2003 *
10.31 Letter Amendment dated as of August 21, 2003, to the Filed as an exhibit to our Quarterly Report on Form 10-Q for the
Amended and Restated Collaboration Agreement between quarter ended June 30, 2006, filed with the Commission on August 3,
2006, and incorporated herein by reference.
Genentech, Inc. and Idec Pharmaceuticals Corporation
10.32 Agreement and Plan of Merger by and among Genentech, Filed as an exhibit to our Annual Report on Form 10-K for the year
Inc., Green Acquisition Corporation and Tanox, Inc., dated as ended December 31, 2006 filed with the Commission and
incorporated herein by reference.
of November 9, 2006
10.33 Form of Voting Agreement between Genentech, Inc. and Filed as an exhibit to our Annual Report on Form 10-K for the year
Certain Stockholders of Tanox, Inc. ended December 31, 2006 filed with the Commission and
incorporated herein by reference.
23.1 Consent of Independent Registered Public Accounting Firm Filed herewith
24.1 Power of Attorney Reference is made to the signature page.
28.1 Description of the Company’s capital stock Incorporated by reference to the description under the heading
“ Description of Capital Stock” relating to our Common Stock in
the prospectus included in our Amendment No. 2 to the
Registration Statement on Form S-3 (No. 333-88651) filed with
the Commission on October 20, 1999, and the description under
the heading “ Description of Capital Stock” relating to the
Common Stock in our final prospectus filed with the Commission
on October 21, 1999 pursuant to Rule 424(b)(1) under the
Securities Act of 1933, as amended, including any amendment or
report filed for the purpose of updating that description.
31.1 Certification of Chief Executive Officer pursuant to Rules 13a- Filed herewith
14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rules 13a- Filed herewith
14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended
32.1 Certifications of Chief Executive Officer and Chief Financial Furnished herewith
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
________________________
* P ursuant 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.
† Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant

Date: February 19, 2009 By: /s/ ROBERT E. ANDREATTA


Robert E. Andreatta
Vice President, Controller and
Chief Accounting Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David A. Ebersman,
Executive Vice President and Chief Financial Officer, and Robert E. Andreatta, Vice President, Controller and Chief Accounting Officer, and
each of them, his or her true and lawful attorneys-in-fact and agents, with the full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorney-in-fact
and agent, or either of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:

S ignature Title Date

Principal Executive Officer:

/s/ ARTHUR D. LEVINSON Chairman and Chief Executive Officer February 19, 2009
Arthur D. Levinson

Principal Financial Officer:

/s/ DAVID A. EBERSMAN Executive Vice President and February 19, 2009
David A. Ebersman Chief Financial Officer

Principal Accounting Officer:

/s/ ROBERT E. ANDREATTA Vice President, Controller and February 19, 2009
Robert E. Andreatta Chief Accounting Officer

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S ignature Title Date

Directors:

/s/ HERBERT W. BOYER Director February 19, 2009


Herbert W. Boyer

/s/ WILLIAM M. BURNS Director February 19, 2009


William M. Burns

/s/ ERICH HUNZIKER Director February 19, 2009


Erich Hunziker

/s/ JONATHAN K.C. KNOWLES Director February 19, 2009


Jonathan K.C. Knowles

/s/ DEBRA L. REED Director February 19, 2009


Debra L. Reed

/s/ CHARLES A. SANDERS Director February 19, 2009


Charles A. Sanders

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SCHEDULE II

GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2008, 2007, and 2006
(In m illions)

Addition
C h arge d to
Balan ce at C ost Balan ce at
Be ginn ing Expe n se s, En d of
of Pe riod an d Re ve n u e (1) De du ction s (2) Pe riod
Accounts receivable allowances:
Year ended December 31, 2008: $ 116 $ 612 $ (571) $ 157
Year ended December 31, 2007: $ 92 $ 521 $ (497) $ 116
Year ended December 31, 2006: $ 84 $ 415 $ (407) $ 92
Inventory reserves:
Year ended December 31, 2008: $ 62 $ 80 $ (52) $ 90
Year ended December 31, 2007: $ 71 $ 41 $ (50) $ 62
Year ended December 31, 2006: $ 57 $ 50 $ (36) $ 71
Rebate accruals:
Year ended December 31, 2008: $ 60 $ 180 $ (163) $ 77
Year ended December 31, 2007: $ 47 $ 144 $ (131) $ 60
Year ended December 31, 2006: $ 38 $ 113 $ (104) $ 47
________________________
(1)
Additions to rebate accruals are netted against the related revenue.
(2)
Represents amounts written off or returned against the allowance or reserves, or returned against earnings.

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EXHIBIT 10.9

GENENTECH, INC.
TAX REDUCTION INVESTMENT PLAN

Restatement Effective Date: January 1, 2008

(except as otherwise stated herein)


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TABLE OF CONTENTS

Page
SECTION 1 DEFINITIONS 2
1.1 Account or Participant’s Account 2
1.2 Affiliate 3
1.3 Alternate Payee 4
1.4 Beneficiary 4
1.5 Board of Directors 4
1.6 Catch-Up Contributions 4
1.7 Code 4
1.8 Committee 4
1.9 Company 4
1.10 Company Match Contributions 4
1.11 Company Stock 5
1.12 Company Stock Fund 5
1.13 Compensation 5
1.14 Compensation Limit 6
1.15 Disability 6
1.16 Elective Deferrals 6
1.17 Eligible Bonus 6
1.18 Eligible Commissions 7
1.19 Eligible Employee 7
1.20 Employee 7
1.21 Employee Pre-Tax Catch-Up Contributions 7
1.22 Employee Pre-Tax Contributions 8
1.23 Employer 8
1.24 Employer Contributions 8
1.25 Entry Date 8
1.26 ERISA 8
1.27 Highly Compensated Employee or HCE 8
1.28 Investment Funds 9
1.29 Investment Manager 9
1.30 Leased Employee 9
1.31 Leave of Absence 10
1.32 1934 Act 10
1.33 Non-Elective Contributions 10
1.34 Normal Retirement Age 10
1.35 Participant 10
1.36 Plan 11
1.37 Plan Year 11
1.38 Rollover Contributions 11
1.39 Roth Basic Contributions 11
1.40 Roth Catch-Up Contributions 11
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TABLE OF CONTENTS
(Continued)

Page
1.41 Roth Rollover Contributions 11
1.42 Trust Agreement 11
1.43 Trust Fund 11
1.44 Trustee 12
1.45 Valuation Date 12
SECTION 2 ELIGIBILITY AND PARTICIPATION 12
2.1 Initial Eligibility 12
2.2 Employer Aggregation 12
2.3 Participation 12
2.4 Voluntary Suspension 13
2.5 Mandatory Suspension 14
2.6 Provision of Information 14
2.7 Termination of Participation 14
2.8 Acquisitions 15
2.9 Erroneous Participation 15
SECTION 3 ELECTIVE DEFERRALS 15
3.1 Employee Pre-Tax Contributions and Roth Basic Contributions 15
3.2 Catch-Up Contributions 19
3.3 Deferral Elections 19
3.4 Payment of Elective Deferrals 23
SECTION 4 EMPLOYER CONTRIBUTIONS 23
4.1 Company Match Contributions 23
4.2 Non-Elective Contributions 26
4.3 Timing 27
4.4 Periodic Contributions 27
4.5 Reinstatements 27
4.6 Profits Not Required 27
SECTION 5 ALLOCATION OF CONTRIBUTIONS AND INVESTMENTS 27
5.1 Elective Deferrals 27
5.2 Company Match Contributions 28
5.3 Non-Elective Contributions 28
5.4 Investment 29
5.5 Limitations on Allocations 29
SECTION 6 PARTICIPANT ACCOUNTS AND INVESTMENT FUNDS 33
6.1 Participant Accounts 33
6.2 Trust Fund Assets 34
6.3 Investment Funds 34

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TABLE OF CONTENTS
(Continued)

Page
6.4 Valuation of Participants’ Accounts 36
6.5 Valuation of Shares 36
6.6 Statements of Account 37
6.7 Vesting of Participants’ Accounts 37
6.8 Forfeitures 37
SECTION 7 DISTRIBUTIONS 37
7.1 Events Permitting Distribution 37
7.2 Times for Distribution 38
7.3 Consent Requirement and Immediate Distributions 39
7.4 Form of Distribution 40
7.5 Company Stock Restrictions 43
7.6 Beneficiary Designations 43
7.7 Payments to Minors or Incompetents 44
7.8 Undistributable Accounts 45
SECTION 8 WITHDRAWALS, LOANS AND DOMESTIC RELATIONS ORDERS 45
8.1 General Rules 45
8.2 Hardship Withdrawal 46
8.3 Age 59½ Withdrawal 48
8.4 Withdrawal From Company Match Account at Normal Retirement Age 48
8.5 Withdrawal From Rollover Contributions Accounts 48
8.6 Loans to Participants 48
8.7 Qualified Domestic Relations Orders 52
8.8 Withdrawals and Distributions Relating to Military Service 53
SECTION 9 ADMINISTRATION OF THE PLAN 54
9.1 Plan Administrator 54
9.2 Committee 54
9.3 Actions by Committee 54
9.4 Powers of Committee 55
9.5 Fiduciary Responsibilities 56
9.6 Investment Responsibilities 57
9.7 Voting and Tender Offer Rights in Company Stock 58
9.8 Decisions of Committee 58
9.9 Administrative Expenses 58
9.10 Eligibility to Participate 58
9.11 Indemnification 59
SECTION 10 TRUST FUND, ROLLOVER CONTRIBUTIONS AND PLAN MERGERS 59
10.1 Trust Fund 59
10.2 No Diversion of Assets 60

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TABLE OF CONTENTS
(Continued)

Page
10.3 Continuing Conditions 60
10.4 Change of Investment Alternatives 61
10.5 Rollover Contributions 61
10.6 Merger of Other Plans 63
SECTION 11 MODIFICATION OR TERMINATION OF PLAN 63
11.1 Employers’ Obligations Limited 63
11.2 Right to Amend or Terminate 63
11.3 Effect of Termination 64
SECTION 12 TOP-HEAVY PLAN 65
12.1 Top-Heavy Plan Status 65
12.2 Top-Heavy Plan Provisions 66
SECTION 13 GENERAL PROVISIONS 67
13.1 Plan Information 67
13.2 Inalienability 67
13.3 Rights and Duties 67
13.4 No Enlargement of Employment Rights 68
13.5 Apportionment of Duties 68
13.6 Merger, Consolidation or Transfer 68
13.7 Military Service 69
13.8 Applicable Law 70
13.9 Severability 70
13.10 Exhaustion of Claims Procedure and Right to Bring Legal Claim 70
13.11 Captions 70

APPENDIX A – Puerto Rico Supplement A-1


APPENDIX B – Plan-to-Plan Transfer of Tanox, Inc. 401(k) Plan Accounts B-1

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GENENTECH, INC.
TAX REDUCTION INVESTMENT PLAN
(January 1, 2008 Restatement)

PREAMBLE

GENENTECH, INC. (the “Company”), having established the Genentech, Inc. Tax Reduction Investment Plan (the
“Plan”) effective as of January 1, 1985, and having amended and restated the Plan hereby again amends and restates the Plan
in its entirety effective as of January 1, 2008, except as otherwise indicated herein.
The Plan was established and is maintained for the benefit of Eligible Employees of the Company and its participating
Affiliates in order to provide them with (1) a means of supplementing their retirement income on a tax-favored basis, (2) an
incentive to continue and increase their efforts to contribute to the success of the Company, and (3) the opportunity to acquire
an equity ownership interest in the Company.
The Plan is intended to qualify as (a) a profit-sharing plan (within the meaning of Section 401(a) of the Code), which
includes a qualified cash or deferred arrangement (within the meaning of Section 401(k) of the Code), (b) a 404(c) plan
(within the meaning of Section 404(c) of ERISA), and (c) an eligible individual account plan (within the meaning of
Section 407(d)(3) of ERISA). Effective as of January 1, 2008, the Plan permits Participants to elect to make salary deferrals
as designated Roth contributions.
The Plan also is designed to constitute a tax-qualified plan and related tax-exempt trust under Sections 1165(a),
1165(e) and 1101(17) of the Puerto Rico Internal Revenue Code of 1994, as amended, as detailed in Appendix A.
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Effective on November 1, 2007, the Tanox, Inc. 401(k) Plan was merged with and into the Plan, as detailed in
Appendix B.

SECTION 1

DEFINITIONS

The following capitalized words and phrases shall have the following meanings unless a different meaning is plainly
required by the context:
1.1 Account or Participant’s Account. “Account” or “Participant’s Account” means as to any Participant the
account maintained in order to reflect his or her interest in the Plan. Each Participant’s Account shall be comprised of several
separate subaccounts (as specified by the Committee in its discretion), including, but not limited to, the following subaccounts:
1.1.1 “Company Match Account” means the subaccount maintained to record any Company
Match Contributions made on behalf of the Participant pursuant to Sections 4.1 and 5.2, and any adjustments relating thereto.
1.1.2 “Employee Pre-Tax Account” means the subaccount maintained to record any Employee
Pre-Tax Contributions that the Participant has elected to have contributed to his or her Employee Pre-Tax Account pursuant
to Sections 3.1 and 3.3, and any adjustments relating thereto.
1.1.3 “Employee Pre-Tax Catch-Up Account” means the subaccount maintained to record any
Pre-Tax Catch-Up Contributions that the Participant has elected to have contributed to his or her Employee Pre-Tax Catch-
Up Account pursuant to Sections 3.2 and 3.3, and any adjustments relating thereto.
1.1.4 “Genenflex Account” means the subaccount maintained to record any excess “flex credits”
that the Participant previously elected under Genenflex to have contributed to his or

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her Genenflex Account during Plan Years when such contributions were permitted under the Plan (“Prior Excess Flex Credit
Contributions”), and any adjustments relating thereto. For this purpose, “Genenflex” means the cafeteria plan maintained by
the Company under Section 125 of the Code.
1.1.5 “Non-Elective Contribution Account” means the subaccount maintained to record any
Non-Elective Contributions made on behalf of the Participant pursuant to Sections 4.2 and 5.3, and any adjustments relating
thereto.
1.1.6 “Rollover Contributions Account” means the subaccount maintained to record any
transfers to the Plan made by or on behalf of a Participant pursuant to Section 10.5.2, and any adjustments relating thereto.
1.1.7 “Roth Basic Account” means the subaccount maintained to record any Roth Basic
Contributions that the Participant has elected to have contributed to his or her Roth Basic Account pursuant to Sections 3.1
and 3.3, and any adjustments relating thereto.
1.1.8 “Roth Catch-Up Account” means the subaccount maintained to record any Roth Catch-
Up Contributions that the Participant has elected to have contributed to his or her Roth Catch-Up Account pursuant to
Sections 3.2 and 3.3, and any adjustments relating thereto.
1.1.9 “Roth Rollover Account” means the subaccount maintained to record any transfers to the
Plan made by or on behalf of a Participant pursuant to Section 10.5.3, and any adjustments relating thereto.
1.2 Affiliate. “Affiliate” means a corporation, trade or business which is, together with any Employer, a
member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of
Section 414(b), (c), (m) or (o) of the Code), but only for the period during which such other entity is so affiliated with the
Employer.

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1.3 Alternate Payee. “Alternate Payee” means any spouse, former spouse, child or other dependent (within
the meaning of Section 152 of the Code) of a Participant who is recognized by a QDRO (as defined in Section 8.7) as having
a right to receive any immediate or deferred payment of all or a portion of the balance credited to a Participant’s Account
under the Plan.
1.4 Beneficiary. “Beneficiary” means the individual person and/or entity entitled to receive benefits under the
Plan upon the death of a Participant in accordance with Section 7.6.
1.5 Board of Directors. “Board of Directors” means the Board of Directors of the Company, as from time to
time constituted.
1.6 Catch-Up Contributions. “Catch-Up Contributions” means (collectively) Employee Pre-Tax Catch-Up
Contributions and Roth Catch-Up Contributions.
1.7 Code. “Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific Section of
the Code shall include such Section, any valid regulation promulgated thereunder, and any comparable provision of any future
legislation amending, supplementing or superseding such Section.
1.8 Committee. “Committee” means the administrative committee charged with responsibility for the general
administration of the Plan pursuant to Section 9, as it may be constituted from time to time.
1.9 Company. “Company” means Genentech, Inc., a Delaware corporation, and any successor by merger,
consolidation or otherwise that assumes (in writing) the obligations of the Company under the Plan.
1.10 Company Match Contributions. “Company Match Contributions” means as to each Participant the
amounts (if any) contributed to the Trust Fund by the Employers on account of

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Employee Pre-Tax Contributions and/or Roth Basic Contributions in accordance with Sections 4.1 and 5.2.
1.11 Company Stock. “Company Stock” means the common stock of the Company, as from time to time
constituted.
1.12 Company Stock Fund. “Company Stock Fund” means the Investment Fund that is wholly or primarily
invested in shares of Company Stock.
1.13 Compensation. “Compensation” means all salary, wages, Eligible Commissions and Eligible Bonuses
paid by any Employer with respect to services performed during any period by an Employee, including Elective Deferrals, but
excluding (a) any contributions made by any Employer under this Plan (other than Elective Deferrals) or any other employee
benefit plan (within the meaning of Section 3(3) of ERISA), and (b) other items, even if reported as income on the
Employee’s Internal Revenue Service (“IRS”) Form W-2, such as income from the exercise of stock options, proceeds from
the redemption of Company Stock, tuition reimbursements, reimbursements of health club dues, Genenchecks, sign-on
bonuses, referral bonuses, severance payments, and relocation expenses, subject to the following:
(a) A Participant’s Compensation shall be determined without regard to any increase or
decrease in the amount of his or her total remuneration that is paid in cash as the result of compensation reductions elected
under Sections 125 or 132(f)(4) of the Code;

(b) Effective as of January 1, 2009, Compensation shall include amounts described above that
are paid to an individual who does not currently perform services for the Employer by reason of qualified military service (as
defined in Section 414(u) of the Code), to the extent the payments do not exceed the amounts the individual would have
received if the individual had continued to perform services for the Employer rather than entering qualified military service;

(c) Compensation shall include amounts described above that are paid to an individual who
does not currently perform services for the Employer as a result of a Disability; and

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(d) The determination of the amount of a Participant’s Compensation shall be made by his or
her Employer (or its designee), in accordance with the records of the Employer, and shall be conclusive.

1.14 Compensation Limit. “Compensation Limit” means the dollar limit prescribed in Section 401(a)(17) of
the Code, as adjusted pursuant to Sections 401(a)(17) and 415(d) of the Code (e.g., $230,000 for 2008 and $245,000 for
2009). No portion of any Participant’s Compensation for a Plan Year that exceeds the Compensation Limit shall be taken
into account for any purpose under the Plan for any Plan Year.
1.15 Disability. “Disability” means the mental or physical inability of a Participant to perform his or her normal
job as evidenced by the certificate of a medical examiner satisfactory to the Committee (in its discretion) certifying that the
Participant is disabled under the standards of the Company’s long-term disability plan.
1.16 Elective Deferrals. “Elective Deferrals” means (collectively) Employee Pre-Tax Contributions, Roth
Basic Contributions, Employee Pre-Tax Catch-Up Contributions and Roth Catch-Up Contributions.
1.17 Eligible Bonus. “Eligible Bonus” means any of the following payments paid by the Employer to an
Employee: (a) any annual cash bonus under the Company’s Corporate Bonus Program, (b) any fourth calendar quarter
commission payment under the Company’s Field Sales Incentive Compensation Plan; (c) any bonus paid by the Company and
designated as an “incremental sales bonus,” and/or (d) any bonus paid by the Company and designated as a “key
contributor bonus.” Notwithstanding the foregoing, all Eligible Bonus amounts shall be determined net of mandatory
deductions including, without limitation, Employee-paid FICA and SDI withholdings (but not net of employee stock purchase
plan deductions).

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1.18 Eligible Commissions. “Eligible Commissions” means any first, second or third calendar quarter
commission payments under the Company’s Field Sales Incentive Compensation Plan.
1.19 Eligible Employee. “Eligible Employee” means every Employee of an Employer except:
(a) An Employee who is a member of a collective bargaining unit and who is covered by a
collective bargaining agreement where retirement benefits were the subject of good faith bargaining, unless the agreement
specifically provides for coverage of such Employee under this Plan;

(b) An individual employed by any corporation or other business entity that is merged or
liquidated into, or whose assets are acquired by any Employer, unless any two members of the Committee, acting in their
capacities as officers of the Company rather than as fiduciaries with respect to the Plan, designate (in writing) the employees of
that corporation or other business entity as Eligible Employees under the Plan;

(c) An Employee whose Compensation is not paid from any Employer’s United States payroll;

(d) An Employee who does not have a United States Social Security Number; and

(e) An individual who, as to any period of time, is classified or treated by an Employer as an


independent contractor, a consultant, a Leased Employee or an employee of an employment agency or any entity other than
an Employer, even if such individual is subsequently determined to have been a common-law employee of the Employer
during such period.

1.20 Employee. “Employee” means an individual who is (a) a common-law employee of any Employer or
Affiliate, or (b) a Leased Employee. However, if Leased Employees constitute less than 20% of the nonhighly compensated
work force (within the meaning of Section 414(n)(5)(C)(ii) of the Code), the term “Employee” shall not include those Leased
Employees who are covered by a plan described in Section 414(n)(5) of the Code.
1.21 Employee Pre-Tax Catch-Up Contributions. “Employee Pre-Tax Catch-Up Contributions” means as
to each Participant the amounts (if any) contributed to the Trust Fund by

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the Employers in accordance with Sections 3.4 and 5.1, pursuant to the salary deferral election made by the Participant in
accordance with Sections 3.2 and 3.3.
1.22 Employee Pre-Tax Contributions. “Employee Pre-Tax Contributions” means as to each Participant the
amounts (if any) contributed to the Trust Fund by the Employers in accordance with Sections 3.4 and 5.1, pursuant to the
salary deferral election made by the Participant in accordance with Sections 3.1 and 3.3.
1.23 Employer. “Employer” means the Company and each Affiliate that adopts this Plan with the approval of
the Board of Directors.
1.24 Employer Contributions. “Employer Contributions” means (collectively) Company Match Contributions
and Non-Elective Contributions.
1.25 Entry Date. “Entry Date” means each calendar day in each Plan Year.
1.26 ERISA. “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended. Reference to a specific Section of ERISA shall include such Section, any valid regulation promulgated thereunder,
and any comparable provision of any future legislation amending, supplementing or superseding such Section.
1.27 Highly Compensated Employee or HCE. “Highly Compensated Employee” or “HCE” means a Highly
Compensated Active Employee or a Highly Compensated Former Employee, as defined below:
(a) “Highly Compensated Active Employee” means any Employee who performs services for
an Employer or Affiliate during the Determination Year and who:

(1) During the Look-Back Year (A) received Compensation in excess of the dollar limit
prescribed in Section 414(q)(1)(B) of the Code, as adjusted pursuant to Sections 414(q)(1) and 415(d) of the Code (e.g.,
$100,000 for 2007, $105,000 for 2008 and $110,000 for 2009), and (B) was a member of the top-paid group (within the
meaning of Section 414(q)(3) of the Code) for such Year; or

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(2) Is or was a 5-percent owner (within the meaning of Section 414(q)(2) of the Code)
at any time during the Determination Year or the Look-Back Year.

(b) “Highly Compensated Former Employee” means any Employee who (1) separated (or
was deemed to have separated) from service prior to the Determination Year, (2) performed no services for any Employer or
Affiliate during the Determination Year, and (3) was a Highly Compensated Active Employee for either the Plan Year in which
the separation occurred or any Determination Year ending on or after his or her 55th birthday.

(c) The determination of who is a Highly Compensated Employee, including the determinations
of the number and identity of Employees who are in the top-paid group, shall be made in accordance with Section 414(q) of
the Code.

(d) For purposes of applying this Section 1.27:

(1) “Compensation” means Total Compensation (as defined in Section 5.5.2(e) and
applied using the definition of “Affiliate” in Section 1.2 rather than in Section 5.5.2(a));

(2) “Determination Year” means the Plan Year for which the determination is being
made; and

(3) “Look-Back Year” means the Plan Year immediately preceding the Determination
Year.

1.28 Investment Funds. “Investment Funds” means (collectively) the investment funds described in
Section 6.3.
1.29 Investment Manager. “Investment Manager” means any investment manager appointed by the
Committee in accordance with Section 9.6.
1.30 Leased Employee. “Leased Employee” means any person (other than a common-law employee of the
Employer or Affiliate) who, pursuant to an agreement between the Employer or Affiliate and any other person (“leasing
organization”), has performed services for the Employer or Affiliate on a substantially full-time basis for a period of at least
one (1) year, and such services are performed under the primary direction of or control by the Employer or Affiliate.

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1.31 Leave of Absence. “Leave of Absence” means the period of an Employee’s absence from active
employment with the Employer:
(a) Authorized by his or her Employer in accordance with its established and uniformly
administered personnel policies, provided that the Employee returns to active employment after the authorized absence period
expires, unless the Employee’s failure to return is attributable to his or her retirement or death; or

(b) Because of military service in the armed forces of the United States, as defined in the
Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) and in Section 414(u) of the Code;
provided that upon discharge from the military service of the United States, such Employee must take all necessary action to
be entitled to, and to be otherwise eligible for, re-employment rights, as provided by USERRA or any similar law from time to
time in force, or such Employee must be deemed to have returned to employment with the Employer pursuant to applicable
law or the terms of the Plan, as provided in Section 13.7.

1.32 1934 Act. “1934 Act” means the Securities Exchange Act of 1934, as amended from time to
time. Reference to a specific Section of the 1934 Act shall include any Section, any valid regulation promulgated thereunder,
and any comparable provision of any future legislation amending, supplementing or superseding such Section.
1.33 Non-Elective Contributions. “Non-Elective Contributions” means as to each Participant the amounts (if
any) contributed to the Trust Fund by the Employers in accordance with Sections 4.2 and 5.3.
1.34 Normal Retirement Age. “Normal Retirement Age” means age 55.
1.35 Participant. “Participant” means an Eligible Employee who has become a Participant in the Plan pursuant
to Section 2.1 and has not ceased to be a Participant pursuant to Section 2.7, subject to the following:
(a) For each Plan Year, a Participant shall be classified as an “Active Participant” if (1) he or
she has enrolled in the Plan for any portion of the Plan Year by authorizing Elective Deferrals in accordance with Sections 2.3,
3.1, 3.2 and 3.3, or (2) his or her active participation in the Plan is resumed during the Plan Year after the end of a suspension
period in accordance with Section 2.4, 2.5 or 8.2.3; and

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(b) A Participant who is not an Active Participant shall be classified as an “Inactive


Participant.”

1.36 Plan. “Plan” means the Genentech, Inc. Tax Reduction Investment Plan, formerly the Genentech, Inc.
Tax Incentive Savings Plan, as set forth in this instrument and as heretofore or hereafter amended from time to time in
accordance with Section 11.2.
1.37 Plan Year. “Plan Year” means the calendar year.
1.38 Rollover Contributions. “Rollover Contributions” means as to each Participant the pre-tax amounts (if
any) contributed to the Trust Fund in accordance with Section 10.5.2.
1.39 Roth Basic Contributions. “Roth Basic Contributions” means as to each Participant the amounts (if any)
contributed to the Trust Fund by the Employers in accordance with Sections 3.4 and 5.1, pursuant to the salary deferral
election made by the Participant in accordance with Sections 3.1 and 3.3.
1.40 Roth Catch-Up Contributions. “Roth Catch-Up Contributions” means as to each Participant the
amounts (if any) contributed to the Trust Fund by the Employers in accordance with Sections 3.4 and 5.1, pursuant to the
salary deferral election made by the Participant in accordance with Sections 3.2 and 3.3.
1.41 Roth Rollover Contributions. “Roth Rollover Contributions” means as to each Participant the amounts
(if any) contributed to the Trust Fund in accordance with Section 10.5.3.
1.42 Trust Agreement. “Trust Agreement” means the trust agreement entered into by and between the
Company and the Trustee, as amended from time to time for the purpose of establishing and maintaining the Trust Fund.
1.43 Trust Fund. “Trust Fund” means all of the assets, at any time and from time to time, of the trust
established by the Trust Agreement to hold the assets of the Plan.

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1.44 Trustee. “Trustee” means Fidelity Management Trust Company, a Massachusetts trust company, and any
additional, successor or substitute trustee or trustees from time to time acting as Trustee of the Trust Fund.
1.45 Valuation Date. “Valuation Date” means the last financial business day of each Plan Year, any other
financial business day where a valuation is required under the terms of the Plan, and such other date(s) as the Committee (in its
discretion) may designate from time to time.

SECTION 2

ELIGIBILITY AND PARTICIPATION

2.1 Initial Eligibility. An Employee shall become a Participant in the Plan on the date he or she becomes an
Eligible Employee.
2.2 Employer Aggregation. The status of an Employee as an Eligible Employee shall not be adversely affected
merely by reason of his or her employment by more than one Employer during any Plan Year. The transfer of a Participant
from employment with an Employer to employment with an Affiliate that is not an Employer shall not constitute an event
entitling the Participant to a distribution under Section 7.
2.3 Participation.
2.3.1 Active Participation. Each Participant’s decision to become an Active Participant shall be
entirely voluntary. An Employee who has become a Participant under Section 2.1 may elect to become an Active Participant
as of any Entry Date following the Employee’s receipt of his or her first pay check from the Employer, provided that he or she
is then an Eligible Employee, and provided further, that he or she enrolls in the Plan and elects to make Elective Deferrals, in
such manner as the Committee (in its discretion) shall specify, in accordance

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with Section 3. Such Employee’s status as an Active Participant shall be effective as soon as administratively feasible
following his or her enrollment.
2.3.2 Inactive Participation. A Participant who does not elect to become an Active Participant
when first eligible to do so, or whose active participation in the Plan is suspended pursuant to Section 2.4, 2.5 or 8.2.3, shall
be treated as an Inactive Participant until the Entry Date as of which he or she elects to become an Active Participant in
accordance with Section 2.3.1 or Section 2.5(d).
2.3.3 Effect of Inactive Participation. An Inactive Participant shall not be able to make Elective
Deferrals nor share in the allocation of Company Match Contributions, and he or she may not later make the Elective
Deferrals that he or she might otherwise have made during the Participant’s period of inactive participation in the
Plan. However, an Inactive Participant’s Account shall continue to share in the allocation of earnings and gains (or losses) of
the Trust Fund as provided in Section 6.4. No distribution shall be made to a Participant solely as the result of any suspension
of his or her active participation in the Plan.
2.4 Voluntary Suspension. An Active Participant may voluntarily suspend his or her active participation in the
Plan, thereby suspending his or her Elective Deferrals and becoming an Inactive Participant for future payroll periods during
the suspension period by giving notice to such person, in such manner and within such advance notice period as the Committee
(in its discretion) shall specify. A Participant whose active participation in the Plan has been voluntarily suspended pursuant to
this Section 2.4 may resume his or her status as an Active Participant only in accordance with Section 2.3.1.

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2.5 Mandatory Suspension. If a Participant (1) ceases to be an Eligible Employee because he or she ceases to
meet the requirements of Section 1.19, (2) is transferred to employment with an Affiliate which is not an Employer, (3) is
granted a Leave of Absence without pay, (4) is on long-term disability, or (5) is placed on layoff or furlough status, then:
(a) His or her active participation in the Plan shall be suspended (in accordance with
Section 2.3.3) for each payroll period beginning during the continuation of such ineligible status;

(b) He or she shall be treated as an Inactive Participant for the duration of the suspension
period; and

(c) After he or she again becomes an Eligible Employee and the conditions described in clauses
(1) through (5) above cease to apply, his or her status as an Active Participant may be resumed only in accordance with
Section 2.3.1.

(d) Notwithstanding the foregoing, if a Participant’s active participation in the Plan is suspended
because he or she is granted an unpaid Leave of Absence, his or her status as an Active Participant automatically will resume
as of the Entry Date that coincides with or next follows his or her return to active employment with an Employer (provided that
he or she is then an Eligible Employee).

2.6 Provision of Information. Each Participant shall comply with such enrollment procedures as are required by
the Committee and shall make available to the Committee and the Trustee any information they may reasonably request. By
virtue of his or her participation in the Plan, a Participant agrees, on his or her own behalf and on behalf of all persons who
may make any claim arising out of, relating to, or resulting from his or her participation in the Plan, to be bound by all of the
provisions of the Plan, the Trust Agreement and any other related agreements.
2.7 Termination of Participation. An Eligible Employee who has become a Participant shall remain a Participant
until his or her employment with all Employers and Affiliates terminates, or if later, until his or her entire Account balance is
distributed.

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2.8 Acquisitions. If determined by the Committee (in its discretion), an Acquired Employee may elect to
become an Active Participant sooner than the date specified in Section 2.3.1. As determined in the discretion of the
Committee, such date shall be as soon as administratively feasible on or after the later of (a) the date on which the Acquired
Employee becomes an Eligible Employee, or (b) such other date as may be specified by the Committee (which shall in no
event be later than the Entry Date following the Acquired Employee’s receipt of his or her first pay check from the
Employer). For purposes of this Section 2.8, an “Acquired Employee” is an Eligible Employee who becomes an Employee
by reason of the acquisition by the Company or its Affiliate of the assets and liabilities of, or the voting stock of, another
corporation or other business entity, or another type of business transaction effected by the Company or its Affiliate.
2.9 Erroneous Participation.
(a) Erroneous Elective Deferrals. If Elective Deferrals are erroneously made on behalf of an
individual who is not eligible to participate in the Plan and/or, in the case of Catch-Up Contributions, who is determined not to
be eligible to make Catch-Up Contributions in accordance with Section 3.2, then such amounts, including any earnings and
gains (or losses) thereon, shall be (1) segregated from all other Plan assets, (2) treated as a nonqualified trust established by
and for the benefit of such individual, and (3) distributed to the individual as soon as administratively practicable after
discovery of such error.

(b) Other Erroneous Contributions. If any contributions (other than Elective Deferrals, as set
forth in paragraph (a) above) are erroneously made on behalf of an individual who is not entitled to such contributions, then
such contributions, including any earnings and gains (or losses) thereon, shall be forfeited and utilized in accordance with
Section 6.8 or returned to the Employer in accordance with Section 10.3, to the extent that such contributions are made as a
result of a good faith mistake of fact.

SECTION 3

ELECTIVE DEFERRALS

3.1 Employee Pre-Tax Contributions and Roth Basic Contributions.

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3.1.1 General. Each Active Participant may elect to defer portions of his or her Compensation
payments and to have the amounts of such Employee Pre-Tax Contributions and, effective as of January 1, 2008, Roth Basic
Contributions, contributed by the Employer to the Trust Fund and credited to his or her Employee Pre-Tax Account or Roth
Basic Account, as applicable, under the Plan, provided that he or she elects to make Elective Deferrals in accordance with
Section 3.3. Subject to Section 5.5, an Active Participant may elect to defer:
(a) A portion of each payment of Compensation, other than any Eligible Bonus, that would
otherwise be made to him or her, after the election becomes and while it remains effective, equal to any whole percentage
from 1% to 50% (inclusive) of such payment;

(b) In addition to any election made under subsection (a) above, a portion of any Eligible Bonus
payment that would otherwise be made to him or her, after the election becomes and while it remains effective, equal to any
whole percentage from 1% to 99% (inclusive) (or such lesser percentage as is determined by the Company to comply with
mandatory tax withholding and applicable payroll deductions) of such payment.

3.1.2 Section 401(k) Ceiling. Notwithstanding any contrary Plan provision, the Committee:
(a) May suspend or limit any Participant’s salary deferral election at any time in order to
prevent the cumulative amount of the Employee Pre-Tax Contributions and Roth Basic Contributions contributed on behalf of
the Participant for any calendar year from exceeding the Section 401(k) Ceiling, except to the extent permitted under
Section 3.2 and Section 414(v) of the Code.

(b) Shall cause any amount allocated to the Participant’s combined Pre Tax 401(k) Deferrals
Account and Roth Basic Account (combined) as an excess deferral (calculated by taking into account only amounts deferred
under this and any other cash or deferred arrangement maintained by any Employer or Affiliate and qualified under
Section 401(k) of the Code), together with any income or loss allocable thereto for the calendar year to which the excess
deferral relates, as well as, for the Gap Period, to be distributed to the Participant no later than the April 15 that next follows
the year of deferral in accordance with Section 402(g)(2)(A) of the Code. For this purpose, the “Gap Period” means the
period beginning on the first day of the subsequent Plan Year and ending on either the day before the date of distribution or on
a date selected in accordance with the safe harbor method set forth in Treasury Regulations § 1.401(k)-2(b)(2)(iv)(D).

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(c) May cause any other amount allocated to the Participant’s Employee Pre-Tax Account
and/or Roth Basic Account and designated by the Participant as an excess deferral, together with any income or loss allocable
thereto for the calendar year to which the excess deferral relates, as well as for the Gap Period, to be distributed to the
Participant in accordance with Section 402(g)(2)(A) of the Code.

(d) Shall cause any Company Match Contributions allocated to the Participant’s Company
Match Account by reason of any excess deferral distributed pursuant to subsection (b) or (c), together with any income or
loss allocable thereto for the calendar year to which the excess deferral relates, as well as for the Gap Period, to be forfeited
at the time such distribution is made and applied to reduce the next succeeding Matching Contribution to the Plan.

For purposes of this Section 3.1.2 and Section 4.1.2, the “Section 401(k) Ceiling” means the dollar limit prescribed in
Section 402(g)(1) of the Code, as adjusted pursuant to Sections 402(g)(5) and 415(d) of the Code (e.g., $15,500 in 2008
and $16,500 in 2009).
3.1.3 Limitations on HCE Participants. For any Plan Year, the Committee (in its discretion)
may limit the period for which, and/or specify a lesser maximum percentage at which, Employee Pre-Tax Contributions and
Roth Basic Contributions may be elected by HCE Participants (as defined in Section 3.1.4) in such manner as may be
necessary or appropriate in order to assure that the limitation described in Section 3.1.5 will be satisfied.
3.1.4 HCE and Non-HCE Participants. All Participants who are Eligible Employees at any time
during a Plan Year (whether or not they are Active Participants), and who are Highly Compensated Employees with respect
to the Plan Year, shall be “HCE Participants” for the Plan Year. All other Participants who are Eligible Employees at any
time during the Plan Year shall be “Non-HCE Participants” for the Plan Year.
3.1.5 Deferral Percentage Limitation. In no event shall the actual deferral percentage,
determined in accordance with Section 3.1.6 (the “ADP”), for the HCE Participants for a

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Plan Year exceed the maximum ADP, as determined by reference to the ADP for the Non-HCE Participants, in accordance
with the following table:

If the ADP for the Non-HCE Then the Maximum ADP for
Participants (“NHCEs’ ADP”) is: the HCE Participants is:
Less than 2% 2.0 x NHCEs’ ADP
2% to 8% NHCEs’ ADP + 2%
More than 8% 1.25 x NHCEs’ ADP

3.1.6 Actual Deferral Percentage. The actual deferral percentage for the HCE or Non-HCE
Participants for any Plan Year shall be calculated by computing the average of the deferral percentages (calculated separately
for each HCE or Non-HCE Participant) (the “Deferral Rates”) determined by dividing (1) the total for the Plan Year of all
Employee Pre-Tax Contributions and Roth Basic Contributions made by the Participant and credited to his or her Pre-Tax
401(k) Deferral Account or Roth 401(k) Deferral Account, as applicable, by (2) the Participant’s Testing Compensation (as
defined in Section 3.1.7) for the Plan Year. In computing a Participant’s Deferral Rate, the following special rules shall apply:
(a) If any Employer or Affiliate maintains any other cash or deferred arrangement which is
aggregated by the Company with this Plan for purposes of applying Section 401(a)(4) or 410(b) of the Code, then all such
cash or deferred arrangements shall be treated as one plan for purposes of applying Section 3.1.5.

(b) If an HCE Participant is a participant in any other cash or deferred arrangement maintained
by any Employer or Affiliate and qualified under Section 401(k) of the Code, the separate deferral rates determined for the
Participant under all such cash or deferred arrangements shall be aggregated with the separate Deferral Rate determined for
the Participant under this Section 3.1.6 for purposes of applying Section 3.1.5.

3.1.7 Testing Compensation. For purposes of applying Sections 3.1, 3.3 and 4.1 and the non-
discrimination tests of Sections 401(k)(3) and 401(m)(2) of the Code, “Testing Compensation” means with respect to any
Participant, his or her Total Compensation (as defined in

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Section 5.5.2(e) and applied using the definition of “Affiliate” in Section 1.2 rather than in Section 5.5.2(a)), subject to the
following:
(a) For any Plan Year, the Committee may specify an alternate definition of Testing
Compensation, provided that such alternate definition satisfies the applicable requirements of Treasury Regulations
§ 1.401(k)-6;

(b) No amount in excess of the Compensation Limit shall be taken into account under this
Section 3.1.7 for any Plan Year; and

(c) Compensation for periods prior to the time that the individual became a Participant shall not
be taken into account.

3.2 Catch-Up Contributions. Notwithstanding any contrary Plan provision:


(a) Eligible Participants. All Employees who are Participants eligible to make Elective Deferrals
under this Plan and who have attained age fifty (50) before the close of the Plan Year shall be eligible to make Employee Pre-
Tax Catch-Up Contributions (and, effective as of January 1, 2008, Roth Catch-Up Contributions) for the Plan Year in
accordance with, and subject to the limitations of, Section 414(v) of the Code. An Active Participant who meets the
foregoing requirements may elect to defer a portion of each payment of Compensation that would otherwise be made to him
or her, after the election becomes and while it remains effective, equal to any whole percentage from 1% to 75% (inclusive) of
such payment.

(b) Certain Code Limitations Inapplicable. A Participant’s Catch-Up Contributions shall not be
taken into account for purposes of applying Plan provisions implementing the required limitations of Sections 402(g) and 415
of the Code, and the Plan shall not be treated as failing to satisfy Plan provisions implementing the requirements of
Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b) or 416 of the Code, as applicable, by reason of Catch-Up Contributions
being or having been made under the Plan.

(c) No Company Match Contributions. Catch-Up Contributions shall not be eligible for
Company Match Contributions under the Plan.

(d) Crediting of Catch-Up Contributions. A Participant’s Catch-Up Contributions shall be


credited to his or her Employee Pre-Tax Catch-Up Account or Roth Catch-Up Account, as applicable, under the Plan.

3.3 Deferral Elections. Each Active Participant shall determine the percentage(s) of his or her Compensation
that shall be deferred and contributed to the Trust Fund as his or her Employee Pre-Tax Contributions, Roth Basic
Contributions, Employee Pre-Tax Catch-Up Contributions and/or

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Roth Catch-Up Contributions in accordance with Sections 3.1.1 and 3.2, respectively, at the time he or she becomes an
Active Participant. The Participant thereafter may redetermine such percentage(s) from time to time in accordance with
3.3.2. In either event –
(a) The Active Participant shall make such Elective Deferral elections, in such manner and
within such advance notice period as the Committee (in its discretion) shall specify;

(b) No Employee Pre-Tax Contributions or Roth Basic Contributions shall be made by any
Active Participant except in accordance with his or her Elective Deferral election and the limitations of Sections 3.1 and 5.5;
and

(c) No Employee Pre-Tax Catch-Up Contributions or Roth Catch-Up Contributions shall be


made by any Active Participant except in accordance with his or her Elective Deferral election and the limitations of
Section 3.2.

3.3.1 Amounts. Notwithstanding anything in Section 3.1.1 (other than Eligible Bonus deferral
elections in accordance with Section 3.1.1(b)) or 3.2 to the contrary, no Active Participant may elect to defer an amount of his
or her Compensation for any pay period as all types of Elective Deferrals that, when combined, exceeds 75% of each
payment of Compensation. The amount of Elective Deferrals that may be made by each Active Participant for each payroll
period shall be the amount in dollars and cents that is nearest to the amount of Compensation subject to the deferral election(s)
multiplied by the percentage(s) elected by the Participant pursuant to Section 3.1.1 or 3.2(a), as applicable.
3.3.2 Changes. An Active Participant may change the percentage(s) determined under the first
sentence of this Section 3.3 by giving notice in such manner and within such advance notice period as the Committee (in its
discretion) shall specify, effective with respect to Compensation paid on such date as the Committee (in its discretion) may
specify. The Elective Deferral elections made by an Active Participant shall remain in effect until his or her active

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participation in the Plan is terminated, except to the extent that the election is suspended in accordance with Sections 2.4, 2.5
or 8.2.3, changed in accordance with this Section 3.3.2, or reduced pursuant to Section 3.1.2 or 3.1.3 (as applicable).
3.3.3 Potential Excess ADP. In the event that (but for the application of this Section 3.3.3) the
Committee determines that the ADP for HCE Participants would exceed the maximum permitted under Section 3.1.5 for a
Plan Year (the “ADP Maximum”), then the Committee (in its discretion) may reduce, in accordance with Section 3.1.3, the
percentages or amounts of Pre Tax 401(k) Deferrals and/or Roth Basic Contributions subsequently to be contributed on
behalf of the HCE Participants by such percentages or amounts as, and for as long as, the Committee (in its discretion) may
determine is necessary or appropriate in the circumstances then prevailing. If the Committee determines that it is no longer
necessary to reduce the Pre Tax 401(k) Deferrals and/or Roth Basic Contributions contributed on behalf of the HCE
Participants, the Committee (in its discretion) may permit some or all HCE Participants, on a uniform and nondiscriminatory
basis, to make new Elective Deferral elections with respect to their subsequent Compensation payments and with respect to
Pre Tax 401(k) Deferrals and/or Roth Basic Contributions, and shall establish a policy as to the deferral percentages that shall
apply with respect to those HCE Participants who do not make new elections.
3.3.4 Actual Excess ADP. In the event that the Committee determines that the ADP for the
HCE Participants exceeds the ADP Maximum for any Plan Year, then the amount of any excess contributions (within the
meaning of Section 401(k)(8)(B) of the Code) contributed on behalf of any HCE Participant shall be distributed, together with
any income or loss allocable thereto for

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the Plan Year to which the excess contributions relate, to the HCE Participant before the close of the next following Plan
Year.
(a) Determination and Allocation of Excess Contributions. The amount of excess contributions
for HCE Participants for the Plan Year shall be determined and allocated among HCE Participants in the following manner:

(1) With respect to each HCE Participant whose Deferral Rate exceeds the ADP
Maximum, the Committee shall calculate an excess contribution amount by calculating the excess of (A) his or her Pre Tax
401(k) Deferrals and/or Roth Basic Contributions, over (B) the product of the ADP Maximum times his or her Testing
Compensation. The aggregate of the excess contributions for all such HCE Participants shall be the total excess contributions
to be distributed pursuant to this Section 3.3.4.

(2) The Pre Tax 401(k) Deferrals and/or Roth Basic Contributions of the HCE
Participant with the highest total dollar amount of Pre Tax 401(k) Deferrals and/or Roth Basic Contributions contributed shall
be reduced to the extent necessary to cause the total dollar amount of his or her Pre Tax 401(k) Deferrals and/or Roth Basic
Contributions contributed to equal the lesser of the dollar amount of excess contributions for all HCE Participants calculated
pursuant to subsection (a)(1) above or the dollar amount of Pre Tax 401(k) Deferrals and/or Roth Basic Contributions of the
HCE Participant with the next highest total dollar amount of Pre Tax 401(k) Deferrals and/or Roth Basic Contributions
contributed. This process shall be repeated until the total dollar amount of reductions of such Pre Tax 401(k) Deferrals and/or
Roth Basic Contributions equals the total excess contributions calculated pursuant to subsection (a)(1) above.

(3) The amount of excess contributions to be distributed to an HCE Participant


pursuant to this Section 3.3.4 shall be equal to the total amount by which his or her actual Pre Tax 401(k) Deferrals and/or
Roth Basic Contributions is reduced under subsection (a)(2) above, but reduced by the amount of any excess deferrals
previously distributed to the HCE Participant for the Plan Year under Section 3.1.2.

(b) Forfeiture of Related Company Match Contributions. Any Company Match Contributions
allocated to the HCE Participant’s Company Match Account by reason of any excess contributions distributed pursuant to this
Section 3.3.4, together with any income allocable thereto for the Plan Year to which the excess contributions relate, shall be
forfeited and applied to reduce the next succeeding Matching Contribution to the Plan.

(c) Incorporation By Reference. The foregoing provisions of this Section 3 are intended to
satisfy the requirements of Section 401(k)(3) of the Code and, to the extent not otherwise stated above, the provisions of
Section 401(k)(3) of the Code, Treasury Regulations § 1.401(k)-1(a)(iv) (to the extent not inconsistent with amendments to
the Code), and subsequent Internal Revenue Service guidance under Section 401(k)(3) of the Code are incorporated herein
by reference.

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3.4 Payment of Elective Deferrals. Subject to the foregoing provisions of this Section 3, Sections 5.5, 10.3 and
Section 11, the Employers shall pay to the Trust Fund the amounts elected by Active Participants to be contributed as Elective
Deferrals. Any Elective Deferrals to be contributed for a payroll period in accordance with the preceding sentence shall be
paid to the Trust Fund as soon as administratively practicable thereafter, and in no event later than the 15th business day of the
month that next follows the month in which such Compensation was paid.

SECTION 4

EMPLOYER CONTRIBUTIONS

4.1 Company Match Contributions. Subject to the provisions of this Section 4.1, Sections 5.5, 10.3 and
Section 11, the Employers shall contribute to the Trust Fund as Company Match Contributions amounts equal to the following:
4.1.1 Basic Company Match Contributions. The Employer will make Company Match
Contributions for each eligible Active Participant on a payroll by payroll basis equal to 100% of the eligible Active
Participant’s Employee Pre-Tax Contributions and, effective as of January 1, 2008, Roth Basic Contributions, for the pay
period, but not to exceed 5% of the eligible Active Participant’s Compensation for the pay period against which such
contributions are made.
4.1.2 True-Up Company Match Contributions. In addition to the Company Match
Contributions set forth in Section 4.1.1, the Employer will make additional Company Match Contributions for the Plan Year,
to be allocated as of the last Valuation Date of the Plan Year to eligible Participants as an adjustment to take into account any
changes in Compensation or Participant deferral elections which may have occurred during the Plan Year. The amount of the
additional Company Match Contributions for each eligible Participant shall be equal to the

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difference, if any, between (i) the Company Match Contributions allocated to the eligible Participant pursuant to Section 4.1.1
for the Plan Year, and (ii) a Matching Contribution equal to 100% of the eligible Participant’s Employee Pre-Tax
Contributions and/or, effective January 1, 2008, Roth Basic Contributions for the Plan Year, but not to exceed 5% of the
eligible Participant’s Compensation for the Plan Year. Notwithstanding the foregoing, the only Compensation that shall be
taken into account with respect to a Participant for purposes of this additional Matching Contribution shall be Compensation
paid (or payable if deferred under Section 3) to the eligible Participant for payroll periods for which he or she made Employee
Pre-Tax Contributions and/or, effective January 1, 2008, Roth Basic Contributions, to the Plan or after which the
Section 401(k) Ceiling took effect under the Plan. In order to be eligible for this additional Matching Contribution, a
Participant must be an Eligible Employee on the last Valuation Date of the Plan Year, or his or her employment with the
Employer must have been terminated during the Plan Year due to Disability or death.
4.1.3 Calculation Rules. Only those Employee Pre-Tax Contributions and Roth Basic
Contributions that are made pursuant to Sections 3.1 and 3.3 shall be taken into account in calculating the amount of the
Company Match Contributions (if any) to be made in respect of the Participant’s Employee Pre-Tax Contributions and Roth
Basic Contributions for any payroll period. In no event shall the amount of any Catch-Up Contributions contributed to any
Participant’s Employee Pre-Tax Catch-Up Account and/or Roth Catch-Up Account, be taken into account in determining the
amount of Company Match Contributions to be made to the Trust Fund and/or allocated to his or her Company Match
Account.
4.1.4 Limitations on HCE Participants. For any Plan Year, the Committee (in its discretion)
may limit the Company Match Contributions to be made on behalf of HCE Participants

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(as defined in Section 3.1.4) in such manner as may be necessary or appropriate in order to assure that the limitation
described in Section 4.1.5 will be satisfied.
4.1.5 Contribution Percentage Limitation. In no event shall the actual contribution percentage,
determined in accordance with Section 4.1.6 (the “ACP”), for the HCE Participants for a Plan Year exceed the maximum
ACP, as determined by reference to the ACP for the Non-HCE Participants (as defined in Section 3.1.4), in accordance with
the following table:

If the ACP for the Non-HCE Participants (“NHCEs’ Then the Maximum ACP for
ACP”) is: the HCE Participants is
Less than 2% 2.0 x NHCEs’ ACP
2% to 8% NHCEs’ ACP + 2%
More than 8% 1.25 x NHCEs’ ACP

4.1.6 Actual Contribution Percentage. The actual contribution percentage for the HCE or Non-
HCE Participants for a Plan Year shall be calculated by computing the average of the percentages (calculated separately for
each HCE or Non-HCE Participant) (the “Contribution Rates”) determined by dividing (a) the total of all Company Match
Contributions made on behalf of the Participant and credited to his or her Company Match Account for the Plan Year, by
(b) the Participant’s Testing Compensation (as defined in Section 3.1.7) for the Plan Year. The special testing and
aggregation rules set forth in Section 3.1.6 with respect to calculation of the Participants’ Deferral Rates shall also apply to the
calculation of their Contribution Rates.
4.1.7 Potential Excess ACP. In the event that (but for the application of this Section 4.1.7) the
Committee determines that the ACP for the HCE Participants would exceed the maximum permitted under Section 4.1.5 for a
Plan Year (the “ACP Maximum”), then the Committee (in its discretion) may reduce, in accordance with Section 4.1.4, the
percentages or amounts of

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Company Match Contributions subsequently to be made on behalf of the HCE Participants by such percentages or amounts
as, and for as long as, the Committee (in its discretion) may determine is necessary or appropriate in the circumstances then
prevailing.
4.1.8 Actual Excess ACP. In the event that the Committee determines that the ACP for the
HCE Participants exceeds the ACP Maximum for a Plan Year, then the amount of any excess aggregate contributions (within
the meaning of Section 401(m)(6)(B) of the Code) contributed on behalf of any HCE Participant shall be distributed, together
with any income or loss allocable thereto for the Plan Year to which the excess aggregate contributions relate, to the HCE
Participant before the close of the next following Plan Year.
(a) Determination and Allocation of Excess Aggregate Contributions. The amount of excess
aggregate contributions for HCE Participants for the Plan Year shall be determined and allocated among HCE Participants in
the manner provided in Section 3.3.4 with respect to excess contributions.

(b) Determination of Allocable Income. The income allocable to any excess aggregate
contributions for the Plan Year shall be determined in the manner provided in Section 3.3.4 with respect to excess
contributions.

(c) Incorporation By Reference. The foregoing provisions of this Section 4.1 are intended to
satisfy the requirements of Section 401(m) of the Code and, to the extent not otherwise stated above, the provisions of
Section 401(m)(2) and (9) of the Code, Treasury Regulations §1.401(m) 1(b) (to the extent not inconsistent with amendments
to the Code), and subsequent Internal Revenue Service guidance under Section 401(m)(2) and (9) of the Code are
incorporated herein by reference.

4.2 Non-Elective Contributions. Subject to the provisions of Sections 5.3 and Section 11, for any Plan Year
each Employer shall also contribute to the Trust Fund such amount (if any) as the Board of Directors (in its discretion) may
direct be contributed (a “Non-Elective Contribution”) on behalf of those Participants who are eligible to share in the
allocation of the Non-Elective Contribution pursuant to Section 5.3.

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4.3 Timing. Subject to the foregoing provisions of this Section 4, Section 10.3 and Section 11, Employer
Contributions shall be paid to the Trust Fund within the time prescribed by law (including extensions) for filing the Company’s
federal income tax return for its taxable year that ends with or within the Plan Year for which the Contributions are made.
4.4 Periodic Contributions. Subject to the foregoing provisions of this Section 4, Sections 5.4 and Section 11,
any Employer Contributions to be made for a Plan Year may be paid in installments from time to time during or after the Plan
Year for which they are made. The Employers shall specify, as to each Employer Contribution payment made to the Trust
Fund, the Plan Year to which the payment relates. The Employers intend the Plan to be permanent, but the Employers do not
obligate themselves to make any Employer Contributions under the Plan whatsoever.
4.5 Reinstatements. The Employers shall also contribute to the Trust Fund any amount necessary to reinstate a
closed Account pursuant to Section 7.8.
4.6 Profits Not Required. Each Employer shall make any contributions otherwise required to be made for a
Plan Year without regard to its current or accumulated earnings or profits for the taxable year that ends with or within the Plan
Year for which the contributions are made. Notwithstanding the foregoing, the Plan is designed to qualify as a profit sharing
plan under Section 401(a) of the Code.

SECTION 5

ALLOCATION OF CONTRIBUTIONS AND INVESTMENTS

5.1 Elective Deferrals. Except as provided in Sections 3.1.2 and 3.3.4, the Elective Deferrals made on behalf
of an Active Participant for any period shall be allocated to his or her Pre

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Tax 401(k) Deferrals Account, Roth Basic Account, Employee Pre-Tax Catch-Up Account or Roth Catch-Up Account, as
applicable, as of the Valuation Date that coincides with or next follows the date on which such Elective Deferrals are received
by the Trustee.
5.2 Company Match Contributions. Except as provided in Section 4.1.8, the Company Match Contributions
made on behalf of a Participant shall be allocated to his or her Company Match Account as of the Valuation Date that
coincides with or next follows the date on which such Company Match Contributions are received by the Trustee.
5.3 Non-Elective Contributions. Any Non-Elective Contributions made by an Employer for a Plan Year shall
be allocated, as of the Valuation Date that coincides with or next follows the date on which such Non-Elective Contributions
are received by the Trustee, to the Non-Elective Contributions Accounts of:
(a) All Participants (as determined under Section 2) who are Eligible Employees as of the last
Valuation Date of the Plan Year for which the Non-Elective Contributions were made; and

(b) Those Participants who, during such Plan Year, ceased to be Employees on account of
death or Disability.

The portion of the Employer’s Non-Elective Contributions to be allocated to the Non-Elective Contribution Account
of each Participant who is eligible to share in the allocation pursuant to the preceding sentence shall be determined by
multiplying the total amount of the Non-Elective Contributions by a fraction, of which (1) the numerator is the total
Compensation received by the Participant while employed by the Employer during the Plan Year, and (2) the denominator is
the aggregate total Compensation of all such Participants eligible to share in the allocation for such Plan Year.

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5.4 Investment. Each Participant (or, if deceased, his or her Beneficiary) shall elect, in such manner and at such
times as the Committee (in its discretion) shall specify, the percentages of all amounts allocated to his or her Account that are
to be invested in each of the Investment Funds. A Participant (or Beneficiary) may specify as to any Investment Fund any
percentage that is a whole multiple of 1%, provided that the total of the percentages specified shall not exceed 100%.
5.4.1 Changes. The elections of a Participant (or Beneficiary) concerning the investment of the
amounts allocated to his or her Account may be changed in accordance with such procedures as the Committee (in its
discretion) may designate from time to time. The designated procedures may include such rules and limitations (e.g., with
respect to the timing and frequency of elections) as the Committee may specify from time to time, but at all times shall permit
Participants (and Beneficiaries) to make investment changes in a manner designed to permit the Plan to qualify as a 404(c)
plan (within the meaning of Section 404(c) of ERISA).
5.4.2 Failure to Elect. If a Participant (or Beneficiary) fails to direct the manner in which the
amounts allocated (or to be allocated) to his or her Account are to be invested, such amounts shall be invested in the
Investment Fund designated by the Committee for such purpose. Whenever the Committee discontinues an Investment Fund
and the Participant (or Beneficiary) does not make a new election with respect to amounts allocated (or to be allocated) to the
discontinued Investment Fund, such amounts shall be invested in the Investment Fund designated by the Committee for such
purpose.
5.5 Limitations on Allocations.
5.5.1 Annual Addition Limitation. Notwithstanding any contrary Plan provision, in no event shall
the Annual Addition to any Participant’s Account for any Plan Year exceed the lesser

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of: (a) the Defined Contribution Dollar Limit, or (b) 100% of the Participant’s Total Compensation for the Plan Year, except
to the extent permitted under Section 3.2 and Section 414(v) of the Code; provided, however, that clause (b) above shall not
apply to Annual Additions described in clauses (5) and (6) of Section 5.5.2(c).
5.5.2 Definitions. For purposes of this Section 5.5, the following definitions shall apply:
(a) “Affiliate” means a corporation, trade or business which is, together with any Employer, a
member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of
Section 414(b), (c), (m) or (o) of the Code, as modified by Section 415(h) of the Code), but only for the period during which
such other entity is so affiliated with any Employer.

(b) “Aggregated Plan” means any defined contribution plan that is aggregated with this Plan
pursuant to Section 5.5.3.

(c) “Annual Addition” means with respect to each Participant the sum for a Plan Year of (1)
the Participant’s Employee Pre-Tax Contributions and Roth Basic Contributions to be credited to the Participant’s Employee
Pre-Tax Account or Roth Basic Account, as applicable; (2) the share of any Company Match Contributions and/or Non-
Elective Contributions to be credited to the Participant’s Company Match Account and/or Non-Elective Contributions
Account, as applicable; (3) the share of all contributions made by all Employers and Affiliates (including salary reduction
contributions made pursuant to Section 401(k) of the Code) and any forfeitures to be credited to the Participant’s account
under any Aggregated Plan; (4) any after-tax employee contributions made by the Participant for the Plan Year under any
Aggregated Plan; (5) any amount allocated to the Participant’s individual medical account (within the meaning of
Section 415(l) of the Code) under a defined benefit plan maintained by an Employer or Affiliate; and (6) any amount
attributable to post-retirement medical benefits that is allocated pursuant to Section 419A of the Code to the Participant’s
separate account under a welfare benefits fund (within the meaning of Section 419(e) of the Code) maintained by an Employer
or Affiliate.

(d) “Defined Contribution Dollar Limit” means the dollar limit prescribed in
Section 415(c)(1)(A) of the Code, as adjusted in accordance with Section 415(d) of the Code (e.g., $46,000 for 2008 and
$49,000 for 2009).

(e) “Total Compensation” means:

(1) Compensation calculated by the Committee in a manner that satisfies the applicable
requirements of Section 415(c)(3) of the Code and Treasury Regulations

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§1.415-2(d); provided, that if not otherwise specified by the Committee, Total Compensation means the amount of an
Employee’s:

(A) Wages (within the meaning of Section 3401(a) of the Code) and all other
payments of compensation which an Employer or Affiliate is required to report in Box 1 (“wages, tips, other compensation”)
of IRS Form W-2 (or its successor), determined without regard to any rules that limit the remuneration included in wages
based on the nature or location of the employment or the services performed (such as the agricultural labor exception). Total
Compensation shall also include:

(I) regular compensation for services during the Employee’s regular


working hours, or compensation for services outside the Employee’s regular working hours (such as overtime or shift
differentials), commissions, bonuses or other similar payments paid to an Employee who has incurred a severance from
employment (as defined in Treasury Regulations §1.415(a)-1(f)(5)); provided that such amounts are paid by the later of 2½
months after the Employee’s severance from employment with the Employer or the end of the Limitation Year that includes the
Employee’s severance from employment with the Employer;

(II) amounts described in (e)(1)(A) and (e)(1)(A)(I) above that are


includible in the Employee’s income as a result of the application of Section 409A of the Code and the Treasury Regulations
thereunder;

(III) elective deferrals (within the meaning of Section 402(g)(3) of the


Code) and any other amounts that are (i) contributed by any Employer or Affiliate at his or her election, and (ii) not includible
in his or her gross income under Section 125, 132(f)(4), 402(e)(3), 402(h), 408(p) or 457 of the Code;

(IV) amounts earned but not paid during the Limitation Year solely
because of the timing of pay periods and pay dates within the meaning of Treasury Regulations § 1.415(c)-2(e)(2).

(V) compensation paid to an individual who is permanently and totally


disabled (as defined in Code Section 22(e)(3)); provided that all individuals who become so disabled shall receive
compensation for a period of 6 months;

(VI) payments to an individual who does not currently perform services


for the Employer by reason of qualified military service (as defined in Section 414(u) of the Code, to the extent the payments
do not exceed the amounts the individual would have received if the individual had continued to perform services for the
Employer rather than entering qualified military service;

(B) Total Compensation shall not include the following:

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(I) Employer contributions (other than elective contributions described


in Sections 402(e)(3), 408(k)(6), 408(p)(2)(A)(i) or 457(b) of the Code) made by the Employer to a plan of deferred
compensation (including a simplified employee pension described in Section 408(k) of the Code or a simple retirement
account described in Section 408(p) of the Code, and whether or not qualified) to the extent that the contributions are not
includible in the gross income of the Employee for the taxable year in which contributed;

(II) any distributions from a plan of deferred compensation (whether or


not qualified), regardless of whether such amounts are includible in the gross income of the Employee when distributed;

(III) amounts realized from the exercise of a nonstatutory option (which


is an option other than a statutory option as defined in Treasury Regulations § 1.421-1(b)), or when restricted stock or other
property held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

(IV) amounts realized from the sale, exchange or other disposition of


stock acquired under a statutory stock option (as defined in Treasury Regulations § 1.421-1(b));

(V) other amounts that receive special tax benefits, such as premiums
for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee
and are not salary reduction amounts that are described in Section 125 of the Code); or

(VI) severance payments or payments in lieu of notice of severance


from employment paid after severance from employment.

(C) Except as provided in Paragraph (e)(1)(A)(I) above, Total Compensation


shall include only those amounts that are actually paid or made available to the Employee during the Plan Year.

(D) The annual Total Compensation of each Employee that is taken into
account under the Plan for a Plan Year shall not exceed the Compensation Limit for that year.

(E) The determination of the amount of Total Compensation for an Employee


shall be made by the Employer (or its authorized designee) that employs the Employee, in accordance with the records of the
Employer(s), and shall be binding and conclusive.

5.5.3 Other Defined Contribution Plans. All defined contribution plans (terminated or not)
maintained by any Employer or Affiliate shall be aggregated with this Plan, and all plans so

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aggregated shall be considered as one plan in applying the limitations of this Section 5.5, provided that the special limitation
applicable to employee stock ownership plans under Section 415(c)(6) of the Code shall be taken into account with respect
to a Participant who participates in any such plan.
5.5.4 Limitation Year. For purposes of applying the limitations of Section 415 of the Code, the
limitation year shall be the Plan Year.

SECTION 6

PARTICIPANT ACCOUNTS AND INVESTMENT FUNDS

6.1 Participant Accounts. At the direction of the Committee, there shall be established and maintained for each
Participant within his or her Account, the following subaccounts, as appropriate:
(a) An Employee Pre-Tax Account, to which shall be credited all Employee Pre-Tax
Contributions paid to the Trust Fund at his or her election under Section 3;

(b) A Roth Basic Account, to which shall be credited all Roth Basic Contributions paid to the
Trust Fund at his or her election under Section 3;

(c) An Employee Pre-Tax Catch-Up Account, to which shall be credited all Employee Pre-Tax
Catch-Up Contributions paid to the Trust Fund at his or her election under Section 3;

(d) A Roth Catch-Up Account, to which shall be credited all Roth Catch-Up Contributions
paid to the Trust Fund at his or her election under Section 3;

(e) A Company Match Account, to which shall be credited all Company Match Contributions
paid to the Trust Fund on his or her behalf under Section 4;

(f) A Non-Elective Contribution Account, to which shall be credited all Non-Elective


Contributions paid to the Trust Fund on his or her behalf under Section 4;

(g) A Rollover Contributions Account, to which shall be credited all pre-tax transfers made to
the Trust Fund by or on behalf of the Participant under Section 10.5.2;

(h) A Roth Rollover Account, to which shall be credited all transfers made to the Trust Fund by
or on behalf of the Participant under Section 10.5.3;

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(i) A Genenflex Account, which shall continue to hold any Prior Excess Flex Credit
Contributions (as defined in Section 1.1.4); and

(j) Such other Account(s) as the Committee shall deem necessary or appropriate, from time to
time.

Each Participant’s Account also shall reflect the total value of its proportionate interest in each of the Investment Funds as of
each Valuation Date. The maintenance of a separate Account for each Participant shall not be deemed to segregate for the
Participant, nor to give the Participant any ownership interest in, any specific assets of the Trust Fund.
6.2 Trust Fund Assets. The Trust Fund shall consist of the Participants’ Elective Deferrals, Company Match
Contributions, Non-Elective Contributions, Prior Excess Flex Credit Contributions (as defined in Section 1.1.4), Rollover
Contributions or Roth Rollover Contributions, or other transfers made pursuant to Section 10.5, all investments and
reinvestments made therewith, and all earnings and gains (less any losses) thereon. The Trustee shall hold and administer all
assets of the Trust Fund in the Investment Funds, and each Participant and his or her Account shall have only an undivided
interest in any of the Investment Funds.
6.3 Investment Funds.
6.3.1 General. The Trustee shall establish three or more Investment Funds which shall be
maintained for the purpose of investing such portions of Participants’ Accounts as are properly allocable to each such Fund
pursuant to Section 5.4. At least three of the Investment Funds shall (a) be diversified, (b) have materially different risk and
return characteristics, and (c) be designed to satisfy the broad range of investment alternatives requirement of 29 C.F.R.
§ 2550.404c 1(b)(3), all in a manner designed to permit the Plan to qualify as a 404(c) plan (within the meaning of
Section 404(c) of ERISA).

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6.3.2 Investment Media. Except to the extent that such investment responsibility has been
transferred to the Trustee or an Investment Manager in accordance with Section 9.6, the Committee (in its discretion) shall
direct the Trustee to invest each Investment Fund in units, shares or other interests in one or more common, pooled, collective
or other investment media that are (a) designated by the Committee, and (a) either (1) maintained by any person described in
Section 3(38)(B) of ERISA or an affiliate of such person, or (2) registered under the Investment Company Act of 1940, as
amended.
6.3.3 Changes. The Committee may from time to time change the number, identity or
composition of the Investment Funds made available under this Section 6.3. Except to the extent that such investment
responsibility has been transferred to the Trustee or an Investment Manager in accordance with Section 9.6, the Committee
also may select different investment media for the investment of any Investment Fund.
6.3.4 Reinvestments and Cash. All interest, dividends or other income realized from the
investments of any of the Investment Funds shall be reinvested in the Investment Fund that realized such income. Temporary
cash balances arising in any of the Investment Funds shall be invested in a manner that produces a reasonable rate of return
and is consistent with the liquidity needs of the Fund.
6.3.5 Company Stock Fund. Notwithstanding the foregoing provisions of this Section 6.3, one
of the Investment Funds shall be a Company Stock Fund.
6.3.6 Limitation on Investment in Company Stock Fund. Notwithstanding anything in the Plan
to the contrary, the following restrictions on investment in the Company Stock Fund shall apply:

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(a) Investment of future contributions (Elective Deferrals, Employer Contributions, Rollover


Contributions and Roth Rollover Contributions) in the Company Stock Fund shall be limited to 30% of new money invested;

(b) Exchanges of existing assets into the Company Stock Fund will be limited to 30% of the
Participant’s total Plan Account at the time of the exchange; and

(c) Existing investments in the Company Stock Fund may be sold at any time (subject to any
applicable trading restrictions) but once sold, reinvestment in the Company Stock Fund is limited to the above restrictions.

6.4 Valuation of Participants’ Accounts. The Trustee shall determine the fair market values of the assets of the
Investment Funds, and the Committee shall determine the fair market value of each Participant’s Account, as of each
Valuation Date. In making such determinations and in crediting net earnings and gains (or losses) in the Investment Funds to
the Participants’ Accounts, the Committee (in its discretion) may employ, and may direct the Trustee to employ, such
accounting methods as the Committee (in its discretion) deems appropriate in order fairly to reflect the fair market values of
the Investment Funds and each Participant’s Account. For this purpose the Trustee and the Committee (as appropriate) may
rely upon information provided by the Committee, the Trustee or other persons believed by the Trustee or the Committee to
be competent. The value of the interest of any Participant’s Account in the Company Stock Fund may be measured in units
(rather than shares of Company Stock) in such manner as the Committee (in its discretion) shall specify.
6.5 Valuation of Shares. For all purposes of the Plan, the Trustee shall determine the fair market value of a
share of Company Stock, which, as of any date, shall be (except as set forth below) the closing price of the Company Stock
on the New York Stock Exchange on that date, as published in The Wall Street Journal or, if no report is available for that
date, on the next preceding date for which a report is available, except that in the case of a transaction involving the purchase
or sale of

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share(s) of Company Stock, the fair market value of any share of Company Stock shall be the purchase or sale price of such
share on the New York Stock Exchange.
6.6 Statements of Account. Each Participant, Beneficiary or Alternate Payee shall be furnished with periodic
statements reflecting his or her interest in the Plan at least once each calendar quarter. Within sixty (60) days of receipt of any
such statement, each such individual must notify the Committee (or its designee) of any error in the statement and provide any
documents and/or information as the Committee (or its designee) may require.
6.7 Vesting of Participants’ Accounts. Each Participant shall at all times be 100% vested in his or her Account
under the Plan.
6.8 Forfeitures. Any amounts attributable to forfeitures transferred pursuant to the merger of another tax
qualified plan with this Plan, and any other amounts to be treated as forfeitures under the Plan, shall be applied, at the
Committee’s election and in its discretion, to: (a) reduce the Employer’s obligation to make Company Match Contributions;
(b) reduce the Employer’s obligation to make Non-Elective Contributions; (c) fund any other Employer contributions (e.g.,
Qualified Non-Elective Contributions) determined by the Committee to be necessary or appropriate; and/or (d) pay
administrative expenses under the Plan in accordance with Section 9.9.

SECTION 7

DISTRIBUTIONS

7.1 Events Permitting Distribution. Subject to Section 7.3, the balance credited to a Participant’s Account shall
become distributable only in the following circumstances:
(a) Upon the Participant’s severance from employment with all Employers and Affiliates at or
after Normal Retirement Age, on account of Disability or death, or for any other reason;

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(b) If the Participant is a 5-percent owner within the meaning of Section 416(i)(1)(B) of the
Code (a “5-Percent Owner”), at any time during (and no later than) the April 1 that next follows the calendar year in which
the Participant attains age 70½;

(c) Upon the Committee’s approval of the Participant’s application for a withdrawal from his or
her Account, but only to the limited extent provided in Section 8;

(d) In accordance with and to the limited extent provided in Sections 3.1.2, 3.3.4 or 4.1.8; or

(e) Upon the creation or recognition of an Alternate Payee’s right to all or a portion of a
Participant’s Account under a domestic relations order which the Committee determines is a QDRO (as defined in
Section 8.7), but only as to the portion of the Participant’s Account that the QDRO states is payable to the Alternate Payee.

For purposes of determining whether a Participant has met the foregoing requirements, if a Participant experiences a change in
employment status to that of a Leased Employee (as defined in Section 1.30) and he or she continues to work for the
Employer or any Affiliate, such change will not be treated as a severance from employment with all Employers and Affiliates
for purposes of receiving a distribution under the Plan.
7.2 Times for Distribution.
7.2.1 General Rule. Subject to the consent requirements of Section 7.3 and except as provided
in Section 8.7 (relating to QDROs), distributions from a Participant’s Account shall normally be made or commenced as soon
as practicable after the Valuation Date that coincides with or next follows the later of (a) the date on which the event permitting
the distribution occurs, or (b) the date on which any consent required under Section 7.3 is granted in such manner and within
such advance notice period as the Committee (in its discretion) shall specify.
7.2.2 Distribution Deadline. Subject to all other provisions of this Section 7, all distributions not
made sooner pursuant to the first sentence of Section 7.2.1 shall be made no later than sixty (60) days after the end of the Plan
Year in which a distribution event described in

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Section 7.1(a) occurs with respect to the Participant, or the Participant attains Normal Retirement Age (whichever is later),
subject also to the following:
(a) A Participant’s failure to consent to a distribution (if such consent is required under
Section 7.3) shall be deemed to be an election to defer distribution of his or her Account; provided, however, that the
Participant’s Account shall be distributed no later than his or her Deadline Date (as defined in Section 7.2.3).

(b) If the amount of the distribution or the location of the Participant or his or her Beneficiary
(after a reasonable search) cannot be ascertained by the deadline described above, distribution shall be made no later than
sixty (60) days after the earliest date on which the amount or location (as appropriate) is ascertained, subject to the other
provisions of this Section 7.

(c) Distributions permitted by reason of the Participant’s death shall be made within five (5)
years after his or her death.

7.2.3 For purposes of applying this Section 7.2, “Deadline Date” means:
(a) With respect to a Participant who is a 5-Percent Owner (as defined in Section 7.1(b)), the
April 1 that next follows the calendar year in which the Participant attains age 70½.

(b) With respect to a Participant who is not a 5-Percent Owner, the April 1 that next follows
the later of (i) the calendar year in which the Participant attains age 70½, or (ii) the calendar year in which the Participant
incurs a severance from employment with all Employers and Affiliates.

7.2.4 Age 70½ Rule for 5-Percent Owners. If the Account of a Participant who continues in
employment after attaining Normal Retirement Age becomes distributable pursuant to Section 7.1(b), the Account shall be
distributed no later than the Deadline Date, and any subsequent allocations to the Account shall be distributed by the April 1
that next follows the Plan Year to which those allocations pertain.
7.3 Consent Requirement and Immediate Distributions.
7.3.1 Consent Required Over Threshold Amount. If the balance credited to a Participant’s
Account exceeds $1,000 (the “Threshold Amount”) as of the Valuation Date that next precedes the date of distribution from
the Account, then no portion of the Participant’s Account shall

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be distributed to the Participant until he or she attains age 62, unless the Participant (or, if deceased, his or her Beneficiary) has
consented to an earlier distribution in such manner and within such advance notice period as the Committee (in its discretion)
shall specify.
7.3.2 Immediate Distributions of Small Accounts Permitted. Notwithstanding any contrary Plan
provision, if the balance credited to a Participant’s Account does not exceed the Threshold Amount (as defined in
Section 7.3.1) as of the Valuation Date that next precedes the date of distribution from the Account, and if the Participant
does not elect to have such distribution paid directly to an eligible retirement plan specified by the Participant in a direct
rollover or to receive the distribution directly in accordance with this Section 7, then the distribution shall be paid in a single
lump sum as soon as administratively practicable in accordance with the procedures prescribed by the Committee.
7.4 Form of Distribution.
7.4.1 Cash. With respect to any portion of a Participant’s Account as is not invested in the
Company Stock Fund, any distribution from such portion of the Account shall be made in the form of a single lump sum
payment of cash (or its equivalent), such amount to be equal to the balance credited to such portion of the Account as of the
relevant Valuation Date.
7.4.2 Company Stock. Any distribution from such portion of a Participant’s Account as is
invested in the Company Stock Fund as of the Valuation Date shall be made in the form of a single lump sum payment, as
elected by the distributee, in –
(a) Such whole number of shares of Company Stock as is equivalent to the full value of the units
of the Company Stock Fund then credited to such portion of the Account, with fractional shares paid in cash;

(b) Cash (or its equivalent) equal to the full value of the units of the Company Stock Fund then
credited to such portion of the Account; or

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(c) A combination of both.

7.4.3 In-Kind Rollover to Fidelity IRA. Notwithstanding the provisions of Sections 7.4.1 and
7.4.2 above, a Participant may elect that a distribution be made in-kind, provided that (a) the distribution consists of
marketable securities (as defined in Section 731(c)(2) of the Code), (b) the distribution will be in the form of a Direct Rollover
to a Fidelity Investments® individual retirement account (“IRA”), and (c) the Direct Rollover is acceptable to Fidelity
Investments®.
7.4.4 No Annuities. In no event shall any distribution from a Participant’s Account be made in
the form of a life annuity.
7.4.5 Direct Rollovers. Notwithstanding any contrary Plan provision:
(a) General Rule. If the Distributee of an Eligible Rollover Distribution (1) elects to have at least
$500 of the Eligible Rollover Distribution or, if less, the entire Eligible Rollover Distribution, paid directly to an Eligible
Retirement Plan, and (2) specifies the Eligible Retirement Plan to which the Eligible Rollover Distribution is to be paid in such
manner and within such advance notice period as the Committee (in its discretion) may specify, then the Eligible Rollover
Distribution (or elected portion thereof) shall be paid to that Eligible Retirement Plan in a Direct Rollover, in accordance with
and subject to the conditions and limitations of Section 401(a)(31) and related provisions of the Code; and

(b) Definitions.

(1) “Direct Rollover” means an Eligible Rollover Distribution paid directly to an Eligible
Retirement Plan for the benefit of a Distributee.

(2) “Distributee” means a Participant, the surviving spouse of a deceased Participant,


an Alternate Payee (if the spouse or former spouse of a Participant under a QDRO (as defined in Section 8.7)), or a
Beneficiary who is not the surviving spouse of a deceased Participant.

(3) “Eligible Retirement Plan” means:

(A) with respect to a Distributee (other than a Distributee who is a Beneficiary


who is not a surviving spouse of a deceased Participant), (i) an individual retirement account described in Section 408(a) of
the Code, (ii) an individual retirement annuity described in Section 408(b) of the Code (other than an endowment contract) (an
“IRA”), (iii) a

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qualified plan described in Section 401(a) of the Code, which has agreed to accept the Distributee’s Eligible Rollover
Distribution, (iv) an annuity plan described in Section 403(a) of the Code, (v) an annuity contract described in Section 403(b)
of the Code, (vi) an eligible plan under Section 457(b) of the Code maintained by a state, political subdivision of a state, or
any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts
transferred into such plan from this Plan, and (vii) a Roth IRA described in Section 408A of the code, subject to the
restrictions of Section 408A(c)(3)(B) for tax years beginning prior to January 1, 2010;

(B) with respect to a Distributee who is a Beneficiary who is not a surviving


spouse of a deceased Participant, (i) an individual retirement account described in Section 408(a) of the Code, or (ii) an
individual retirement annuity (other than an endowment contract) described in Section 408(b) of the Code); and

(C) with respect to distributions from a Participant’s Roth Basic Account, Roth
Catch-Up Account and/or Roth Rollover Account, (i) another designated Roth account under an applicable retirement plan
described in Section 402A(3)(1) of the Code, or (ii) a Roth IRA described in Section 408A of the Code.

(4) “Eligible Rollover Distribution” means a distribution of any portion of the balance
credited to the Account of a Participant and which is not:

(A) One of a series of substantially equal periodic payments made over (A) a
specified period of ten years or more, or (B) the life (or life expectancy) of the Distributee or the joint lives (or joint life
expectancies) of the Distributee and the Distributee’s designated Beneficiary;

(B) Any distribution to the extent such distribution is required under


Section 401(a)(9) of the Code;

(C) Any hardship distribution described in Section 410(k)(2)(B)(i)(IV) of the


Code; and

(D) The portion of any distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized appreciation with respect to Company Stock), other than any
amounts that are distributions from a Participant’s Roth Basic Account, Roth Catch-Up Account and/or Roth Rollover
Account.

(c) Notice. Such Distribution may commence less than 30 days after the notice required under
Treasury Regulations § 1.411(a)-11(c) is given to the Distributee, provided that (1) the Distributee is clearly informed that he
or she has a right to consider, for a period of at least 30 days after receiving the notice, a decision on whether to elect a
distribution (and, if applicable, a particular distribution option), and (2) the Distributee, after receiving the notice, affirmatively
elects a distribution.

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7.5 Company Stock Restrictions. Any Participant or other prospective Distributee who is to receive a
distribution of Company Stock may be required to execute an appropriate stock transfer agreement, implementing and
evidencing such restrictions on transferability as may be imposed by applicable federal and state securities laws, prior to
receiving a distribution of the Company Stock. Any shares of Company Stock held or distributed by the Trustee may include
such legend restrictions on transferability as the Company may reasonably require in order to assure compliance with
applicable federal and state securities laws.
7.6 Beneficiary Designations. Each Participant may designate one or more Beneficiaries in such manner as the
Committee (in its discretion) shall specify. No such designation shall become effective until its receipt by the Company (as the
Committee’s delegate under Section 9.4(v)) in the manner specified.
7.6.1 Spousal Consent. If a Participant designates any person other than his or her spouse as a
primary Beneficiary, the designation shall be ineffective unless the Participant’s spouse consents to the designation. Any
spousal consent required under this Section 7.6.1 shall be void unless it (a) is set forth in writing, (b) acknowledges the effect
of the Participant’s designation of another person as his or her Beneficiary under the Plan, and (c) is signed by the spouse and
witnessed by an authorized agent of the Committee or a notary public. Notwithstanding the foregoing, if the Participant
establishes to the satisfaction of the Committee that written spousal consent may not be obtained because there is no spouse
or the spouse cannot be located, or because of other circumstances specified under Section 417(a)(2) of the Code, his or her
designation shall be effective without spousal consent. Any spousal consent required under this Section 7.6.1 shall be
irrevocable and valid only with respect to the spouse who signs the consent. A Participant may

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revoke his or her Beneficiary designation at any time, regardless of his or her spouse’s previous consent to the revoked
designation, and any such revoked designation shall be void.
7.6.2 Changes and Failed Designations. A Participant may designate different Beneficiaries (or
revoke a prior Beneficiary designation) at any time by making a new designation (or a revocation of a prior designation) in
such manner as the Committee (in its discretion) shall specify. No such designation shall become effective until its receipt by
the Company (as the Committee’s delegate under Section 9.4(v)) in the manner specified, and the last effective designation
received by the Company shall supersede all prior designations. If a Participant dies without having effectively designated a
Beneficiary, or if no Beneficiary survives the Participant, the Participant’s Account shall be payable to his or her surviving
spouse to whom the Participant was legally married as of the date of the Participant’s death. If the Participant is not survived
by a spouse, the Participant’s Account shall be paid to his or her estate, or in accordance with applicable law.
7.7 Payments to Minors or Incompetents. If any individual to whom a benefit is payable under the Plan is a
minor, or if the Committee (in its discretion) determines that any individual to whom a benefit is payable under the Plan is
physically or mentally incompetent to receive such payment or to give a valid release therefore, payment shall be made to the
guardian, committee or other representative of the estate of such individual which has been duly appointed by a court of
competent jurisdiction. If no guardian, committee or other representative has been appointed, payment:
(a) May be made to any person as custodian for the minor or incompetent under the California
Uniform Transfers to Minors Act (or comparable law of another state), or

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(b) May be made to or applied to or for the benefit of the minor or incompetent, his or her
spouse, children or other dependents, the institution or persons maintaining him or her, or any of them, in such proportions as
the Committee (in its discretion) from time to time shall determine.

(c) The release of the person or institution receiving the payment shall be a valid and complete
discharge of any liability of the Plan with respect to any benefit so paid.

7.8 Undistributable Accounts. Each Participant and (in the event of death) his or her Beneficiary shall keep the
Committee advised of his or her current address. If the Committee is unable to locate the Participant or Beneficiary to whom
a Participant’s Account is payable under this Section 7, (a) the Participant’s Account may be closed after 24 months have
passed since the date the Account first became distributable to such Participant or Beneficiary, and (b) the balance credited to
any Account so closed shall be credited as an offset against future Employer Contribution payments. If the Participant or
Beneficiary whose Account were closed under the preceding sentence subsequently files a claim for distribution of his or her
Account, and if the Committee (in its discretion) determines that such claim is valid, then the balance previously removed upon
closure of the Account shall be restored to the Account by means of a special contribution which shall be made to the Trust
Fund by the Employers.

SECTION 8

WITHDRAWALS, LOANS AND DOMESTIC RELATIONS ORDERS

8.1 General Rules. In accordance with Sections 8.2 and 8.3, a Participant who is an Employee may request a
withdrawal from his or her Account in cash (or its equivalent). Any application for a withdrawal shall be submitted, in such
manner and within such advance notice period as the Committee (in its discretion) may specify from time to time. Except as
otherwise

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specified below, any amount withdrawn under this Section 8 shall be deducted from the Participant’s Account in such order as
may be determined by the Committee from time to time.
8.2 Hardship Withdrawal. The Committee shall authorize a withdrawal (a “Hardship Withdrawal”) under this
Section 8.2 if the Participant provides evidence that is sufficient to enable the Committee to determine that the Hardship
Withdrawal is in connection with a Financial Hardship, and is subject to the following rules:
8.2.1 General Rules.
(a) Subject to the provisions of this Section 8.2, a Participant may make a Hardship
Withdrawal under this Section 8.2 no more frequently than once in any calendar year.

(b) No Hardship Withdrawal shall be granted under this Section 8.2 unless the Participant has
elected to receive all distributions, withdrawals and loans available under this Plan and all other qualified plans maintained by
the Employers and Affiliates.

(c) The amount available to a Participant for a Hardship Withdrawal shall not exceed the
amount that the Committee (in its discretion) determines is necessary to satisfy the Participant’s Financial Hardship (net of
income taxes or penalty taxes reasonably anticipated to result from the Hardship Withdrawal).

(d) Notwithstanding paragraph (c) above, the maximum amount that may be withdrawn from a
Participant’s Elective Deferrals Accounts and Genenflex Account for this purpose shall be equal to the excess of (1) the sum
of all Elective Deferrals and Prior Excess Flex Credit Contributions (as defined in Section 1.1.4) allocated to the Participant’s
applicable Elective Deferrals Accounts and/or Genenflex Account (as applicable) on the date of the withdrawal plus the
amount of any earnings credited to his or her Employee Pre-Tax Account as of December 31, 1988, over (2) the sum of all
amounts previously withdrawn or distributed from the Participant’s Elective Deferrals Accounts and Genenflex Account.

(e) Any amount withdrawn under this Section 8.2 shall be funded from the Investment Funds in
which the Participant’s Account is invested in such order or allocation among such Investment Funds as is determined under
such rules as may be established by the Committee from time to time.

8.2.2 Financial Hardship. For purposes of applying this Section 8.2, a “Financial Hardship”
means and shall be deemed to exist only on account of one or more of the following:

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(a) Expenses incurred or necessary for medical care for the Participant, his or her spouse,
dependents (as defined in Section 152 of the Code, without regard to Section 152(b)(1), (b)(2) and (d)(1)(B) of the Code)
or, effective as of January 1, 2009, for the Participant’s Primary Beneficiary (defined below), that would be deductible under
Section 213(d) of the Code (determined without regard to whether the expenses exceed 7½% of adjusted gross income);

(b) Costs (excluding mortgage payments) relating to the purchase of a principal residence for
the Participant;

(c) Payment of tuition, related educational fees and room and board expenses, for up to the
next 12 months of post-secondary education for the Participant, his or her Spouse, children or dependents (as defined in
Section 152 of the Code, without regard to Section 152(b)(1), (b)(2) and (d)(1)(B) of the Code) or, effective as of January 1,
2009, the Participant’s Primary Beneficiary;

(d) Payments necessary to prevent the eviction of the Participant from his or her principal
residence or foreclosure on the mortgage or deed of trust on that principal residence;

(e) Payments for burial or funeral expenses for the Participant’s deceased parent, Spouse,
children or dependents (as defined in Section 152 of the Code, without regard to Section 152(d)(1)(B) of the Code) or,
effective as of January 1, 2009, the Participant’s Primary Beneficiary; or

(f) Expenses for the repair of damage to the Participant’s principal residence that would qualify
for the casualty deduction under Section 165 of the Code (determined without regard to whether the loss exceeds 10% of
adjusted gross income).

For purposes of this Section, a Participant’s “Primary Beneficiary” means the individual(s) who is named and designated by
the Participant as the Participant’s Beneficiary in accordance with Section 7.6 and who has an unconditional right to all or a
portion of the Participant’s Account balance upon the Participant’s death.

8.2.3 Mandatory Suspension and Contribution Limitations. If determined by the Committee to


be necessary or appropriate in order to preserve the tax-qualification of the Plan, no Hardship Withdrawal shall be made
under this Section 8.2 unless the Participant irrevocably agrees in his or her Hardship Withdrawal application, evidenced in
such manner as the Committee (in its discretion) may specify, that the Participant shall not make contributions to,
compensation deferrals under or payments in connection with the exercise of any rights granted under this Plan or any other
qualified plan or any nonqualified stock option, stock purchase, deferred compensation or similar

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plan (but not any health or welfare plan) maintained by any Employer or Affiliate for a period of six (6) months following
receipt of the Hardship Withdrawal. The Participant may elect to resume his or her active participation in the Plan as of any
Entry Date following the end of the suspension period described above, provided that he or she elects to become an Active
Participant in accordance with Section 2.3.1.
8.3 Age 59½ Withdrawal. At any time after a Participant attains age 59½, the Participant (subject to other
applicable provisions of the Plan) may request a withdrawal from his or her Account in any amount, up to the value of his or
her Account.
8.4 Withdrawal From Company Match Account at Normal Retirement Age. At any time after a Participant
attains Normal Retirement Age, the Participant (subject to other applicable provisions of the Plan) may request a withdrawal
from his or her Company Match Account in any amount, up to the value of his or her Company Match Account.
8.5 Withdrawal From Rollover Contributions Accounts. At any time, a Participant (subject to other applicable
provisions of the Plan) may request a withdrawal from his or her Rollover Contributions Account or Roth Rollover Account in
any amount, up to the value of such Account(s).
8.6 Loans to Participants.
8.6.1 General Loan Rules. A Participant who is an Employee may, upon application to such
person, in such manner and within such advance notice period as the Committee (in its discretion) shall specify, obtain a loan
from the portion of the Trust Fund allocated to the Participant’s Account in accordance with the provisions of this
Section 8.6. Loans shall be available to all Participants who are Employees, and to parties in interest (within the meaning of
Section 3(14)

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of ERISA) with respect to the Plan who are non-Employee Participants or Beneficiaries of deceased Participants, on a
reasonably equivalent basis.
(a) Amount. The amount of the loan shall be neither less than $1,000 nor more than the excess
of (1) 50% of the Participant’s Available Balance (as defined below), determined as of the Valuation Date that occurs on the
date the loan is processed, over (2) the sum of the outstanding balances (including both principal and accrued interest) on all
prior outstanding loans to the Participant under this Plan.

(b) “Available Balance” means the total balance credited to the Participant’s Account as of the
applicable date.

(c) Additional Limits. The amount borrowed under this Section 8.6 shall not cause the sum of
(i) the amount of the loan, plus (ii) the aggregate outstanding balance (including both principal and accrued interest) on all prior
loans to the Participant under this Plan or any other qualified plan maintained by any Employer or Affiliate (an “Other Plan”),
to exceed an amount equal to $50,000, reduced by the excess (if any) of (1) the highest aggregate outstanding balance on all
loans under this Plan and all Other Plans during the one-year period ending on the day before the date the loan is to be made,
over (2) the aggregate outstanding balance on all such loans on the date the loan is made.

(d) Maximum Number of Loans. No Participant shall be permitted to borrow under this
Section 8.6 if the borrowing would result in his or her having more than three (3) loans outstanding.

(e) Twelve Months Required Between Loans. Notwithstanding the foregoing, no additional
loan may be made to a Participant under this Section 8.6 until at least 12 months after the next earliest loan was made.

(f) Unpaid Leave of Absence. If a Participant is granted an unpaid Leave of Absence and
remains an Employee, he or she may elect to have his or her loan payments be suspended for the lesser of the duration of the
approved Leave of Absence or one year. If the Participant’s loan payments are so suspended and he or she returns to active
employment with an Employer or Affiliate, the Committee shall recompute the monthly loan payment amount and the
recomputed amount shall be payable for the balance of the original term of the loan in accordance with this Section 8.6. If the
Participant fails to return to active employment with an Employer or Affiliate or terminates his or her employment with all
Employers and Affiliates, the provisions of Sections 8.6.2(e)(2), 8.6.2(g), 8.6.2(h), 8.6.2(i), 8.6.3 and 8.6.4 shall apply;
provided, however, that the Committee shall recompute the monthly loan payment amount and the recomputed amount shall
be payable for the balance of the original term of the loan if the Participant authorizes an automatic payment method described
in Section 8.6.2(e)(2) for such remaining loan payments.

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8.6.2 Minimum Requirements of Each Loan. Any loan made under this Section 8.6 shall be
evidenced by a loan agreement and promissory note, and the Participant must evidence his or her agreement to the terms
thereof in writing. Such terms shall satisfy the following minimum requirements:
(a) Separate Accounting. Each loan shall be considered as a separate, earmarked investment
of the Participant’s Account. Interest and principal payments on Participant loans shall be reallocated to the Investment Funds
in the same percentages as specified by the Participant pursuant to Section 5.4, or if there is no such designation currently in
force, as the Committee (in its discretion) shall determine.

(b) Term. The term of the loan shall not exceed five years. The Participant may elect a term of
either three or five years for each loan. However, the term of the loan may be fifteen years, provided that the Participant (1)
certifies in writing that the loan proceeds will be used to purchase a dwelling unit which (within a reasonable period of time
after the loan is made) will be the Participant’s principal residence, and (2) submits such certification to the Committee
together with such supporting documentary evidence (e.g., a copy of the signed sale contract) as the Committee (in its
discretion) may request.

(c) Interest Rate. Each loan shall bear a reasonable rate of interest, as determined by the
Committee (in its discretion), which shall be comparable to the interest rates charged under similar circumstances by persons in
the business of lending money.

(d) Payment Schedule. A definite payment schedule shall be established for each loan which
shall require level and monthly payments of both principal and interest over the agreed term of the loan in accordance with the
provisions of this Section 8.6. A Participant may prepay at any time the entire amount remaining due under the loan, but no
partial prepayments shall be permitted.

(e) Withholding Payments. No loan shall be made unless the Participant agrees to make
principal and interest payments on each loan, together with any and all reasonable charges imposed by the Trustee at the
direction of the Committee in connection with the loan:

(1) By payroll withholding, in the case of a Participant who is receiving periodic wage
payments from an Employer or Affiliate; or

(2) By an automatic payment method which the Committee (in its discretion) determines
will provide security comparable to that of payroll withholding, in the case of a Participant who is not receiving periodic wage
payments from an Employer or Affiliate.

(f) On Payroll. If during the term of the loan, a Participant who has been making payments by
the automatic payment method described in Section 8.6.2(e)(2) begins

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receiving periodic wage payments from an Employer or Affiliate, the Participant shall authorize in writing payroll withholding
for the remaining loan payments.

(g) Off Payroll. Subject to Section 8.6.1(f), if during the term of the loan, a Participant who has
been making loan payments by payroll withholding ceases to receive periodic wage payments from an Employer or Affiliate
(and distribution of the Participant’s Account has not begun), the Participant shall authorize in writing an automatic payment
method described in Section 8.6.2(e)(2) for the remaining loan payments.

(h) Failure to Authorize. If any Participant fails to authorize any change in the method of
payment required by Section 8.6.2(f) or (g), the outstanding balance (including unpaid principal and interest) on the loan shall
become immediately due and payable.

(i) Security. Each loan shall be adequately secured by collateral of sufficient value to secure
payment of the loan principal and interest. Notwithstanding the provisions of Section 13.2, the Participant shall pledge 50% of
his or her Available Balance (as defined in Section 8.6.1(b)), and shall provide such other collateral as the Committee (in its
discretion) may require, to secure his or her loan payment obligations.

8.6.3 Default. If a Participant defaults on his or her loan payment obligations and does not cure
the default within thirty days of the date the Participant is notified of the default, the Committee shall take, or direct the Trustee
to take, such action as shall be necessary or appropriate in the circumstances prevailing: (a) to realize upon the security interest
of the Trust Fund in the collateral pledged to secure the loan, and/or (b) to reduce the balance credited to the Participant’s
Account by the amount required to cure the default.
8.6.4 Effect of Distributions. If any amount remains outstanding as a loan obligation of a
Participant when a distribution is made from his or her Account in connection with the Participant’s severance from
employment with all Employers and Affiliates, (a) the outstanding loan balance (including both principal and accrued interest)
shall then become immediately due and payable, and (b) the balance credited to the Participant’s Account shall be reduced to
the extent necessary to discharge the obligation.

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8.6.5 Transferred participant Loans. Notwithstanding any contrary Plan provision, any
Participant loans that are transferred to the Trust Fund pursuant to Section 10.5.5 shall be administered under this Plan in
accordance with such loans’ terms and conditions in effect as of the date of the transfer or as may be otherwise modified to
conform to the administrative and/or payroll procedures of the Employer.
8.7 Qualified Domestic Relations Orders. The Committee shall establish written procedures for determining
whether a domestic relations order (within the meaning of Section 414(p)(1)(B) of the Code) purporting to dispose of any
portion of a Participant’s Account is a qualified domestic relations order (within the meaning of Section 414(p)(1)(A) of the
Code) (a “QDRO”).
8.7.1 No Payment Unless a QDRO. No payment shall be made to an Alternate Payee until the
Committee (in its discretion), or a court of competent jurisdiction reversing an initial adverse determination by the Committee,
determines that the order is a QDRO. Payment shall be made to an Alternate Payee only in a form of distribution that is
available to the Participant under the Plan, and as specified in the QDRO.
8.7.2 Immediate Payment Permitted. Payment may be made to an Alternate Payee, in
accordance with a QDRO, as soon as practicable after the QDRO determination is made, without regard to whether the
distribution, if made to the Participant at the time specified in the QDRO, would be permitted under the terms of the Plan.
8.7.3 Deferred Payment. If the QDRO does not provide for immediate payment to an Alternate
Payee, the Committee shall direct the Trustee to establish a Plan Account for the Alternate Payee’s portion of the Participant’s
Account. All investment decisions with respect to

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amounts credited to the Alternate Payee’s Plan Account shall be made by the Alternate Payee in the manner provided in
Section 5.4. Payment to the Alternate Payee shall not be deferred beyond the date on which distribution to the Participant or
(in the event of death) his or her Beneficiary is made or commenced.
8.7.4 Hold Procedures. Notwithstanding any contrary Plan provision, at any time the
Committee (in its discretion) may place a hold upon all or a portion of a Participant’s Account for a reasonable period of time
(as determined by the Committee) if the Committee receives notice that (a) a domestic relations order is being sought by the
Participant, his or her spouse, former spouse, child or other dependent and (b) the Participant’s Account is a source of
payment under such order. For purposes of this Section 8.7.4, a “hold” means that no withdrawals, loans or distributions may
be made from a Participant’s Account. The Committee shall notify the Participant if a hold is placed upon his or her Account
pursuant to this Section 8.7.4.
8.8 Withdrawals and Distributions Relating to Military Service.
8.8.1 Qualified Reservist Withdrawal. Notwithstanding anything in the Plan to the contrary, a
Participant who is a reservist or national guardsman (as defined in 37 U.S. Code 101(24)) while employed by the Employer,
and who is ordered or called to active duty for a period in excess of one hundred seventy-nine (179) days or for an indefinite
period, may request a withdrawal from his or her Elective Deferrals Accounts; provided that the request is made during the
period beginning on the date or such order to call to duty and ending at the close of the active duty period.
8.8.2 Military Service Distribution. Effective as of January 1, 2009, and notwithstanding any
contrary Plan provision, a Participant who is employed by the Employer and who is performing service in the uniformed
serviced of the United States (as defined in Chapter 43

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of title 38 of the U.S. Code) for a period in excess of thirty (30) days, shall be considered to have incurred a severance from
employment with the Employer solely for purposes of permitting the Participant to elect a distribution from his or her Account
in accordance with Section 7. A Participant who elects a distribution in accordance with this Section 8.8.2, and whose
distribution includes Elective Deferrals, shall be prohibited from making Elective Deferrals to the Plan for a period of six (6)
months following his or her receipt of such distribution.

SECTION 9

ADMINISTRATION OF THE PLAN

9.1 Plan Administrator. The Company is hereby designated as the administrator of the Plan (within the meaning
of Sections 414(g) and 3(16)(A) of the Code and ERISA, respectively).
9.2 Committee. The Plan shall be administered by a Committee consisting of at least three members, appointed
by and holding office at the pleasure of the Board of Directors. The Committee shall have the authority to control and manage
the operation and administration of the Plan as a named fiduciary under Section 402(a)(1) of ERISA. Any member of the
Committee who is also an Employee shall serve as such without additional compensation. Any member of the Committee may
resign at any time by notice in writing mailed or delivered to the Board of Directors. The Board of Directors may remove any
member of the Committee at any time and may fill any vacancy that exists.
9.3 Actions by Committee. Each decision of a majority of the members of the Committee then in office shall
constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held
and shall keep minutes of all meetings held and a record of all actions taken. Except as otherwise specifically or generally

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directed by the Committee, any action of the Committee may be evidenced by a writing signed by any two (2) members of the
Committee.
9.4 Powers of Committee. The Committee shall have all powers necessary to supervise the administration of
the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the following
discretionary powers:
(a) To grant or deny benefits under the Plan;

(b) To interpret the provisions of the Plan and to determine any question arising under, or in
connection with the administration or operation of, the Plan;

(c) To determine all questions concerning the eligibility of any Employee to become or remain a
Participant and/or an Active Participant in the Plan;

(d) To cause one or more separate subaccounts to be maintained for each Participant;

(e) To establish and revise an accounting method or formula for the Plan, as provided in
Section 6.4;

(f) To determine the manner and form, and to notify the Trustee, of any distribution to be made
under the Plan;

(g) To grant or deny withdrawal and loan applications under Section 8;

(h) To determine the status and rights of Participants and their spouses, Beneficiaries or estates
under this Plan;

(i) To instruct the Trustee with respect to matters within the jurisdiction of the Committee;

(j) To direct the Trustee, in accordance with Section 6.3, and subject to Section 6.3.4, as to
the establishment of Investment Funds and the investment of the Plan assets held in the Investment Funds;

(k) to appoint one or more Investment Managers in accordance with Section 9.6.1;

(l) To employ such counsel, agents and advisors, and to obtain such legal, clerical and other
services, as it may deem necessary or appropriate in carrying out the provisions of the Plan;

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(m) To prescribe the form, manner and/or notice period in which any Participant, or his or her
spouse or other Beneficiary, may make any election or designation provided under the Plan;

(n) To establish rules for the performance of its powers and duties and for the administration of
the Plan;

(o) To arrange for distribution to each Participant, Beneficiary or Alternate Payee of a


statement of his or her Account at least once each calendar quarter, as described in Section 105(a) of ERISA;

(p) To establish rules, regulations and/or procedures by which requests for Plan information
from Participants are processed expeditiously and completely;

(q) To provide to each terminated Participant notice of his or her vested interest under the Plan
and the explanation described in Section 402(f) of the Code;

(r) To establish a claims and appeal procedure satisfying the minimum standards of Section 503
of ERISA pursuant to which Participants or their spouses, Beneficiaries or estates may claim Plan benefits and appeal denials
of such claims (the “Claims Procedure”);

(s) To determine the liabilities of the Plan, to establish and communicate a funding policy to the
Trustee and any Investment Manager appointed pursuant to Section 9.6, and in accordance with such funding policy, to
coordinate the Plan’s investment policy with the Plan’s requirements for funds to pay expenses and benefits as they become
due;

(t) To act as agent for the Company in keeping all records and assisting with the preparation of
all reports and disclosures necessary for purpose of complying with the reporting and disclosure requirements of ERISA and
the Code;

(u) To arrange for the purchase of any bond required of the Committee members or others
under Section 412 of ERISA;

(v) To delegate to the Trustee, the Company’s Payroll or Human Resources Department, or
any other (including third-party) recordkeeper the authority, acting as an agent of the Committee, to give or receive notices,
elections and other directions to or from Participants and Beneficiaries as provided in the Plan; and

(w) To delegate to any one or more of its members or to any other person, severally or jointly,
the authority to perform for and on behalf of the Committee one or more of the fiduciary and/or ministerial functions of the
Committee under the Plan.

9.5 Fiduciary Responsibilities. To the extent permissible under ERISA, any person may serve in more than one
fiduciary capacity with respect to the Plan. Except as required by specific

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provisions of ERISA, no person who is a fiduciary with respect to the Plan shall be under any obligation to perform any duty
or responsibility with respect to the Plan which has been specifically allocated to another fiduciary.
9.6 Investment Responsibilities. The Committee shall direct the Trustee to invest the Investment Funds in the
investment media specified in Section 6.3.2. Subject to the provisions of this Section 9.6 and any contrary provision of the
Plan or Trust Agreement, exclusive authority and discretion to manage and control the assets of the Trust Fund shall be vested
in the Trustee, and the Trustee from time to time shall review the assets and make its determinations as to the investments of
the Trust Fund.
9.6.1 Investment Manager Appointment. The Committee (in its discretion) may appoint, and
thereafter may discharge, one or more investment managers (the “Investment Managers”) to manage the investment of one or
more of the Investment Funds and/or other designated portions of the Trust Fund. In the event of any such appointment, the
Trustee shall follow the instructions of the Investment Manager in investing and administering Trust Fund assets managed by
the Investment Manager. Alternatively, the Committee (in its discretion) may delegate investment authority and responsibility
with respect to any Investment Fund directly to any Investment Manager that has investment management responsibility for any
collective investment fund in which the Investment Fund is invested.
9.6.2 Eligibility. Any person, firm or corporation appointed as Investment Manager (a) shall be
a person described in Section 3(38)(B) of ERISA, (b) shall make such representations from time to time as the Committee (in
its discretion) may require in order to determine its

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qualifications to be appointed and to continue to serve in such capacity, and (c) shall acknowledge in writing its status as a
fiduciary with respect to the Plan upon acceptance of its appointment.
9.7 Voting and Tender Offer Rights in Company Stock. All Company Stock held in the Trust Fund shall be
voted, tendered or exchanged as set forth in the Trust Agreement.
9.8 Decisions of Committee. All decisions of the Committee, and any action taken by it with respect to the
Plan and within the powers granted to it under the Plan, and any interpretation of the provisions of the Plan or the Trust
Agreement by the Committee, shall be conclusive and binding on all persons, and shall be given the maximum possible
deference allowed by law.
9.9 Administrative Expenses. All reasonable expenses incurred in the administration of the Plan by the
Employers, the Committee or otherwise, including legal, Trustee’s and investment management fees and expenses, and
premiums for any bonds authorized by Section 9.4(u), (“Administrative Expenses”), shall be payable from the Trust Fund,
except to the extent paid by the Employers under clause (a) below. Notwithstanding the foregoing, Administrative Expenses
shall be paid from the Trust Fund only to the extent that such payments (to the extent prohibited by Section 406) are exempt
under Section 408 of ERISA. The Committee (in its discretion) shall determine which Administrative Expenses are not
payable from the Trust Fund under the foregoing rules. The Company (in its discretion) may (a) direct the Employers to pay
any or all Administrative Expenses, and/or (b) direct the Employers not to pay a greater share, portion or amount of such
Expenses which would otherwise be allocable to the Accounts of Participants who are no longer employed by any Employer
or Affiliate.
9.10 Eligibility to Participate. No member of the Committee, who is also an Eligible Employee and otherwise
eligible under Section 2, shall be excluded from participating in the Plan,

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but he or she, as a member of the Committee, shall not act or pass upon any matters pertaining specifically to his or her own
Account under the Plan.
9.11 Indemnification. Each of the Employers shall, and hereby does, indemnify and hold harmless any of its
Employees, officers or directors who may be deemed to be a fiduciary of the Plan, and the members of the Committee, from
and against any and all losses, claims, damages, expenses and liabilities (including reasonable attorneys’ fees and amounts
paid, with the approval of the Board of Directors, in settlement of any claim) arising out of or resulting from the implementation
of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or
willful misconduct on the part of any such individual.

SECTION 10

TRUST FUND, ROLLOVER CONTRIBUTIONS AND PLAN MERGERS

10.1 Trust Fund. The Company shall establish a Trust Agreement with the Trustee in order to provide for the
safekeeping, administration and investment of all amounts contributed or transferred to the Plan and the payment of benefits as
provided in the Plan. The Trustee shall receive and place in the Trust Fund all such amounts and shall hold, invest, reinvest
and distribute the Trust Fund in accordance with the provisions of the Plan and Trust Agreement. Assets of this Plan may be
commingled with the assets of other qualified plans through one or more collective investment funds described in Section 6.3;
provided, however, that the assets of this Plan shall not be available to provide any benefits under any other such plan. The
benefits provided under the Plan shall be only such as can be provided by the assets of the Trust Fund, and no liability for
payment of benefits shall be imposed upon the Employers or any of their shareholders, directors or Employees. The Trust

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Fund shall continue for such time as may be necessary to accomplish the purposes for which it is created.
10.2 No Diversion of Assets. Notwithstanding any contrary Plan provision, at no time shall any assets of the
Plan be used for, or diverted to, purposes other than for the exclusive benefit of Eligible Employees, Participants, Beneficiaries
and other persons receiving or entitled to receive benefits or payments under the Plan. Except to the limited extent permitted
by Sections 7.8 and 10.3, no assets of the Plan shall ever revert to or become the property of the Employers.
10.3 Continuing Conditions. Any obligation of the Employer to contribute Elective Deferrals, Company Match
Contributions and/or Non-Elective Contributions under the Plan is hereby conditioned upon the deductibility of such Elective
Deferrals, Company Match Contributions and/or Non-Elective Contributions under Section 404(a) of the Code. That portion
of any Elective Deferrals, Company Match Contributions or Non-Elective Contributions that is contributed or made by reason
of a good faith mistake of fact, or by reason of a good faith mistake in determining the deductibility of such portion, shall be
returned to the Employers as promptly as practicable, but not later than one year after the contribution was made or the
deduction was disallowed (as the case may be). The amount returned pursuant to the preceding sentence shall be an amount
equal to the excess of the amount actually contributed over the amount that would have been contributed if the mistake had not
been made; provided, however, that gains attributable to the returnable portion shall be retained in the Trust Fund; and
provided, further, that the returnable portion shall be reduced (a) by any losses attributable thereto and (b) to avoid a
reduction in the balance of any Participant’s Account below the balance that would have resulted if the mistake had not been
made.

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10.4 Change of Investment Alternatives. The Company reserves the right to change at any time the means
through which the Plan is funded, including adding or substituting one or more contracts with an insurance company or
companies, and thereupon may make suitable provision for the use of a designated portion of the assets of the Trust Fund to
provide for the funding and/or payment of Plan benefits under any such insurance contract. No such change shall constitute a
termination of the Plan or result in the diversion to the Employers of any portion of the Trust Fund. Notwithstanding the
implementation of any such change of funding medium, all references in the Plan to the Trust Fund shall also refer to the Plan’s
interest in or the assets held under any other such funding medium.
10.5 Rollover Contributions.
10.5.1 General Rule. If directed by the Committee, the Trustee shall accept a transfer of assets
for the benefit of an Eligible Employee or a group of Eligible Employees, subject to the applicable requirements set forth in this
Section 10.5.
10.5.2 Pre-Tax Rollover Contributions. The transfer of pre-tax amounts may be in the form of:
(i) a trust-to-trust transfer from the trustee of a tax-qualified plan under Code Section 401(a) and related tax-exempt trust
under Code Section 501(a) that is not subject to the funding requirements of Code Section 412; (ii) a rollover by the Eligible
Employee, or (iii) a Direct Rollover from: (A) a qualified plan described in Code Section 401(a) or 403(a), excluding after-tax
employee contributions; (B) an annuity contract described in Code Section 403(b), excluding after-tax employee
contributions; (C) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or
any agency or instrumentality of a state or political subdivision of a state; or (D) an individual retirement account or annuity
described in Code

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Section 408(a) or 408(b) that is eligible to be rolled over and would otherwise be includible in gross income.
10.5.3 Transfer of Designated Roth Contributions. The transfer of designated Roth
contributions may be made in the form of (i) a trust-to-trust transfer from the trustee of a tax qualified plan under Code
Section 401(a) and related tax-exempt trust under Code Section 501(a) that permits designated Roth elective deferral
contributions as described in Code Section 402A(e)(1), or (ii) a Direct Rollover on behalf of an Eligible Employee from a
qualified plan described in Code Section 401(a) that permits designated Roth elective deferral contributions as described in
Code Section 402A(e)(1), and only to the extent the Direct Rollover is permitted under the rules of Code
Section 402(c). Any such amounts shall be deposited in the Participant’s Roth Rollover Account.
10.5.4 Nonqualifying Rollovers. If it is later determined that a transfer to the Trust Fund made
pursuant to this Section 10.5 did not in fact qualify as an eligible rollover contribution as described above, then the balance
credited to the Participant’s Rollover Contributions Account or Roth Rollover Account, as applicable, shall immediately be
(a) segregated from all other Plan assets, (b) treated as a nonqualified trust established by and for the benefit of the Participant,
and (c) distributed to the Participant. Such a nonqualifying rollover shall be deemed never to have been a part of the Trust
Fund.
10.5.5 Rollover of Certain Participant Loans Permitted. At the direction of the Committee (in
its discretion), in the case of a Participant who becomes an Eligible Employee by reason of the acquisition by the Company or
its Affiliate of the assets and liabilities of, or the voting stock of, another corporation or other business entity, or another type of
business transaction effected

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by the Company or its Affiliate, assets may be transferred to the Trust Fund pursuant to Section 10.5 above in a direct
rollover from the Qualified Plan maintained by the Participant’s prior employer (the “Prior Plan”) in the form of loan
promissory notes, provided that the Participant elects to directly rollover his or her entire Prior Plan account balance that
qualifies as an eligible rollover contribution to this Plan as described in Section 10.5.
10.6 Merger of Other Plans. Assets of certain qualified plans may be merged into and commingled with the
assets held under the provisions of this Plan. Assets transferred to the Trust Fund on behalf of a Participant pursuant to this
Section 10.6 shall be credited to such Plan subaccounts of the Participant as the Committee (in its discretion) may specify.

SECTION 11

MODIFICATION OR TERMINATION OF PLAN

11.1 Employers’ Obligations Limited. The Plan is voluntary on the part of the Employers, and the Employers
shall have no responsibility to satisfy any liabilities under the Plan. Furthermore, the Employers do not guarantee to continue
the Plan, and the Company may, by appropriate amendment of the Plan, discontinue contributions of Employee Pre-Tax
Contributions, Roth Basic Contributions, Employee Pre-Tax Catch-Up Contributions, Roth Catch-Up Contributions,
Company Match Contributions and/or Non-Elective Contributions for any reason at any time. Complete discontinuance of all
Elective Deferrals and Employer Contributions shall be deemed a termination of the Plan.
11.2 Right to Amend or Terminate. The Company reserves the right to alter, amend or terminate the Plan, or
any part thereof, in such manner as it may determine. Amendments which do not add materially to the Company’s cost under
the Plan and which are (i) necessary to comply with

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the Code, ERISA or other applicable law, (ii) technical, or (iii) intended to ease administration may be adopted if approved in
writing by any two members of the Committee, acting in their capacities as officers of the Company rather than as fiduciaries
with respect to the Plan. All other amendments shall be approved by the Board of Directors. Any such alteration, amendment
or termination shall take effect upon the date indicated in the document embodying such alteration, amendment or termination;
provided, however, that:
(a) No such alteration or amendment shall (1) divest any portion of an Account that is then
vested under the Plan, or (2) except as may be permitted by regulations or other IRS guidance, eliminate any optional form of
benefit (within the meaning of Section 411(d)(6)(B)(ii) of the Code) with respect to benefits accrued prior to the adoption of
the amendment; and

(b) Any alteration, amendment or termination of the Plan or any part thereof, shall be subject to
the restrictions in Section 10.2 with respect to diversion of the assets of the Plan.

11.3 Effect of Termination. If the Plan is terminated or partially terminated, or if there is a complete
discontinuance of all Elective Deferrals and Employer Contributions, the interests of all affected Participants in their Accounts
shall remain fully (100%) vested and nonforfeitable. In the event the Plan is terminated, the balance credited to the Company
Match Accounts, Non-Elective Contribution Account and Rollover Accounts and, to the extent permitted by
Section 401(k)(2)(B) of the Code, the Elective Deferrals Accounts and/or Genenflex Accounts, of Participants who are
affected by the termination may be distributed prior to the occurrence of a distribution event described in Section 7.1.

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SECTION 12

TOP-HEAVY PLAN

12.1 Top-Heavy Plan Status. Notwithstanding any contrary Plan provision, the provisions of this Section 12
shall apply with respect to any Plan Year for which the Plan is a top-heavy plan (within the meaning of Section 416(g) of the
Code) (a “Top-Heavy Plan”).
12.1.1 60% Rule. The Plan shall be a Top-Heavy Plan with respect to any Plan Year if, as of
the Determination Date, the value of the aggregate of the Accounts under the Plan for key employees (within the meaning of
Sections 416(i)(1) and (5) of the Code) exceeds 60% of the value of the aggregate of the Accounts under the Plan for all
Participants. For purposes of determining the value of the Accounts, the provisions of Sections 416(g)(3) and 416(g)(4)(E) of
the Code are incorporated herein by reference.
12.1.2 Top-Heavy Determinations. The Committee, acting on behalf of the Employers, shall
determine as to each Plan Year whether or not the Plan is a Top-Heavy Plan for that Plan Year. For purposes of making that
determination as to any Plan Year:
(a) “Determination Date” means the last day of the immediately preceding Plan Year;

(b) The Plan shall be aggregated with each other qualified plan of any Employer or any Affiliate
(1) in which a key employee (within the meaning of Sections 416(i)(1) and (5) of the Code) participates, and/or (2) which
enables the Plan or any plan described in clause (1) above to meet the requirements of Section 401(a)(4) or 410(b) of the
Code;

(c) The Plan may be aggregated with any other qualified plan of any Employer or Affiliate,
which plan is not required to be aggregated under subsection (b) (1) above, if the resulting group of plans would continue to
meet the requirements of Sections 401(a)(4) and 410(b) of the Code; and

(d) In determining which Employees are key and non-key employees, an Employee’s
compensation for the Plan Year shall be his or her Total Compensation (as defined in

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Section 5.5.2(e) and applied using the definition of “Affiliate” in Section 1.2 rather than in Section 5.5.2(a)).

12.2 Top-Heavy Plan Provisions. For any Plan Year for which the Plan is a Top-Heavy Plan, the following
provisions shall apply:
12.2.1 Minimum Allocation. The Employers shall make an additional contribution to the
Account of each Participant who is a non-key employee (within the meaning of Sections 416(i)(2) and (5) of the Code), and
who is employed on the last day of the Plan Year, in an amount which equals 3% of his or her Top-Heavy Compensation for
the Plan Year; provided, however, that if the Key Employee Percentage (as defined in subsection (a) below) is less than 3%,
then the percentage rate at which that additional Employer contribution shall be made for that Plan Year shall be reduced from
3% to the Key Employee Percentage. Company Match Contributions shall be taken into account for purposes of satisfying
the minimum contribution requirements of Section 416(c)(2) of the Code and the Plan. Company Match Contributions that
are used to satisfy such minimum contribution requirements shall be treated as Company Match Contributions for purposes of
the actual contribution percentage limitation in Section 4.1.5 and other requirements of Section 401(m) of the Code.
(a) The determination of who is a key employee will be made in accordance with
Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability thereunder.

(b) “Key Employee Percentage” means the largest percentage computed by dividing (1) the
total amount of all Employer contributions allocated for that Plan Year to the Account of each Participant who is a key
employee (within the meaning of Sections 416(i)(1) and (5) of the Code), by (2) his or her Top-Heavy Compensation.

(c) The additional contribution required under this Section 12.2.1 shall be made without regard
to the level of the Participant’s Top-Heavy Compensation for the Plan Year.

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(d) Notwithstanding the foregoing, if a Participant is also covered under any Other Plan (as
defined in Section 8.4.1(c)) and the minimum allocation of benefit requirement applicable to Top-Heavy Plans will be met
under such Other Plan or Plans, no additional contribution will be made for the Participant under this Plan.

12.2.2 “Top-Heavy Compensation” means, with respect to any Participant for a Plan Year, his
or her Total Compensation (as defined in Section 5.5.2(e) and applied using the definition of “Affiliate” in Section 1.2 rather
than in Section 5.5.2(a)) and except that, for this purpose, no amount in excess of the Compensation Limit shall be taken into
account for any Plan Year.

SECTION 13

GENERAL PROVISIONS

13.1 Plan Information. Each Participant shall be advised of the general provisions of the Plan and, upon written
request addressed to the Committee, shall be furnished with any information requested, to the extent required by applicable
law, regarding his or her status, rights and privileges under the Plan.
13.2 Inalienability. Except to the extent otherwise provided in Sections 8.6 and 8.7 or mandated by
Section 401(a)(13)(C) of the Code or other applicable law, in no event may any Participant, former Participant or his or her
spouse, Beneficiary or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under
the Plan; and such rights and interests shall not at any time be subject to the claims of creditors nor be liable to attachment,
execution or other legal process.
13.3 Rights and Duties. No person shall have any rights in or to the Trust Fund or other assets of the Plan, or
under the Plan, except as, and only to the extent, expressly provided for in the Plan. To the maximum extent permissible under
Section 410 of ERISA, neither the Employers, the

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Trustee nor the Committee shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or
for any other action taken, omitted or suffered in good faith.
13.4 No Enlargement of Employment Rights. Neither the establishment or maintenance of the Plan, the making
of any contributions nor any action of any Employer, the Trustee or Committee, shall be held or construed to confer upon any
individual any right to be continued as an Employee nor, upon dismissal, any right or interest in the Trust Fund or any other
assets of the Plan, except to the extent provided in the Plan. Employment with the Employers is on an at-will basis only. Each
Employer expressly reserves the right to discharge any Employee at any time, with or without cause.
13.5 Apportionment of Duties. All acts required of the Employers under the Plan may be performed by the
Company for itself and its Affiliates. Any costs incurred by the Company for itself or its Affiliates in connection with the Plan
and the costs of the Plan, if not paid from the Trust Fund pursuant to Section 9.9, shall be equitably apportioned among the
Company and the other Employers, as determined by the Committee (in its discretion). Whenever an Employer is permitted
or required under the terms of the Plan to do or perform any act, matter or thing, it shall be done and performed by any officer
or employee of the Employer who is duly authorized to act for the Employer.
13.6 Merger, Consolidation or Transfer. This Plan shall not be merged or consolidated with any other plan, nor
shall there be any transfer of any assets or liabilities from this Plan to any other plan, unless immediately after such merger,
consolidation or transfer, each Participant’s accrued benefit, if such other plan were then to terminate, is at least equal to the
accrued benefit to which the Participant would have been entitled if this Plan had been terminated immediately before

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such merger, consolidation or transfer. Subject to the foregoing, the Board of Directors shall have the power (in its discretion)
to direct that this Plan shall participate in any such transaction.
13.7 Military Service.
13.7.1 Notwithstanding any contrary Plan provision, Elective Deferrals and Employer
Contributions with respect to the qualified military service of an Employee on a Leave of Absence pursuant to Section 1.31(b)
will be provided in accordance with USERRA and Section 414(u) of the Code. In addition, Participant loan repayments
under Section 8.6.2 shall be suspended as permitted under Section 414(u) of the Code, and interest on Participant loans shall
be adjusted, if necessary, to conform to the requirements of the Servicemembers Civil Relief Act of 2003 or other applicable
law.
13.7.2 In the case of a Participant who dies on or after January 1, 2007 while performing
qualified military service (as defined in Section 414(u) of the Code), the Participant’s Beneficiary shall be entitled to any
additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had
the Participant returned to employment with the Employer on the day prior to his or her death and then terminated employment
due to his or her death.
13.7.3 Effective as of January 1, 2009, for purposes of determining benefit accruals under the
Plan, an Employee performing qualified military service (as defined in Section 414(u) of the Code) who fails to return to
employment with the Employer in accordance with the time periods proscribed under USERRA and other applicable laws or
guidance solely as a result of his or her death or Disability, shall be deemed to have returned to employment with the Employer
on the day

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prior to his or her death or Disability, and then terminated employment due to his or her death or Disability.
13.8 Applicable Law. The provisions of the Plan shall be construed, administered and enforced in accordance
with ERISA and, to the extent applicable, the laws of the State of California.
13.9 Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability
shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if such provision had not been
included.
13.10 Exhaustion of Claims Procedure and Right to Bring Legal Claim. Notwithstanding any contrary
Plan provision, no legal action for Plan benefits may be brought by any claimant unless and until he or she has followed the
Claims Procedure (as described in Section 9.4(r)) and has had his or her claim for such benefits denied both initially and on
appeal. In addition, no legal action for Plan benefits may be brought by any claimant more than one year after his or her claim
for such benefits has been denied on appeal under the Claims Procedure, or, if earlier, more than four years after the facts or
events giving rise to the claimant’s allegation(s) or claim(s) first occurred.
13.11 Captions. The captions contained in and the table of contents prefixed to the Plan are inserted
only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the
Plan nor in any way shall affect the construction of any provision of the Plan.

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EXECUTION:

In Witness Whereof, Genentech, Inc., by its duly authorized officers, has executed this restated Plan on the date
indicated below.

GENENTECH, INC.
By /s/ TODD W. RICH
Title Vice President, Development Regulatory, Medical
Information, Drug Safety and Quality Assurance
Dated December 18, 2008

And by /s/ WILLIAM N. ANDERSON


Title Senior Vice President, Sales and Marketing,
Immunology
Dated December 18, 2008

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APPENDIX A

PUERTO RICO SUPPLEMENT TO THE


GENENTECH, INC. TAX REDUCTION INVESTMENT PLAN

This Puerto Rico Supplement (the “Supplement”) pertains only to Puerto Rico Employees who are Participants
(“Puerto Rico Participants”) in the Genentech, Inc. Tax Reduction Investment Plan (the “Plan”). Except as otherwise specified
in this Supplement, (1) the provisions of the Plan shall apply to Puerto Rico Employees, and (2) all defined terms used in this
Supplement shall have the meaning set forth in the Plan.

A. Purpose. The purpose of this Supplement is to comply with the qualification requirements of Section 1165(a) of
the PR Code. Accordingly, to the extent inconsistent with the general provisions of the Plan, the following provisions shall
apply to Puerto Rico Employees. In the event of an amendment to the PR Code or enactment of a successor statute that
replaces or renumbers a section of the PR Code references in this Supplement, all such references shall automatically be
renumbered or replaced, as applicable.

B. Applicable Trust. Plan assets attributable to Puerto Rico Participants shall be held by the Trustee and invested
under the Plan in the Trust Fund. The Trust Fund, to the extent of assets attributable to Puerto Rico Participants, shall be
exempt from Puerto Rico income taxes in accordance with PR Code Section 1165(a) and exempt from United States income
taxes pursuant to Section 501(a) of the US Code and Section 1022(i) of ERISA.

C. Definitions.

1. Affiliate. “Affiliate” and/or “member of a controlled group” means a related employer of the
Company that belongs to the Company’s “controlled group” (as that term is defined by PR Code Section 1028).

2. Catch-Up Contributions. “Catch-Up Contributions” means, as to each Puerto Rico Participant, the
amounts (if any) contributed under the Plan by the Employers in accordance with Paragraph F.3 below.

3. Compensation. “Compensation” for a Puerto Rico Participant, shall:

a. for purposes of Salary Deferrals, Company Match Contributions and Non-Elective


Contributions, have the same meaning as set forth in Section 1.13 of the Plan, except that references to IRS Form W-2 shall
mean Puerto Rico Form 499R-2/W-2PR; and

b. for all other purposes, have the same meaning as set forth in Section 5.5.2(e) of the Plan,
consistent with PR Code Section 1165(h)(9).

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4. Direct Rollover. “Direct Rollover” means, with respect to a Puerto Rico Participant, a Direct
Rollover as defined in Section 7.4.5 of the Plan, but with the following applicable definitions:

a. Distributee: A Distributee includes a Puerto Rico Participant.

b. Eligible Retirement Plan: An Eligible Retirement Plan refers to an individual retirement


account described in PR Code Section 1169(a), an annuity plan described in PR Code Section 1165(a), or a qualified trust
described in PR Code Section 1165(a), that accepts the Distributee’s Eligible Rollover Distribution.

c. Eligible Rollover Distribution: An Eligible Rollover Distribution includes any distribution of all
of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution
that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s designated
beneficiary, or for a specified period of 10 years or more; and the portion of any distribution that is not includable in gross
income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).

5. Highly Compensated Puerto Rico Employees. “Highly Compensated Puerto Rico Employees” for
each Plan Year means Puerto Rico Employees who have greater Compensation than two-thirds of all other Puerto Rico
Employees for that Plan Year (as set forth in Section 1165(e)(3)(E)(iii) of the PR Code).

6. Non-Highly Compensated Puerto Rico Employees. “Non-Highly Compensated Puerto Rico


Employees” for each Plan Year means Puerto Rico Employees who are not Highly Compensated Puerto Rico Employees.

7. PR Code. “PR Code” means the Puerto Rico Internal Revenue Code of 1994, as
amended. Reference to any Section or Subsection of the PR Code and the regulations promulgated thereunder includes
reference to any comparable or succeeding provisions of any legislation that amends, supplements, or replaces such section or
subsection.

8. Puerto Rico Employee. “Puerto Rico Employee” means an Employee whose compensation is
subject to Puerto Rico income tax and who is a bona fide resident of Puerto Rico.

9. Puerto Rico Participant. “Puerto Rico Participant” means a Puerto Rico Employee who is an Eligible
Employee, who has become a Participant in the Plan pursuant to Section 2.1 and who has not ceased to be a Participant
pursuant to Section 2.7.

10. Rollover Contribution. “Rollover Contribution” means, with respect to a Puerto Rico Participant, a
Rollover contribution that fulfills the requirements of PR Code Section 1165(b)(2).

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11. Salary Deferrals. “Salary Deferrals” means, as to each Puerto Rico Participant, the amounts (if
any) contributed under the Plan by the Employers in accordance with Paragraph F.1 below.

12. US Code. “US Code” means the United States Internal Revenue Code of 1986, as amended.

D. Effective Date. The provisions of this Supplement are amended effective as of November 1, 2007.

E. Rollover Contributions. A Puerto Rico Participant may elect to make pre-tax Rollover Contributions into the
Plan, subject to the requirements of Section 1165(b)(2) of the PR Code. In addition, if so directed by the Committee, the
Trustee will accept a direct transfer from another retirement plan qualified under Section 1165 of the PR Code on behalf of
Puerto Rico Participants. Such transferred amounts will be treated as Rollover Contributions.

F. Salary Deferrals and Catch-Up Contributions.

1. A Puerto Rico Participant may elect to defer a portion of his or her Compensation and to have the
amounts of such Salary Deferrals contributed by his or her Employer to the Trust Fund. A Puerto Rico Participant may elect
to defer an amount not less than 1% and not more than 10% of his or her Compensation, in whole increments of
1%. Effective as of January 1, 2009, a Puerto Rico Participant may elect to defer an amount not less than 1% and not more
than 50% of his or her Compensation, in whole increments of 1%.

2. The Actual Deferral Percentage for any Highly Compensated Puerto Rico Employee for the Plan
Year who is eligible to have Salary Deferrals allocated to his or her account under two or more plans or arrangements
described in PR Code Section 1165(e) that are maintained by the Employer, shall be determined as if such Salary Deferrals
were made under a single arrangement.

3. A Puerto Rico Participant who will be age fifty (50) or more by the end of a Plan Year may elect to
defer a portion of his or her Compensation for the Plan Year and to have the amounts contributed by his or her Employer to
the Trust Fund as Catch-Up Contributions. A Puerto Rico Participant may elect to defer an amount not less than 1% and not
more than 10% of his or her Compensation, in whole increments of 1%. Effective as of January 1, 2009, a Puerto Rico
Participant may elect to defer an amount not less than 1% and not more than 75% of his or her Compensation, in whole
increments of 1%.

G. Limitations on Deferrals.

1. Notwithstanding Section 3.1 of the Plan and Section F above, a Puerto Rico Participant’s Salary
Deferrals are limited to the amount specified under the PR Code (e.g., $8,000 in 2008 and $9,000 in 2009). These limits may
be adjusted from time to time in accordance with applicable Puerto Rico tax laws.

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2. Notwithstanding Section 3.2 of the Plan and Section F above, a Puerto Rico Participant’s Catch-Up
Contributions are limited to the amount specified under the PR Code. As of the Effective Date, that is $1,000 per Plan
Year. This limit may be adjusted from time to time in accordance with applicable Puerto Rico tax laws.

3. A Puerto Rico Participant may not elect to make deferrals to the Plan in the form of Roth Basic
Contributions.

H. Minimum Coverage Requirements. In applying the statutory minimum coverage requirements to Puerto
Rico Employees, which as to Employees other than Puerto Rico Employees are governed by US Code Section 410(b), the
applicable provisions of the PR Code shall govern. In accordance with such provisions:

1. at least 70% or more of Non-Highly Compensated Puerto Rico Employees are covered or eligible to
participate in the Plan;

2. the Plan shall benefit a percentage of Non-Highly Compensated Puerto Rico Employees that is at
least 70% of the percentage of Highly Compensated Puerto Rico Employees who benefit under the Plan; or

3. the Plan shall pass the ‘average benefit test’ (as described in PR Code Section 1165(a)(3)(B)).

I. Nondiscrimination Testing Rules. Notwithstanding Section 3.1 of the Plan, which sets out the
nondiscrimination provisions of the Plan with respect to Eligible Employees other than Puerto Rico Employees, the following
nondiscrimination requirements shall apply to Puerto Rico Employees:

1. ‘Puerto Rico Actual Deferral Percentage Test’ means the Puerto Rico Actual Deferral Percentage
(as defined in subsection b below) of Highly Compensated Puerto Rico Employees for any Plan Year as compared to the
Puerto Rico Actual Deferral Percentage for Non-Highly Compensated Puerto Rico Employees that must meet either of the
following tests:

a. The Puerto Rico Actual Deferral Percentage of Highly Compensated Puerto Rico Employees
shall not be more than the Puerto Rico Actual Deferral Percentage of Non-Highly Compensated Puerto Rico Employees
multiplied by 1.25; or

b. The Puerto Rico Actual Deferral Percentage of Highly Compensated Puerto Rico Employees
shall not be more than the Puerto Rico Actual Deferral Percentage of Non-Highly Compensated Puerto Rico Employees
multiplied by 2.0 and the excess of the Puerto Rico Actual Deferral Percentage of Highly Compensated Puerto Rico
Employees over the Actual Deferral Percentage for Non-Highly Compensated Puerto Rico Employees is not more than 2
percentage points.

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2. ‘Puerto Rico Actual Deferral Percentage’ means a percentage calculated separately for each of the
following groups (i) Highly Compensated Puerto Rico Employees, and (ii) Non-Highly Compensated Puerto Rico Employees.

3. Determination of Puerto Rico Actual Deferral Percentage. For each group being tested, the Puerto
Rico Actual Deferral Percentage shall be the average of the ‘Employer Contributions’ (as defined in subsection 4 below)
actually deposited in the Trust on behalf of each Puerto Rico Participant for the Plan Year, divided by his or her
Compensation for the Plan Year (calculated separately for each member of each group).

4. ‘Employer Contributions’ mean Salary Deferrals and Qualified Non-Elective Contributions (defined
in subsection 5.b below) made on behalf of a Puerto Rico Participant with respect to the Plan Year being tested.

5. Corrective Procedures. If the Puerto Rico Actual Deferral Percentage Test is not met as of the end
of the Plan Year, then the Committee may, in its sole and absolute discretion, take either of the following actions:

a. cause the Salary Deferrals for Highly Compensated Puerto Rico Employees to be reduced
and refunded to Highly Compensated Puerto Rico Employees until the Puerto Rico Actual Deferral Percentage Test is
satisfied. The sequence of such reductions and refunds shall begin with Highly Compensated Puerto Rico Employee(s) who
deferred the greatest percentage starting with the unmatched Salary Deferrals, then the second greatest percentage, continuing
until the Puerto Rico Actual Deferral Percentage Test is satisfied. This process shall continue through the remaining unmatched
Salary Deferrals until all such applicable unmatched Salary Deferrals have been reduced. Next, the matched Salary Deferrals
shall be reduced until the Puerto Rico Actual Deferral Percentage Test is satisfied. Once the Puerto Rico Actual Deferral
Percentage Test is met, then the Committee shall direct the Trustee to distribute to each affected Highly Compensated Puerto
Rico Employee the amount of the reduction of his or her Salary Deferrals, and to treat as forfeitures the proportionate amount
of Company Match Contributions, if any, together with the earnings (gains or losses) allocable thereto. The Committee shall
designate such distribution and forfeiture as a distribution and forfeiture of excess contributions, determine the amount of the
allocable earnings (gains or losses) to be distributed as it deems appropriate in it sole and absolute discretion, and cause such
distributions and forfeitures to occur prior to the end of the Plan Year following the Plan Year in which the excess Salary
Deferrals and related Company Match Contributions were made; or

b. require the Employer to make “Qualified Non-Elective Contributions” (as such amounts are
contemplated in Article 1165-8(b)(3) of the Puerto Rico Tax Regulations) on behalf of each Non-Highly Compensated Puerto
Rico Employee for the Plan Year in which the Puerto Rico Actual Deferral Percentage Test was not met. If made, a Qualified
Non-Elective Contribution shall be consistent with the provisions of Article 1165 8(b)(3) of the Puerto Rico Tax Regulations,
and shall be in such amount as will cause the Puerto Rico Average Deferral Percentage Test to be met. Any such Qualified
Non-Elective Contributions will be allocated, in the sole discretion of the Committee, to the Account of Non-Highly
Compensated Puerto Rico Employees

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(1) in an equal dollar amount based on the number of Non-Highly Compensated Puerto Rico Employees eligible to receive an
allocation of the Qualified Non-Elective Contributions, or (2) to such Non-Highly Compensated Puerto Rico Employees and
in such amounts as are necessary to satisfy the Puerto Rico Actual Deferral Percentage Test.

6. The Catch-Up Contributions of Puerto Rico Participants are not subject to the Puerto Rico Actual
Deferral Percentage Test as set forth above.

J. Company Contributions. The Committee, in its discretion, may elect to have all or a portion of the Company
contributions (that meet the requirements of the applicable Puerto Rico Treasury Regulations) for a calendar year taken into
account in calculating the PR Code Section 1165(a)(3) tests for that year.

K. In-Service Withdrawals. In accordance with Sections 8.2 and 8.3 of the Plan, a Puerto Rico Participant who
is an Employee may make a withdrawal from his or her Account in cash (or its equivalent). Any application for a withdrawal
shall be submitted to such person, in such manner and within such advance notice period as the Committee (in its discretion)
shall specify. The active membership of a Puerto Rico Participant who makes a withdrawal under Section 8.2 shall be
suspended, in the manner set forth in Section 8.2.3, for each payroll period that begins during the period starting on the
withdrawal approval date and ending 12 months following that date. Following that suspension period, the Puerto Rico
Participant may again become an Active Participant and resume his or her Salary Deferrals by again electing to become an
Active Participant in the Plan.

L. Plan Provisions and Terms. All terms and provisions of the Plan shall apply to this Supplement, except that
where the terms and provisions of the Plan and this Supplement conflict, the terms and provisions of this Supplement shall
govern.

M. Miscellaneous.

1. Information between Committee and Trustee. The Committee and Trustee will furnish each other
such information relating to the Plan and Trust as may be required under the PR Code and any regulations issued or forms
adopted by the Puerto Rico Treasury Department thereunder or under ERISA and any regulations issued or forms adopted by
the US Labor Department thereunder.

2. Governing Law. With respect to Puerto Rico Employees, the Plan will be construed, administered
and enforced according to the laws of the Commonwealth of Puerto Rico to the extent such laws are not inconsistent with and
preempted by ERISA and/or any applicable Section of the US Code. Notwithstanding any provision of this Supplement, to
the extent that any provision described herein is modified by applicable Puerto Rico law, any such applicable modification shall
be deemed to be incorporated herein by reference.

A-6
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APPENDIX B

PLAN-TO-PLAN TRANSFER OF
TANOX, INC. 401(k) PLAN ACCOUNTS

The Tanox, Inc. 401(k) Plan (the “Tanox Plan”) was merged with and into the Plan effective as of November 1,
2007 (the “Tanox Transfer Date”). All outstanding account balances under the Tanox Plan (the “Tanox Transferred
Accounts”) were transferred in a plan-to-plan transfer (the “Tanox Plan-to-Plan Transfer”) from the Tanox Plan to this
Plan. The Plan-to-Plan Transfer was effected in accordance with the following provisions:

B.1 Transfer of Account Balances. The amounts credited to a Tanox Participant’s account under the Tanox
Plan immediately before the Tanox Transfer Date were credited to his or her Account under this Plan on the Tanox Transfer
Date. For this purpose, a “Tanox Participant” means a Participant whose account balance under the Tanox Plan was
transferred to this Plan by reason of the Tanox Plan-to-Plan Transfer.

B.2 Investment of Transferred Account Balances. The Tanox Participants’ Plan Account balances transferred
in the Tanox Plan-to-Plan Transfer were initially invested in such Investment Fund(s) as the Committee deemed appropriate, in
its sole and absolute discretion. As soon as administratively practicable after the Tanox Transfer Date, the Tanox Participants
were able to direct the investment of such amounts in accordance with the procedures established under the Plan allowing such
investment direction.

B.3 Vesting of Plan Accounts. Each Tanox Participant shall be 100% vested in all of his or her Plan Account
balance (including any amounts vested pursuant to actions taken under the Tanox Plan prior to the Tanox Transfer Date) plus
any earnings thereon.

B.4 Optional Forms of Distribution. Notwithstanding any contrary Plan provision, a Tanox Participant’s Plan
Account attributable to amounts accrued under the Tanox Plan and transferred to this Plan in the Tanox Plan-to-Plan Transfer
shall continue to be subject to any optional form of distribution available with respect to such assets under the Tanox Plan to
the extent that under Section 411(d)(6) of the Code such optional forms of distribution cannot be eliminated; however,
effective with this restatement of the Plan, any such Tanox Plan benefits required to be preserved have been incorporated into
the terms of the Plan and made available to all Plan Participants.

B-1
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EXHIBIT 10.19

AMENDMENT NO. 1 TO THE


GENENTECH, INC. SUPPLEMENTAL PLAN
(January 1, 2004 Restatement)

WHEREAS, the Genentech, Inc. Supplemental Plan (the "Plan") was originally established effective as of January 1,
1991 and was most recently amended and restated in its entirety effective as of January 1, 2004;
WHEREAS, notwithstanding any provisions of the Plan to the contrary, Section 409A of the Internal Revenue Code
of 1986, as amended (the "Code") requires that distributions to key employees (as defined in Code Section 416) of amounts
deferred in taxable years beginning after December 31, 2004 must be delayed for six months following their separation from
service;
WHEREAS, no amounts will be deferred under the Plan for the 2005 plan year until December 31, 2005;
WHEREAS, Genentech, Inc. wishes to treat all Plan participants the same, to the extent possible under the terms of
the Plan and applicable law;
WHEREAS, Code Section 409A also requires that the Plan be amended to eliminate the discretion of the Committee
under the Plan as to any accelerated distribution of Plan participants' accounts in the event of the termination of the Plan; and
WHEREAS, Genentech, Inc. wishes to make certain other amendments to the Plan.
NOW, THEREFORE, the Plan is hereby amended, effective as of May 1, 2005, as follows:
FIRST: Section 1.4 is amended in its entirety to read as follows:
"1.4 "Beneficiary" shall mean the person(s) or entity entitled to receive benefits under the Plan upon the
death of a Member in accordance with Section 5.4."

SECOND: Section 5.1 is amended in its entirety to read as follows:


"5.1 Distribution. Subject to Section 5.2, distribution of the balance credited to a Member's Account shall
be made by the Member's Employer to the Member (or, in the event of the death of the Member, to the Member’s
Beneficiary) upon the Member’s separation from service (as defined in Code Section 409A) or other applicable
Internal Revenue Service guidance (“Separation From Service”).”
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THIRD: Section 5.2 is amended in its entirety to read as follows:


“5.2 Time for Distribution. The distribution of a Member’s Account shall occur as soon as administratively practicable
following the date that is six (6) months after the date of the Member’s Separation From Service (as defined in Section 5.1).”

FOURTH: Section 5.4 is amended to read as follows (Sections 5.4.1 and 5.4.2 are not amended):
“5.4 Beneficiary Designations. Each member may designate one or more Beneficiaries in such manner as the
Committee (in its discretion) shall specify. No such designation shall be effective until it is received by the Committee (or its
delegate) in the manner specified.”

FIFTH: Section 8.3 is amended in its entirety to read as follows:


“8.3 Effect Of Termination. If the Plan is terminated, then the interests of all Members in their Accounts shall
remain fully (100%) vested and nonforfeitable. The balances credited to the Accounts of the Members shall be distributed to
them at the time and manner set forth in Section 5.”
IN WITNESS WHEREOF, Genentech, Inc., by its duly authorized officers, has executed this Amendment No. 1 to
the Plan on the date(s) indicated below.

GENENTECH, INC.
By:
/s/ David Ebersman
Title:
Senior Vice President and
Chief Financial Officer
Dated:
9/13/05

And by:
/s/ Denise Smith-Hams
Title:
Vice President Human Resources
Dated:
9/13/05

EXHIBIT 10.20

AMENDMENT NO. 2 TO THE


GENENTECH, INC. SUPPLEMENTAL PLAN
(January 1, 2004 Restatement)

WHEREAS, the Genentech, Inc. Supplemental Plan (the "Plan") was originally established effective as of January 1,
1991, was most recently amended and restated in its entirety effective as of January 1, 2004, and was further amended
effective as of May 1, 2005;
WHEREAS, Genentech, Inc. wishes to make certain other amendments to the Plan;

NOW, THEREFORE, effective as of October 1, 2006, the Plan is amended, as follows:

FIRST: Paragraph (a) of Section 3.1.3 of the Plan is hereby amended to read as follows:

"(a) No amount shall be credited to a Member's Account for a Plan Year pursuant to Section 3.1.1(a)
unless: (i) he or she has deferred the maximum amount permitted under the Tax Reduction Investment Plan for the Plan
Year (taking into account the Salary Deferral Dollar Limit and the Salary Deferral Nondiscrimination Limits, and
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determined by reference to actual amounts, not percentages of compensation, deferred); (ii) he or she is eligible for a
TRIP+ matching Contribution for the Plan Year in accordance with the provisions of the Tax Reduction Investment
Plan, and (iii) he or she is an Eligible Employee (as defined under TRIP+) on the last TRIP+ Valuation Date of the
Plan Year, or his or her employment with all Employers and Affiliates (as defined under TRIP+) terminated at any time
during the Plan Year by reason of death or Disability (as defined under TRIP+); and"

SECOND: The following new Section 6.9 is hereby added to Section 9, Administration:

"6.9 Domestic Relations Orders. Notwithstanding any contrary Plan provision, if the Committee (or its
authorized delegate) determines that a domestic relations order with regard to the Plan is a QDRO, then the
Committee (or its authorized delegate) shall establish a separate Account for the amount to be allocated to the
Alternate Payee pursuant to the QDRO, and such Alternate Payee shall then be treated as a Member for purposes of
such Account.

6.91 Definitions.

(a) "Alternate Payee" shall have the same meaning as that assigned from time to time to the
identical term under the Tax Reduction Investment Plan.

(b) "QDRO" shall have the same meaning as that assigned from time to time to the identical
term under the Tax Reduction Investment Plan.

6.9.2 QDRO Procedures. The Committee (or its authorized delegate) shall establish reasonable
procedures for determining the qualified status of domestic relations orders.
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6.9.3 Hold Procedures. Notwithstanding any contrary Plan provision, the Committee (or its
authorized delegate) may place a hold at any time on all or a portion of a Member's Plan Account in the same manner as set
forth in the Tax Reduction Investment Plan with regard to TRIP+ accounts.

6.9.4 Beneficiary Designation. The Alternate Payee shall be permitted to designate a Beneficiary
for his or her Account in accordance with the provisions of Section 5.4.

6.9.5 Distribution of Alternate Payee's Account. The Account established for the benefit of an
Alternate Payee under the Plan shall be distributed to the Alternate Payee at the same time and in the same manner as the
Member's Plan Account is distributed to him or her, as set forth in Section 5."

IN WITNESS WHEREOF, Genentech, Inc., by its duly authorized officers, has executed this Amendment No. 2 to
the Plan on the date(s) indicated below.

GENENTECH, INC.

By: /s/ David Ebersman And By: /s/ Denise Smith-Hams

Title: Executive Vice President and


Chief Financial Officer Title: Vice President Human Resources

Dated: 9/1/06 Dated: 9/1/06

EXHIBIT 10.21

AMENDMENT NO. 3 TO THE


GENENTECH, INC. SUPPLEMENTAL PLAN
(January 1, 2004 Restatement)

WHEREAS, the Genentech, Inc. Supplemental Plan (the “Plan”) was originally established effective as of January 1,
1991 and was most recently amended and restated in its entirety effective as of January 1, 2004, was amended effective as of
May 1, 2005 and further amended effective as of October 1, 2006;

WHEREAS, notwithstanding any provisions of the Plan to the contrary, Section 409A of the Internal Revenue Code
of 1986, as amended (the “Code section 409A”) requires that all non-qualified deferred compensation plans, like the Plan, be
in documentary compliance no later than December 31, 2008;

WHEREAS, Genentech, Inc. amended the Plan for Code section 409A compliance in Amendment No. 1 to the Plan,
effective as of May 1, 2005 (the “Amendment No. 1”);

WHEREAS, the Treasury Department has provided additional guidance regarding Code section 409A, since the
effectiveness of Amendment No.1, requiring an additional amendment to the timing of the distribution to comply with Code
section 409A.

NOW, THEREFORE, the Plan is hereby amended, effective as of December 18, 2008, as follows:

FIRST: Section 5.2 is amended in its entirety to read as follows:


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“5.2 Time for Distribution. The distribution of a Member’s Account shall occur on the date that is six
(6) months after the date of the Member’s Separation From Service (as defined in Section 5.1) (the “Payment
Date”). Notwithstanding any contrary Plan provision, any payment that is scheduled to be made to a Member under
the Plan on a Payment Date shall be made no later than (a) the end of the Member’s taxable year that includes the
Payment Date, or (b) if later, the fifteenth (15th ) day of the third calendar month immediately following the Payment
Date. In no event, however, shall the Member be permitted, directly or indirectly, to designate the taxable year of
such payment.”

IN WITNESS WHEREOF, Genentech, Inc., by its duly authorized officers, has executed this Amendment No. 3 to the Plan
on the date(s) indicated below.
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GENENTECH, INC.
By: /s/ Todd Rich
Title: V. P. Development RISQ
Dated: 12/18/08

And by: /s/ William Anderson


Title: S.V.P. Sales + Marketing
Dated: 12/18/08

-2-
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EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-8 No. 333-133841) pertaining to the 1991 Employee Stock Plan of Genentech, Inc.,
(2) Registration Statement (Form S-3 No. 333-37072) of Genentech, Inc.,
(3) Registration Statement (Form S-8 No. 333-115219) pertaining to the 1999 Stock Plan, 1991 Employee Stock Plan, and 2004 Equity
Incentive Plan of Genentech, Inc.,
(4) Registration Statement (Form S-8 No. 333-87444) pertaining to the 1999 Stock Plan of Genentech, Inc.,
(5) Registration Statement (Form S-8 No. 333-94749) pertaining to the Tax Reduction Investment Plan of Genentech, Inc.,
(6) Registration Statement (Form S-8 No. 333-90669) pertaining to the 1999 Stock Plan and 1991 Employee Stock Plan of Genentech, Inc.,
(7) Registration Statement (Form S-8 No. 333-83989) pertaining to the 1999 Stock Plan and 1991 Employee Stock Plan of Genentech, Inc.,
and
(8) Registration Statement (Form S-8 No. 333-83157) pertaining to the 1990 Stock Option/Stock Incentive Plan, 1994 Stock Option Plan, and
1996 Stock Option/Stock Incentive Plan of Genentech, Inc.;

of our reports dated February 4, 2009 (except for the first paragraph of Note 3 and the thirteenth paragraph of Note 10, as to which the date is
February 9, 2009) with respect to the consolidated financial statements and schedule of Genentech, Inc. and the effectiveness of internal
control over financial reporting of Genentech, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2008.

/s/ ERNST & YOUNG LLP

Palo Alto, California


February 13, 2009

EXHIBIT 31.1

CERTIFICATIONS

I, Arthur D. Levinson, certify that:

1. I have reviewed this annual report on Form 10-K of Genentech, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
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based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.

Date: February 19, 2009 By: /s/ ARTHUR D. LEVINSON


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

EXHIBIT 31.2

CERTIFICATIONS

I, David A. Ebersman, certify that:

1. I have reviewed this annual report on Form 10-K of Genentech, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
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and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.

Date: February 19, 2009 By: /s/ DAVID A. EBERSMAN