10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
[x]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2002
	OR
[  ]	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)

A Delaware Corporation (State or other jurisdiction of incorporation or organization)	94-2347624 (I.R.S. Employer Identification Number)
1 DNA Way, South San Francisco, California  94080-4990 (Address of principal executive offices and zip code)	(650) 225-1000 (Telephone Number)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.02 par value	New York Stock Exchange

            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 [x]  No [ ]

            Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of Act).   Yes [x]  No [ ]

            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. [x]

            The approximate aggregate market value of voting stock held by non-affiliates of the registrant is $7,566,161,679 as of January 31, 2003^(A)

            Number of shares of Common Stock outstanding as of January 31, 2003:  512,577,987

Documents incorporated by reference:

Definitive Proxy Statement with respect to the 2003 Annual Meeting of Stockholders to be filed by Genentech, Inc. with the Securities and Exchange Commission (hereinafter referred to as "Proxy Statement") Part III

___________

(A) Excludes 306,639,999 shares of Common Stock held by directors and executive officers of Genentech and Roche Holdings, Inc.

GENENTECH, INC.

2002 Form 10-K Annual Report

Table of Contents

		Page
PART I
Item 1	Business		1
Item 2	Properties		12
Item 3	Legal Proceedings		12
Item 4	Submission of Matters to a Vote of Security Holders		16
Executive Officers of the Company			17
PART II
Item 5	Market for the Registrant's Common Equity and Related Stockholder Matters		19
Item 6	Selected Financial Data		20
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		58
Item 8	Financial Statements and Supplementary Data		59
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		92
PART III
Item 10	Directors and Executive Officers of the Registrant		93
Item 11	Executive Compensation		93
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		93
Item 13	Certain Relationships and Related Transactions		93
Item 14	Controls and Procedures		93
PART IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K		94
SIGNATURES			96
CERTIFICATIONS			98

            In this report, "Genentech," "we," "us" and "our" refer to Genentech, Inc. "Common Stock" refers to Genentech's common stock, par value $0.02 per share, "Special Common Stock" refers to Genentech's callable putable common stock, par value $0.02 per share and "Redeemable Common Stock" refers to Genentech's redeemable common stock, par value $0.02 per share. All numbers related to the number of shares and per share amounts of Common Stock, Special Common Stock and Redeemable Common Stock give effect to the two-for-one splits of our Common Stock that were effected in October 2000 and November 1999.

            We own or have rights to various copyrights, trademarks and trade names used in our business including the following: Actimmune® interferon gamma-1b; Activase® (alteplase, recombinant) tissue-plasminogen activator; Avastin™ (bevacizumab) anti-VEGF antibody; Cathflo® Activase® (alteplase for catheter clearance); Herceptin® (trastuzumab) anti-HER2 antibody; Nutropin® (somatropin (rDNA origin) for injection) growth hormone; Nutropin AQ® and Nutropin AQ Pen™ (somatropin (rDNA origin) for injection) liquid formulation growth hormone; Nutropin Depot® (somatropin (rDNA origin) for injectable suspension) encapsulated sustained-release growth hormone; Protropin® (somatrem for injection) growth hormone; Pulmozyme® (dornase alfa, recombinant) inhalation solution; TNKase™ (tenecteplase) single-bolus thrombolytic agent; and Raptiva™ (efalizumab, formerly Xanelim™ ) anti-CD11a antibody. Rituxan® (rituximab) anti-CD20 antibody is a registered trademark of IDEC Pharmaceuticals Corporation; Tarceva™ (erlotinib) is a trademark of OSI Pharmaceuticals, Inc.; and Xolair™ (omalizumab) anti-IgE antibody is a trademark of Novartis AG. This report also includes other trademarks, service marks and trade names of other companies.

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PART I

Item 1. BUSINESS

Overview

            Genentech is a leading biotechnology company using human genetic information to discover, develop, manufacture and commercialize biotherapeutics for significant unmet medical needs. Fifteen of the approved products of biotechnology originated from or are based on our science. We manufacture and commercialize 10 biotechnology products directly in the United States. These products are listed below in the "Marketed Products" section. We also license several additional products to other companies. See the "Licensed Products" section below for further information.

Redemption of Our Special Common Stock

            On June 30, 1999, we redeemed all of our outstanding Special Common Stock held by stockholders other than Roche Holdings, Inc. (or Roche) at a price of $20.63 per share in cash with funds deposited by Roche for that purpose. We refer to this event as the "Redemption." As a result, on that date, Roche's percentage ownership of our outstanding Common Stock increased from 65% to 100%. Consequently, under accounting principles generally accepted in the United States, we were required to use push-down accounting to reflect in our financial statements the amounts paid for our stock in excess of our net book value. Push-down accounting required us to record $1,685.7 million of goodwill and $1,499.0 million of other intangible assets onto our balance sheet on June 30, 1999. For more information about push-down accounting, you should read "Redemption of Our Special Common Stock" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K. Roche subsequently completed public offerings of our Common Stock as described below.

Public Offerings

            On July 23, 1999, October 26, 1999, and March 29, 2000, Roche completed public offerings of our Common Stock. We did not receive any of the net proceeds from these offerings. On January 19, 2000, Roche completed an offering of zero-coupon notes that are exchangeable for an aggregate of approximately 13.0 million shares of our Common Stock held by Roche. Roche's percentage ownership of our outstanding Common Stock was 59.8% at December 31, 2002.

            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 F. Hoffmann-La Roche Ltd (or Hoffmann-La Roche), an affiliate of Roche, and entered into or amended certain agreements with Roche, which are discussed in "Relationship With Roche" of Part II, Item 7 of this Form 10-K.

Marketed Products

            We manufacture and commercialize 10 biotechnology products listed below and license several additional products to other companies.

• Herceptin antibody for the treatment of certain patients with metastatic breast cancer whose tumors overexpress the Human Epidermal growth factor Receptor type 2 (or HER2) protein;

• Rituxan antibody which we market together with IDEC Pharmaceuticals Corporation (or IDEC) for the treatment of patients with relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma including retreatment, times 8 dosing and bulky disease;

• TNKase single-bolus thrombolytic agent for the treatment of acute myocardial infarction (heart attack);

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• Activase tissue plasminogen activator (or t-PA) for the treatment of acute myocardial infarction, acute ischemic stroke (brain attack) within three hours of the onset of symptoms and acute massive pulmonary embolism (blood clots in the lungs);

• Cathflo Activase tissue plasminogen activator approved for the restoration of function to central venous access devices that have become occluded due to a blood clot;

• Nutropin Depot long-acting growth hormone for the treatment of growth failure associated with pediatric growth hormone deficiency;

• Nutropin AQ liquid formulation growth hormone for the same indications as Nutropin;

• Nutropin human growth hormone for the treatment of growth hormone deficiency in children and adults, growth failure associated with chronic renal insufficiency prior to kidney transplantation and short stature associated with Turner syndrome;

• Protropin growth hormone for the treatment of inadequate endogenous growth hormone secretion, or growth hormone deficiency, in children; and

• Pulmozyme inhalation solution for the treatment of cystic fibrosis.

            We receive royalties on sales of MabThera® (rituximab), Pulmozyme and Herceptin outside of the United States, on sales of human growth hormone products, Rituxan, Herceptin, Pulmozyme, Activase and TNKase in Canada and on sales of Pulmozyme and Herceptin in Japan from Hoffmann-La Roche. We receive royalties from other companies on sales of growth hormone products within the United States and outside of the United States, on sales of t-PA outside of the United States and Canada, and on sales of tenecteplase outside of the United States, Canada and Japan. We also receive worldwide royalties on additional licensed products that are marketed by other companies, see "Licensed Products" below for further information. A number of these products originated from our technology.

Herceptin:  Herceptin is approved in the United States for use as a first-line therapy in combination with Taxol® (paclitaxel), a product made by Bristol-Myers Squibb Company (or Bristol-Myers) and others and as a single agent in second- and third-line therapy in patients with metastatic breast cancer who have tumors that overexpress the HER2 protein.

            Herceptin is the first humanized monoclonal antibody for the treatment of HER2 overexpressing metastatic breast cancer. We have granted Hoffmann-La Roche exclusive marketing rights to Herceptin outside of the United States. Hoffmann-La Roche markets Herceptin for the treatment of HER2-positive metastatic breast cancer in Europe and Japan. We receive royalties from Hoffmann-La Roche for these European and Japanese Herceptin product sales.

Rituxan:  Rituxan, or rituximab, is approved in the United States for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system, including retreatment, times 8 dosing and bulky disease. We co-developed Rituxan with IDEC from whom we license Rituxan. Rituxan was the first monoclonal antibody approved in the United States to treat cancer. We jointly promote Rituxan with IDEC in the United States. Under an agreement with us, Hoffmann-La Roche markets Rituxan in Canada and is responsible for marketing rituximab under the trademark MabThera in the rest of the world, excluding Japan. Hoffmann-La Roche pays us royalties and cost plus a mark-up on the supply of rituximab. We receive net sales of MabThera from Zenyaku Kogyo Co., Ltd., a pharmaceutical company that markets MabThera in Japan in conjunction with Hoffmann-La Roche and its Japanese subsidiary, Chugai, through a separate marketing arr angement with Zenyaku.

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Activase, TNKase and Cathflo Activase:  Tissue plasminogen activator (or t-PA) is an enzyme that is produced naturally by the body to dissolve blood clots. However, when a blood clot obstructs blood flow in the coronary artery and causes a heart attack, the body is unable to produce enough t-PA to dissolve the clot rapidly enough to prevent damage to the heart. Activase, a recombinant form of t-PA, is approved for marketing in the United States for the treatment of acute myocardial infarction (heart attack), for use in the treatment of acute pulmonary embolism (blood clots in the lungs) and for the treatment of acute ischemic stroke or brain attack (blood clots in the brain) within three hours of symptom onset. TNKase, single-bolus thrombolytic agent, is approved for the treatment for acute myocardial infarction. Cathflo Activase, approved for the restoration of function to central venous access devices that have become occluded due to a blood clot, received approval f rom the U.S. Food and Drug Administration (or FDA) and was launched in September 2001.

            In exchange for royalty payments, we have licensed marketing rights to a recombinant t-PA in Japan to Kyowa Hakko Kogyo Co., Ltd. (or Kyowa) and Mitsubishi Pharmaceutical (or Mitsubishi). Kyowa is marketing a form of a recombinant t-PA under the trademark Activacin® and Mitsubishi is marketing a form of recombinant t-PA under the trademark GRTPA®. In a number of countries outside of the United States, Canada and Japan, we have licensed t-PA marketing and manufacturing rights to Boehringer Ingelheim, GmbH. We have also licensed certain rights to Boehringer Ingelheim regarding sales of TNKase. Boehringer Ingelheim, which markets a recombinant t-PA under the trademark Actilyse®, received regulatory approval from the European commission for sale of Metalyse® (tenecteplase) and also received marketing approval for Metalyse in Switzerland and Australia.

Nutropin Depot:  Nutropin Depot is a long-acting form of our recombinant human growth hormone using ProLease®, an injectable extended-release drug delivery system, which was developed by our partner Alkermes, Inc. This new formulation was designed to reduce the frequency of injections by encapsulating the drug in biodegradable microspheres.

Nutropin AQ:  Nutropin AQ is a liquid formulation of Nutropin (see below) aimed at providing improved convenience in administration. Nutropin AQ is the first and only liquid (aqueous) recombinant human growth hormone product available in the United States. Nutropin AQ was approved for the treatment of growth hormone inadequacy in children, growth hormone failure in children associated with chronic renal insufficiency up to the time of renal transplantation, and short stature associated with Turner syndrome. Nutropin AQ is also approved for the treatment of growth hormone deficiency in adults.

            In September 2002, we entered into an agreement with Beaufour Ipsen under which Beaufour Ipsen has the exclusive right to market Nutropin AQ and Nutropin AQ Pen Cartridge in Europe and the rest of the world, excluding North America and Japan. As part of a strategic alliance in December 1997 with Sumitomo Pharmaceuticals Co., Ltd. (or Sumitomo), we agreed to provide Sumitomo exclusive rights to develop, import and distribute Nutropin AQ and Nutropin Depot in Japan, and in October 2000, we reacquired the rights to Nutropin Depot in Japan.

Nutropin:  Nutropin is a human growth hormone similar to Protropin (see below); however, it does not have the additional N-terminal amino acid, methionine, found in the Protropin chemical structure. Nutropin is approved in the United States for the treatment of growth failure in children associated with chronic renal insufficiency up to the time of renal transplantation. Nutropin is approved for the treatment of growth hormone inadequacy in children and for the treatment of short stature associated with Turner syndrome. Nutropin is also approved for the treatment of growth hormone deficiency in adults.

Protropin:  Protropin is approved for marketing in the United States for the treatment of growth hormone inadequacy in children. We discontinued the manufacture of Protropin at the end of 2002 because physicians are typically initiating therapy with one of the Nutropin family products and the demand for Protropin has declined. We will continue to sell Protropin for the next 12 to 18 months until we deplete our current inventory of Protropin.

            In exchange for royalty payments, we licensed rights to manufacture and market recombinant growth hormone to Pharmacia Corporation, which manufactures and markets recombinant growth hormone under the trademarks Genotropin® (somatropin (rDNA) for injection) and Genotropin MiniQuick®.

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Pulmozyme:  Pulmozyme is approved for marketing in the United States for the treatment of cystic fibrosis.

Actimmune:  Actimmune is approved in the United States for the treatment of chronic granulomatous disease. In return for a royalty on net sales, we have licensed certain U.S. manufacturing, marketing and development rights to interferon gamma, including Actimmune, to Connetics Corporation, which in turn sublicensed all of its rights to InterMune Pharmaceuticals, Inc. (or InterMune). As of January 1, 2002, we no longer manufacture, use or sell Actimmune. We receive royalty payments from Boehringer Ingelheim from the sale of interferon gamma in certain countries outside of the United States, such as Canada, Japan and the People's Republic of China.

Licensed Products

            In addition to the royalties mentioned above, we also receive royalties on the following products from the following companies:

Product	Trademark	Company
Human growth hormone	Humatrope	Eli Lilly and Company
Hepatitis B vaccine	Engerix-B	GlaxoSmithKline plc
Factor VIII	Kogenate/Helixate	Bayer Corporation
Bovine growth hormone	Posilac	Monsanto Company
Interferon gamma-1b	Actimmune (see above)	InterMune
Soluble TNF receptor	ENBREL	Immunex Corporation
Infliximab	Remicade	Celltech Pharmaceuticals plc
Abciximab	ReoPro	Centocor, Inc.
Interferon Beta-1b	Betaseron	Berlex Laboratories, Inc.
Interferon alfacon-1	Infergen	Immunex Corporation
Bosentan	Tracleer	Actelion Ltd.
Palivizumab	Synagis	MedImmune, Inc.

            On August 1, 2003, our royalties from Pharmacia will expire and on December 31, 2003, our royalties from Eli Lilly will expire. These expirations are not expected to have a significant impact on our financial position and results of operations.

Products in Development

            Our product development efforts, including those of our collaborative partners, cover a wide range of medical conditions, including cancer, respiratory disorders, cardiovascular diseases, endocrine disorders, and inflammatory and immune problems.

            Below is a summary of products and related stages of development for each product in clinical development:

Product	Description
Awaiting Regulatory Approval
Xolair (Anti-IgE antibody)	An anti-IgE monoclonal antibody designed to interfere early in the process leading to symptoms of allergic asthma and seasonal allergic rhinitis. In collaboration with Novartis Pharmaceuticals Corporation (or Novartis) and Tanox, Inc., Phase III clinical trials have been completed in patients with allergic asthma and in patients with seasonal allergic rhinitis. A complete response letter was received from the FDA and an amendment to the Biologic License Application (or BLA) seeking approval for moderate to severe allergic asthma in adults and adolescents was submitted in December 2002.

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Raptiva (Anti-CD11a antibody)	An antibody designed to block certain immune cells as a potential treatment for psoriasis. The FDA previously requested that the additional Phase III study be completed before the filing of a BLA after results from a pharmacokinetic study suggested that Genentech-produced material showed a slightly higher serum concentration than XOMA Ltd.-produced material. An additional Phase III trial in moderate to severe plaque psoriasis has been completed and a BLA seeking approval for moderate to severe plaque psoriasis was submitted in December 2002. The product has been developed in collaboration with XOMA, and Serono S.A. has marketing rights outside of the U.S. and Japan.
Phase III
Rituxan antibody	A monoclonal antibody approved for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system, including retreatment, times 8 dosing and bulky disease. We are in Phase III clinical trials for the treatment of intermediate- and high-grade non-Hodgkin's lymphoma. This product is being developed in collaboration with Hoffmann-La Roche and IDEC.
Avastin (Anti-VEGF antibody)	An antibody developed to inhibit angiogenesis (the formation of new blood vessels) as a potential treatment for solid-tumor cancers. Phase III trials are ongoing to treat several types of solid tumors. A company-sponsored pivotal study is ongoing in metastatic colorectal cancer. There are additional ongoing Phase III trials conducted by cooperative groups in non-small cell lung cancer, first-line metastatic breast cancer and colorectal cancer. A company-sponsored Phase III trial in relapsed metastatic breast cancer patients did not meet its primary efficacy endpoint of progression-free survival. One of the secondary endpoints, overall response rate, did achieve statistical significance, but this did not translate into benefit in progression-free survival or twelve-month survival.
Herceptin antibody	An antibody that is an approved treatment for HER2-positive overexpressing metastatic breast cancer. In collaboration with Hoffmann-La Roche and cooperative groups, we are conducting Phase III trials for adjuvant treatment of early-stage breast cancer in patients who overexpress the HER2 protein.
Tarceva	In collaboration with OSI Pharmaceuticals (or OSI) and Hoffmann-La Roche, we are co-developing Tarceva, a small molecule tyrosine kinase inhibitor directed against epidermal growth factor (or EGFR) for the potential treatment of solid tumors. The collaboration has initiated four Phase III clinical trials and numerous additional trials as part of the clinical development program. Phase III trials are evaluating Tarceva for non-small cell lung cancer and pancreatic cancer.
Nutropin Depot	Nutropin Depot is a long-acting formulation of growth hormone developed in collaboration with Alkermes. The product is approved for the treatment of growth failure associated with pediatric growth hormone deficiency. A Phase III trial is being conducted for the treatment of adults with growth hormone deficiency.
Preparing for Phase III
Rituxan RA	A monoclonal antibody approved for the treatment of relapsed or refractory low-grade or follicular CD20-positive B-cell non-Hodgkin's lymphoma. Based upon a Phase II trial in the treatment of rheumatoid arthritis (or RA) and discussions with the FDA, we are planning for a global clinical development program, including potential registration Phase III trials and additional Phase II studies.

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Avastin (Anti-VEGF antibody)	An antibody developed to inhibit angiogenesis (the formation of new blood vessels) as a potential treatment for solid-tumor cancers. A Phase II renal cell carcinoma study conducted by the National Cancer Institute (or NCI) stopped enrollment after reaching the primary endpoint (time to progression) at an interim analysis. A Phase III program in renal cell carcinoma is being planned.
RhuFab V2 AMD	A customized fragment of an anti-VEGF antibody for the potential treatment of age-related macular degeneration (or AMD). In this condition, excessive blood vessel growth behind the retina of the eye can lead to blindness. Based on Phase Ib/II results, and following discussions with the FDA, we are preparing for Phase III randomized trials.
Phase II
MLN-02 (formerly LDP-02)	A monoclonal antibody for the treatment of inflammatory bowel diseases. This product is licensed from and being developed in collaboration with Millennium Pharmaceuticals, Inc. (or Millennium). Millennium is conducting Phase II clinical trials. In 2002, Millennium announced a Phase II trial in patients with mild to moderate Crohn's Disease did not meet its primary endpoint. A Phase II trial in patients with ulcerative colitis is ongoing. In the event we receive positive Phase II results, we will have opt-in rights to develop and commercialize this product. We await the results of the Phase II ulcerative colitis trial.
Raptiva (Anti-CD11a antibody)	An antibody designed to block certain immune cells as a potential treatment for rheumatoid arthritis. We are conducting a Phase II study in patients with moderate to severe rheumatoid arthritis. The product is being developed in collaboration with XOMA and Serono S.A.
Preparing for Phase II
Rituxan ITP	A monoclonal antibody approved for the treatment of relapsed or refractory low-grade or follicular CD20-positive B-cell non-Hodgkin's lymphoma. We are currently planning additional studies in the treatment of idiopathic thrombocytopenic purpura (or ITP).
2C4	2C4 is a monoclonal antibody directed against the human epidermal growth factor receptor, type 2 (or HER2) as a potential treatment for cancer. 2C4 is designed to block the association of HER2 with other HER family members, thereby inhibiting intra-cellular signaling through the HER pathway. A Phase I trial was successfully completed and plans are underway to initiate Phase II trials in several tumor types.
Preparing for Phase I
Anti-Tissue Factor antibody	Anti-Tissue Factor (or ATF) a recombinant, humanized, F(ab')2 antibody fragment is derived from the murine anti-human tissue factor (or TF) antibody. ATF binds to the membrane proximal substrate interaction region of human tissue factor and is designed to block tissue factor function even in the presence of bound factor VIIa. As tissue factor is not normally expressed in the vascular space, the putative advantages of this target include anticoagulant action targeted to injured or diseased areas. We are currently conducting preclinical studies that could lead to potential human studies of acute coronary syndromes.

            In conjunction with our amended licensing and marketing agreement with Hoffmann-La Roche in July 1999, Hoffmann-La Roche was granted an option until at least 2015 for licenses to use and sell certain of our products in non-U.S. markets (the "Licensing Agreement"). See "Relationship With Roche" of Part II, Item 7 of this Form 10K, for further information.

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            In general, with respect to our products, Hoffmann-La Roche pays us a royalty on aggregate sales outside of the United States. Hoffmann-La Roche has rights to, and pays us royalties for, Canadian sales of human growth hormone products, Rituxan, Herceptin, Pulmozyme, Activase and TNKase, for Japanese sales of Pulmozyme and Herceptin, and for sales of Pulmozyme, Herceptin and MabThera (rituximab) in other countries outside of the United States. We supply the products to Hoffmann-La Roche, and have agreed to supply the products for which Hoffmann-La Roche has exercised its option with respect to those products, for sales outside of the United States. In late September 2002, Hoffmann-La Roche received approval from the European Committee for Proprietary Medicinal Products to manufacture Herceptin at its Penzberg, Germany facility. Starting in 2003, the Penzberg facility will become the primary site for the manufacture of Herceptin to supply the ex-U.S. territories. This will affect our ex-U.S. sales to Hoffmann-La Roche starting in the first quarter of 2003. During 2003, we expect our sales of Herceptin to Hoffmann-La Roche to decline. However, we will continue to receive royalties from their ex-U.S. Herceptin sales.

            In August 2002, we entered into an agreement with Serono S.A. to market Raptiva internationally outside the United States, Japan, and certain other Asian countries. In February 2003, we amended the agreement with Serono to expand Serono's marketing rights to include certain Asian countries other than Japan. Development and marketing rights in the United States remain with us and our U.S. partner XOMA (US) LLC and we retain exclusive marketing rights in Japan. Under the agreement, we and Serono may collaborate on co-developing additional indications of Raptiva and will share certain global development costs. In addition, we have a supply agreement with Serono, under which we have a loss exposure up to a maximum of $10.0 million.

            In the second quarter of 2002, we entered into a manufacturing agreement with Immunex Corporation, a wholly-owned subsidiary of Amgen, to provide Immunex with additional manufacturing capacity for ENBREL® (etanercept) at Genentech's manufacturing facility in South San Francisco, California. As part of the agreement, we are responsible for facility modifications needed to manufacture ENBREL, including the internal labor costs and development production runs. The cost of equipment and outside service costs are reimbursable by Immunex. However, if certain milestones are not met, we are required to reimburse Immunex for up to 45% of the total equipment and outside service costs. Costs associated with development runs are reflected in R&D expense as incurred. Milestones will be paid to us upon the achievement of certain events. If the FDA approves the manufacturing of the product at Genentech, shipment of the product to Immunex would be recorded as product sales based on an agreed upon price with the associated costs reflected in cost of sales.

            We entered into a research collaboration agreement with CuraGen Corporation in November 1997, as amended and restated in March 2000, and agreed to provide a convertible equity loan to CuraGen of up to $21.0 million. In October 1999, CuraGen exercised its right to borrow $16.0 million. Simultaneously, with this draw down, CuraGen repaid the loan by issuing common shares of CuraGen stock valued at $16.0 million. Our remaining commitment to CuraGen on the convertible equity loan is $5.0 million. At December 31, 2002, there were no outstanding loans to CuraGen.

            In December 1997, we entered into a research collaboration agreement with Millennium to develop and commercialize Millennium's MLN-02 (formerly LDP-02). Under the terms of the agreement, we have agreed to provide a convertible equity loan for approximately $15.0 million to fund Phase II development costs. Upon successful completion of Phase II, if Millennium agrees to fund 25% of Phase III development costs, we have agreed to provide a second loan to Millennium for such funding. As of December 31, 2002, there were no outstanding loans to Millennium.

            In April 1996, we entered into a research collaboration agreement with XOMA to develop and commercialize Raptiva. In connection with our collaboration with XOMA, we have agreed to provide a convertible equity loan to XOMA of up to $80.0 million (outstanding at any one time) to fund XOMA's share of development costs for Raptiva through FDA approval, and a cash loan of up to $15.0 million to fund XOMA's share of U.S. marketing and sales costs prior to the date of regulatory approval of Raptiva. As of December 31, 2002, XOMA had an aggregate outstanding loan balance of approximately $60.0 million, of which we have reserved $20.7 million. There is no revenue impact on our statements of operations as it relates to the funding of the loan. However, provisions are recorded when we determine that recoverability of the loan has been impaired.

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Distribution

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

            Our products are also available at no charge to qualified patients under our uninsured patient programs in the United States. We have established the Genentech Endowment for Cystic Fibrosis to assist cystic fibrosis patients in the United States with obtaining Pulmozyme and the Genentech Access To Care Foundation for all other Genentech products.

            We provide certain customer service programs relating to our products. We maintained a comprehensive wastage replacement program for Activase and TNKase that, subject to specific conditions, provides customers the right to return Activase and TNKase to us for replacement related to patient-related product wastage. We also maintained expired product programs for all our products that, subject to certain specific conditions, provides customers the right to return products to us for replacement or credit for the price paid related to product expiration. We maintain the right to renew, modify or discontinue the above programs.

            As discussed in the "Segment, Significant Customer And Geographic Information" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K, we had three major customers who individually provided over 10% of our total revenues in at least two of the last three years. Also discussed in the note are material net foreign revenues by country in 2002, 2001 and 2000.

Raw Materials

            Raw materials and supplies required for the production of our principal products are generally available from various suppliers in quantities adequate to meet our needs.

Proprietary Technology - Patents and Trade Secrets

            We seek patents on inventions originating from our ongoing research and development (or R&D) activities. Patents, issued or applied for, cover inventions ranging from basic recombinant DNA techniques to processes relating to specific products and to the products themselves. We have either been granted patents or have patent applications pending that relate to a number of current and potential products including products licensed to others. 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. Important legal issues remain to be resolved as to the extent and scope of available patent protection for biotechnology products and processes in the United States and other important markets outside of the United States. We expect that litigation will likely be necessary to determine the validity and scope of cer tain of our proprietary rights. We are currently involved in a number of patent lawsuits, as either a plaintiff or defendant, and administrative proceedings relating to the scope of protection of our patents and those of others. These lawsuits and proceedings may result in a significant commitment of our resources in the future and, depending on their outcome, may adversely affect the validity and scope of certain of our patent or other proprietary rights. We cannot assure you that the patents we obtain or the unpatented proprietary technology we hold will afford us significant commercial protection.

            In general, 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.

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            Our trademarks, Activase, Herceptin, Nutropin Depot, Nutropin AQ, Nutropin, Protropin, Pulmozyme, Rituxan (licensed from IDEC), TNKase, Cathflo, Xolair (licensed from Novartis), Raptiva, Avastin, Nutropin AQ Pen and Tarceva (licensed from OSI) in the aggregate are considered to be of material importance. All are covered by registrations or pending applications for registration in the U.S. Patent and Trademark Office and in other countries.

            Our royalty income for patent licenses, know-how and other related rights amounted to $365.6 million in 2002, $264.5 million in 2001, and $207.2 million in 2000. Royalty expenses were $204.4 million in 2002, $150.4 million in 2001, and $100.3 million in 2000.

Competition

            We face competition, and believe significant long-term competition can be expected, from large pharmaceutical companies and pharmaceutical divisions of chemical companies as well as biotechnology companies. This competition can be expected to become more intense as commercial applications for biotechnology products increase. Some competitors, primarily large pharmaceutical companies, have greater clinical, regulatory and marketing resources and experience than we do. Many of these companies have commercial arrangements with other companies in the biotechnology industry to supplement their own research capabilities.

            The introduction of new products or the development of new processes by competitors or new information about existing products may result in price reductions or product replacements, even for products protected by patents. However, we believe our competitive position is enhanced by our commitment to research leading to the discovery and development of new products and manufacturing methods. Other factors that should help us meet competition include ancillary services provided to support our products, customer service, and dissemination of technical information to prescribers of our products and to the health care community, including payers.

            Over the longer term, our and our collaborators' abilities to successfully market current products, expand their usage and bring new products to the marketplace will depend on many factors, including but not limited to the effectiveness and safety of the products, FDA and foreign regulatory agencies' approvals of new products and indications, the degree of patent protection afforded to particular products, and the effect of managed care as an important purchaser of pharmaceutical products.

Herceptin:  Herceptin is the first humanized monoclonal antibody for the treatment of HER2 overexpressing metastatic breast cancer and the second United States approval in this new class of monoclonal antibody biotherapeutic cancer drugs. The first monoclonal antibody biotherapeutic cancer drug was Rituxan. We are aware of other potentially competitive biologic therapies in development.

Rituxan:  Rituxan received designation as a U.S. Orphan Drug by the FDA in 1994 for the treatment of relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma. We are aware of other potentially competitive biologic therapies in development. Corixa Corporation filed a revised BLA in 2001 for Bexxar™ (tositumomab and iodine-131 tositumomab) and received a positive review by the FDA's Oncology Drugs Advisory Committee in December 2002. In February 2002, IDEC received approval from the FDA for Zevalin™ (indium-111 ibritumomab and yttrium-90 ibritumomab) for the treatment of relapsed or refractory low grade, follicular, or transformed B-cell non-Hodgkin's lymphoma. Zevalin is used in combination with Rituxan. Both Bexxar and Zevalin are radiolabeled molecules while Rituxan is not. We are also aware of other potentially competitive biologic therapies for non-Hodgkin's lymphoma in development.

Activase, TNKase and Cathflo Activase:  We continue to face competition in the thrombolytic market. Activase has lost market share due to increased competition and switching to TNKase. We could lose additional market share to Centocor Inc.'s Retavase® either alone or in combination with the use of another Centocor product, ReoPro® (abciximab) and to the use of mechanical reperfusion therapies to treat acute myocardial infarction; the resulting adverse effect on sales could be material. Retavase is approved for the treatment of acute myocardial infarction. In addition, the market for thrombolytic therapy has declined due to an increasing use of mechanical reperfusion in lieu

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of thrombolytic therapy for the treatment of acute myocardial infarction compounded by a declining number of ST segment-elevated myocardial infarction patients. In addition, we face potential increased competition in the catheter clearance market from the reintroduction of Abbott Laboratories' Abbokinase® (urokinase) in October 2002. Abbokinase is approved for pulmonary embolism.

Nutropin Depot, Nutropin AQ, Nutropin and Protropin:  Eli Lilly and Company received FDA approval in 1987 to market its growth hormone product for treatment of growth hormone inadequacy in children. Three other companies: Bio-Technology General Corporation (or BTG), Novo Nordisk A/S (or Novo) and Pharmacia-received FDA approval in 1995 to market their growth hormone products in the United States. Novo did not begin distribution in the United States market until the first quarter of 1997 when it launched Norditropin®, a lyophilized formulation. As a result of a patent infringement lawsuit brought by Genentech relating to the process used by BTG to make its growth hormone product, BTG is currently enjoined from selling its product in the U.S. The patent on which that injunction is based will expire in July 2003. Furthermore, BTG has stated publicly that it has developed a new process for making growth hormone product, which may enable BTG to begin selling that produ ct in the U.S. in 2003. A fifth competitor, Serono, Inc., received FDA approval in October 1996 to market its growth hormone product. On June 21, 2000, Novo announced that the FDA approved Norditropin® SimpleXx™, a liquid form of its recombinant somatropin product, for the long-term treatment of children who have growth hormone failure due to inadequate secretion of endogenous growth hormone. In addition, four of our competitors have received approval to market their existing human growth hormone products in the United States for additional indications.

            Nutropin Depot is approved as the first long-acting dosage form of recombinant growth hormone for pediatric growth hormone deficiency. We are aware of other companies developing sustained release forms of growth hormone that may compete with Nutropin Depot.

            In late April 2002, the FDA approved Nutropin AQ Pen Cartridge, a new delivery system for Nutropin AQ. The Nutropin AQ Pen Cartridge was launched on July 10, 2002. Devices for delivery of growth hormone products are becoming an increasingly important component to gaining and maintaining market share. Other companies have developed devices for delivery of growth hormone products that may compete with this product.

Pulmozyme:  Pulmozyme is used for the treatment of cystic fibrosis. We are not aware of any directly competing products in development.

Government Regulation

            Regulation by governmental authorities in the United States 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. In particular, 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. Any failure by us to obtain or maintain, or any delay in obtaining or maintaining, regulatory approvals cou ld materially adversely affect our business.

            The activities required before a pharmaceutical product may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and 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 (or IND), which must be reviewed by the FDA before proposed clinical testing 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 specified disease in order to provide enough data to statistically evaluate the preliminary efficacy, optimal dosages and expan ded evidence of safety. In Phase III, large scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data to statistically evaluate the efficacy and

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safety of the product, as required by the FDA. The results of the preclinical and clinical testing of a chemical pharmaceutical product are then submitted to the FDA in the form of a New Drug Application (or NDA), or for a biological pharmaceutical product in the form of a BLA, for approval to commence commercial sales. In responding to a NDA or a BLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. We can not assure you that any approval required by the FDA will be obtained on a timely basis, if at all.

            Among the conditions for a 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 (or GMP). Before approval of a BLA, the FDA will perform a prelicensing inspection of the facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full compliance. After the establishment is licensed for the manufacture of any product, manufacturers are subject to periodic inspections by the FDA. Any determination by the FDA of manufacturing related deficiencies could materially adversely affect our business.

            The requirements that we must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in such countries can be as rigorous, costly and uncertain.

            We are also subject to various laws and regulations relating 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. The extent of governmental regulation that might result from any legislative or administrative action cannot be accurately predicted.

            The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and third-party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability. In addition, in the United States and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the co nsumer from third-party payers, such as government and 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. We cannot assure you that any of our products will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive and profitable basis.

Research and Development

            A major portion of our operating expenses to date are related to the R&D of products incurred either by us alone or under contracts with our collaborative partners. R&D expenses were $623.5 million in 2002, $526.2 million in 2001, and $489.9 million in 2000. Our R&D efforts have been the primary source of our products. We intend to maintain our strong commitment to R&D as an essential component of our product development effort. Licensed technology developed by outside parties is an additional source of potential products.

Human Resources

            As of December 31, 2002, we had 5,252 employees.

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Environment

            We seek to comply with all applicable statutory and administrative requirements concerning environmental quality. We have made, and will continue to make, expenditures for environmental compliance and protection. Expenditures for compliance with environmental laws have not had, and are not expected to have, a material effect on our capital expenditures, results of operation, financial position or competitive position.

Available Information

            We file electronically with the Securities and Exchange Commission (or SEC) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

            You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.gene.com, by contacting the Investor Relations Department at our corporate offices by calling (650) 225-1599 or by sending an e-mail message to investor.relations@gene.com. You can direct requests for literature to our literature request line at (800) 488-6519 or on our website.

Item 2. PROPERTIES

            Our primary facilities are located in a research and industrial park in South San Francisco, California in both leased and owned properties. We currently occupy 31 buildings for our research and development, manufacturing, marketing and administrative activities. Of the buildings, 18 are owned and 13 are leased. Of the 13 buildings that are leased, 5 buildings are leased pursuant to synthetic off-balance sheet operating lease arrangements. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for a discussion of our synthetic lease arrangements. We have made and continue to make improvements to these properties to accommodate our growth. Our buildings include a manufacturing facility of approximately 300,000 square feet in Vacaville, California, a cell culture manufacturing facility of approximately 50,000 square feet and a ware house of approximately 18,000 square feet under construction in Porrino, Spain. The Spain facility will supplement our existing bulk cell culture production capacity. We also have leases for certain additional office facilities in several locations in the United States.

            We believe our facilities are in good operating condition and that the real property owned or leased are adequate for all present and near term uses. Additional manufacturing capacity may be added to the South San Francisco or the Vacaville sites depending on the success of potential products in clinical trials. We believe any additional facilities can be obtained or constructed with our capital resources.

Item 3. LEGAL PROCEEDINGS

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

            We and the City of Hope Medical Center are parties to a 1976 agreement relating to work conducted by two City of Hope employees, Arthur Riggs and Keiichi Itakura, and patents that resulted from that work, which are referred to as the "Riggs/Itakura Patents." Since that time, Genentech has entered into license agreements with various companies to make, use and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999, the City of Hope filed a complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties to the City of Hope in connection with these license agreements, as well as product license agreements that involve the grant of licenses under the Riggs/Itakura Patents. The complaint stated claims for declaratory relief,

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breach of contract, breach of implied covenant of good faith and fair dealing, and breach of fiduciary duty. On December 15, 1999, we filed our answer to the City of Hope's complaint. The first trial of this suit began on August 28, 2001, in which City of Hope was seeking compensatory damages in the amount of approximately $445 million (including interest) and special damages. On October 24, 2001, the jury hearing the lawsuit announced that it was unable to reach a verdict and on that basis the Court declared a mistrial. City of Hope requested a retrial, and the retrial began on March 20, 2002. On June 10, 2002, the jury voted to award the City of Hope approximately $300 million in compensatory damages. On June 24, 2002, the jury voted to award the City of Hope an additional $200 million in punitive damages. Such amounts were accrued as an expense in the second quarter of 2002 and were included in other long-term liabilities in the consolidated balance sheet at December 31, 2002. O n August 22, 2002, the Superior Court denied Genentech's motion for judgment notwithstanding the verdict and motion for a new trial. Accordingly, on September 13, 2002, Genentech filed a notice of appeal of the verdict and damages awards with the California Court of Appeal. The appeal process is ongoing. The amount of cash, if any, to be paid in connection with the City of Hope matter will depend on the outcome of the appeal.

            On June 7, 2000, Chiron Corporation filed a patent infringement suit against us in the U.S. District Court in the Eastern District of California (Sacramento), alleging that the manufacture, use, sale and offer for sale of our Herceptin antibody product infringes Chiron's U.S. Patent No. 6,054,561. This patent was granted on April 25, 2000, and will expire on June 28, 2005, and it relates to certain antibodies that bind to breast cancer cells and/or other cells. Chiron is seeking compensatory damages for the alleged infringement, additional special damages (e.g., for willful infringement), and attorneys' fees and costs. We filed our answer to Chiron's complaint, and in our answer we also stated counterclaims against Chiron. On April 22, 2002, the Court issued its decision ("Markman Order") construing certain aspects of the patent claims that are in dispute. On June 25, 2002, the Court issued several decisions regar ding summary judgment motions that previously had been filed by Chiron and us. In those decisions, the Court ruled as a matter of law that Herceptin infringes claims 1 to 25 of Chiron's patent, and also ruled as a matter of law in favor of Chiron on some but not all of Genentech's defenses and counterclaims regarding the alleged invalidity and/or unenforceability of the patent. The trial of this suit began on August 6, 2002, with jury selection and opening statements. Following the first phase of the trial, which related to Genentech's remaining defenses and counterclaims regarding the alleged invalidity of the patent, the jury unanimously found that claims 1 to 25 of Chiron's patent were invalid, and on that basis the Court entered judgment in favor of Genentech. On September 23, 2002, Chiron filed a motion for judgment as a matter of law or for a new trial, and on October 14, 2002, Chiron filed a motion for relief from judgment, in each case seeking to overturn or set aside the jury verdict. On Octobe r 23, 2002, the Court denied the first of the motions in its entirety. On November 4, 2002, the Court denied the second motion in its entirety. On November 20, 2002, Chiron filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On December 4, 2002, Genentech filed a notice of cross-appeal with the U.S. Court of Appeals for the Federal Circuit. The appeal process is ongoing.

            On August 12, 2002, the U.S. Patent and Trademark Office (or Patent Office) declared an interference between the Chiron patent involved in the above mentioned lawsuit (U.S. Patent No. 6,054,561) and a patent application exclusively licensed by Genentech from a university relating to anti-HER2 antibodies. An interference proceeding is declared to decide who first made a particular invention where two or more parties claim the same invention, whether the parties' claims are patentable, and consequently who is or is not entitled to a patent on the invention. In declaring this interference, the Patent Office has determined that there is a substantial question as to whether the inventors of the Chiron patent were first to invent and are entitled to this patent. If the Patent Office were to decide that the inventors of the university's patent application were first to invent and that their claims are patentable, a new pat ent would be issued to the university and the Chiron patent would be revoked. On October 24, 2002, the Patent Office redeclared the interference to include, in addition to the above-referenced Chiron patent and university patent application, a number of patents and patent applications owned by either Chiron or Genentech, including Chiron's U.S. Patent No. 4,753,894 that is also at issue in the separate patent infringement lawsuit described below. On November 27, 2002, the parties filed their respective lists of preliminary motions and prior art to be relied on in the interference. The Patent Office has scheduled a tentative date for a hearing on the preliminary motions for October 15, 2003.

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            On March 13, 2001, Chiron filed another patent infringement lawsuit against us in the U.S. District Court in the Eastern District of California, alleging that the manufacture, use, sale and/or offer for sale of our Herceptin antibody product infringes Chiron's U.S. Patent No. 4,753,894. Chiron is seeking compensatory damages for the alleged infringement, additional special damages, and attorneys' fees and costs. Genentech filed a motion to dismiss this second lawsuit, which was denied. On November 1, 2002, the parties filed a proposed stipulation to stay all proceedings in this lawsuit until (1) the interference involving U.S. Patent No. 4,753,894 is resolved or (2) two years from entry of the proposed stipulation, whichever is sooner. On or about November 13, 2002, the Court entered the stipulation, staying the proceedings as requested by the parties. This lawsuit is separate from and in addition to the Chiron su it mentioned above.

            On July 24, 2002, Green Equity, LLC filed a shareholder derivative lawsuit in the San Francisco Superior Court against Genentech as nominal defendant and against several members of our Board of Directors (the "individual defendants"). The lawsuit is based upon the claims made by the City of Hope in the contract dispute referred to above. The complaint alleges that the individual defendants breached the fiduciary duty they owe to Genentech by causing us to withhold royalty payments allegedly due to the City of Hope and to conceal third-party licenses that allegedly should have been disclosed to the City of Hope. The plaintiff seeks unspecified damages, costs, and attorneys' fees. The defendants have removed the case to federal court and the case is now pending in the U.S. District Court in the Northern District of California (San Francisco). Defendants filed motions to dismiss the lawsuit, and a hearing on the moti ons is scheduled for February 26, 2003. No answer to the complaint has yet been filed.

            We and Tanox Biosystems, Inc. (or Tanox) are parties to a July 1996 Settlement and Cross-Licensing Agreement relating to the development and manufacture of certain antibody products directed towards immunoglobin E, including Xolair and Hu-901. On February 20, 2002, Tanox filed an amended demand in an ongoing arbitration proceeding between Genentech and Tanox that is being conducted by the American Arbitration Association in San Francisco. In its amended demand, Tanox has claimed breach of the July 1996 Agreement, conversion, tortious interference, unjust enrichment, and unfair competition by Genentech, and requests injunctive relief as well as monetary damages "many times in excess of $100,000,000." On March 14, 2002, Genentech denied all of Tanox's claims, and counterclaimed for breach of contract, theft of trade secrets, misappropriation, breach of confidence, interference with contract, and interference with econ omic expectancies by Tanox. Genentech requested injunctive relief and monetary damages. On October 16, 2002, Tanox announced that in a dispute between it and Novartis, an arbitration panel ruled that Tanox is not entitled to develop independently the Hu-901 antibody product. The Novartis/Tanox panel also ruled that Tanox is entitled to receive certain know-how from Novartis. Tanox contends in its dispute against Genentech that it is entitled to similar information from Genentech. The effect of the October 16 ruling from the Novartis/Tanox arbitration, if any, on Tanox's claims against Genentech cannot be determined since it has not yet been resolved by the arbitrators in the Tanox/Genentech proceedings. The arbitration hearing began on January 13, 2003 and is ongoing.

            We and Pharmacia AB are parties to a 1978 agreement relating to Genentech's development of recombinant human growth hormone products, under which Pharmacia is obligated to pay Genentech royalties on sales of Pharmacia's growth hormone products throughout the world. Pharmacia filed a Request for Arbitration with the International Chamber of Commerce (or ICC) to resolve several disputed issues between Genentech and Pharmacia under the 1978 agreement. One of the claims made by Pharmacia is for a refund of some of the royalties previously paid to Genentech for sales of Pharmacia's growth hormone products in certain countries. On February 14, 2002, the ICC issued a decision in Genentech's favor on that claim, ruling that no refund of royalties is due to Pharmacia. On August 8, 2002, the ICC issued a further decision in Genentech's favor on all remaining claims that had been made by Pharmacia.

            On May 28, 1999, GlaxoSmithKline plc (or Glaxo) filed a patent infringement lawsuit against us in the U.S. District Court in Delaware. The suit asserted that we infringe four U.S. patents owned by Glaxo. Two of the patents relate to the use of specific kinds of antibodies for the treatment of human disease, including cancer. The other two patents asserted against us relate to preparations of specific kinds of antibodies which are made more stable and the methods by which such preparations are made. After a trial, the jury hearing the lawsuit unanimously found that our Herceptin and Rituxan antibody products do not infringe the patents and therefore that Genentech is not required to

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pay royalties to Glaxo. The jury also unanimously found that all of the patent claims that Glaxo asserted against Genentech were invalid. Glaxo filed an appeal of the jury's verdict with the U.S. Court of Appeals for the Federal Circuit ("CAFC Appeal"). The oral argument of the appeal took place on February 6, 2002. Genentech's claim against Glaxo for inequitable conduct and other related issues remained pending before the District Court.

            On September 14, 2000, Glaxo filed another patent infringement lawsuit against us in the U.S. District Court in Delaware, alleging that we are infringing U.S. Patent No. 5,633,162 owned by Glaxo. The patent relates to specific methods for culturing Chinese Hamster Ovary cells. The complaint failed to specify which of our products or methods of manufacture allegedly infringed that patent. However, the complaint made a general reference to Genentech's making, using and selling "monoclonal antibodies," and so we believed that the suit related to our Herceptin and Rituxan antibody products. We filed our answer to Glaxo's complaint, and in our answer we also stated counterclaims against Glaxo. This lawsuit was separate from and in addition to the Glaxo suit mentioned above.

            In September 2002, we and Glaxo agreed to a settlement of both of the above-referenced lawsuits, pursuant to which we and Glaxo dismissed with prejudice all the claims and/or counterclaims made by each of us in the lawsuits and dismissed with prejudice the CAFC Appeal. The settlement resolved and ended all the patent infringement claims that Glaxo made against Genentech in the above-referenced lawsuits.

            On March 13, 2001, Genentech filed a complaint in the United States District Court in Delaware against Genzyme Corporation seeking a declaratory judgment that Genentech does not infringe Genzyme's U.S. Patent No. 5,344,773 and that Genentech has not breached a 1992 Patent License and Interference Settlement Agreement between Genentech and Genzyme relating to that patent. Genentech was seeking a declaration that Genzyme's patent is not infringed by any Genentech product, that the patent is invalid, that Genzyme be enjoined from further legal action against Genentech regarding the patent, and that Genentech has not breached the 1992 Agreement.

            On or about April 6, 2001, Genzyme filed a complaint in the same court against Genentech alleging that our TNKase product infringes the Genzyme patent and that Genentech is in breach of the 1992 Agreement referred to above. Genzyme's complaint also alleged willful infringement and reckless breach of contract by Genentech. Genzyme was seeking to enjoin Genentech from infringing the patent, and also was seeking compensatory damages for the alleged infringement and breach of contract, additional special damages, and attorneys' fees and costs. In pre-trial proceedings, Genzyme indicated its intention to present evidence in the trial that the compensatory damages for the alleged infringement and breach of contract should equal $41.9 million. Genentech disputed that any damages were owed and also disputed the amount of compensatory damages for which Genzyme indicated an intention to present evidence in the trial.

            In November 2002, we and Genzyme agreed to a settlement of both of the above-referenced lawsuits, pursuant to which we and Genzyme dismissed with prejudice all the claims and/or counterclaims made by each of us in the lawsuits.

            In 2002, we recognized $543.9 million of litigation-related special charges. These special charges were comprised of the City of Hope Medical Center (or City of Hope) litigation judgment in the second quarter of 2002, including accrued interest and costs related to obtaining a surety bond, and certain other litigation-related matters. In conjunction with the City of Hope judgment, we arranged to post a $600.0 million surety bond and as part of this arrangement, we were required to pledge $630.0 million in cash and investments to secure the bond. The $630.0 million cash and investments were classified as restricted cash on our consolidated balance sheet at December 31, 2002. In addition, we accrued $9.1 million of royalty expenses related to the City of Hope judgment, which was reflected in marketing, general and administrative expenses. We expect that we will continue to incur interest charges on the judgment and service fees on the surety bond each quarter through the process of appealing the City of Hope trial results. These special charges represent our estimate of the costs for the current resolution of these matters and are included in other long-term liabilities in the consolidated balance sheet at December 31, 2002. We developed this estimate in consultation with outside counsel handling our defense in these matters and is based upon the facts and circumstances of these matters known to us at that time. The amount of our liability for certain of these matters could exceed or be less than the amount of our current estimate, depending on the outcome of these matters.

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The amount of cash, if any, paid in connection with the City of Hope matter will depend on the outcome of the appeal. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for further information regarding our litigations.

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 (ages as of December 31, 2002) and positions with the Company are as follows:

Name	Age	Position
Arthur D. Levinson, Ph.D.*	52	Chairman, President and Chief Executive Officer
Susan D. Desmond-Hellmann, M.D.*	45	Executive Vice President-Development and    Product Operations and Chief Medical Officer
Stephen G. Juelsgaard, J.D.*	54	Executive Vice President, General Counsel and Secretary
Louis J. Lavigne, Jr.*	54	Executive Vice President and Chief Financial Officer
Myrtle S. Potter*	44	Executive Vice President-Commercial Operations and    Chief Operating Officer
David A. Ebersman	33	Senior Vice President-Product Operations
Robert L. Garnick, Ph.D.	53	Senior Vice President-Regulatory, Quality and Compliance
Richard H. Scheller, Ph.D.*	49	Senior Vice President-Research
John M. Whiting	47	Vice President, Controller and Chief Accounting Officer

*  Members of the Executive Committee of the Company.

            All officers are elected annually by the Board of Directors. There is no family relationship between or among any of the officers or directors.

Business Experience

            Arthur D. Levinson, Ph.D. was appointed Chairman of the Board of Directors in September 1999 and was elected President and 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 and Senior Vice President in January 1993. Dr. Levinson was formerly on the editorial boards of "Molecular Biology and Medicine" and "Molecular and Cellular Biology," and is active in the American Society of Microbiology, the New York Academy of Sciences, the American Association for the Advancement of Science, and the American Society for Biochemistry and Molecular Biology. From 1977 to 1980, Dr. Levinson was a Postdoctoral Fellow in the Department of Microbiol ogy at the University of California, San Francisco. In 1977, Dr. Levinson received his Ph.D. in Biochemistry from Princeton University. Dr. Levinson also serves as a member of the Board of Directors of Apple Computer, Inc.

            Susan D. Desmond-Hellmann, M.D. was appointed Executive Vice President, Development and Product Operations in September 1999. She has served as Chief Medical Officer since December 1996. She previously served as Senior Vice President, Development from December 1997 until 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.

            Stephen G. Juelsgaard, J.D. was appointed Executive Vice President in September 2002, Vice President and General Counsel in July 1994 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 and Senior Vice President from April 1998 to September 2002.

            Louis J. Lavigne, Jr. was appointed Executive Vice President of Genentech in March 1997 and Chief Financial Officer in August 1988. He previously served as Senior Vice President from July 1994 to March 1997 and as Vice President from July 1986 to July 1994. Mr. Lavigne joined Genentech in July 1982 from Pennwalt Corporation and became Controller in May 1983 and an officer of Genentech in February 1984.

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            Myrtle S. Potter was appointed Executive Vice President, Commercial Operations and Chief Operating Officer in May 2000. Prior to joining Genentech, she held the positions of President of U.S. Cardiovascular/Metabolics from November 1998 to May 2000, Senior Vice President of Sales, U.S. Cardiovascular/Metabolics from March 1998 to October 1998, Group Vice President of Worldwide Medicines Group from February 1997 to February 1998 and Vice President of Strategy and Economics, U.S. Pharmaceutical Group from April 1996 to January 1997 at Bristol-Myers Squibb. Previously, she held the position of Vice President of the Northeast Region Business Group at Merck and Company from October 1993 to March 1996.

            David A. Ebersman was appointed Senior Vice President, Product Operations in May 2001. 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.

            Robert L. Garnick, Ph.D. was appointed Senior Vice President, Regulatory, Quality and Compliance in February 2001. Previously, he served as Vice President, Regulatory Affairs from February 1998 to February 2001, Vice President, Quality from April 1994 to February 1998, Senior Director, Quality Control from 1990 to 1994 and Director, Quality Control from 1988 to 1990. He joined Genentech in August 1984 from Armour Pharmaceutical, where he held various positions.

            Richard H. Scheller, Ph.D. was appointed Senior Vice President, Research in March 2001. 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 esteemed position of professor of Molecular and Cellular Physiology in 1993 and as an investigator in the Howard Hughes Medical Institute in 1994.

            John M. Whiting was appointed Vice President in January 2001 and Controller and Chief Accounting Officer in October 1997. He previously served as Director, Financial Planning and Analysis from January 1997 to October 1997 and as Director, Operations, Financial Planning and Analysis from December 1996 to January 1997. He also served in a variety of financial positions at Genentech from 1989 to 1996. Prior to joining Genentech, he served as Senior Audit Manager at Arthur Young.

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PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

             See the footnotes labeled "Redemption of Our Special Common Stock," "Relationship With Roche" and "Capital Stock" in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K.

      Stock Trading Symbol:  DNA

      Stock Exchange Listing

            Our Common Stock trades on the New York Stock Exchange under the symbol "DNA." No dividends have been paid on the Common Stock. We currently intend to retain all future income for use in the operation of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

      Common Stockholders

            As of December 31, 2002, there were approximately 2,036 stockholders of record of our Common Stock, one of which is Cede & Co., a nominee for Depository Trust Company (or 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

	Common Stock
	2002				2001
	High		Low		High		Low
4th Quarter	$	36.85	$	29.50	$	58.95	$	39.50
3rd Quarter		37.49		25.10		58.10		37.99
2nd Quarter		52.44		30.02		58.19		40.00
1st Quarter		55.15		45.72		84.00		38.50

      Stock Repurchases

            See the "Capital Stock" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for information on our stock repurchases.

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Item 6. SELECTED FINANCIAL DATA

            The following selected consolidated financial information has been derived from the audited consolidated financial statements. The information below is not necessarily indicative of 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" 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)

	2002			2001			2000			1999							1998
										New Basis (June 30 to December 31)(5)			| | | |	Old Basis (January 1 to June 30)(5)
Total revenues	$	2,719.3		$	2,212.3		$	1,736.4		$	703.8		|	$	697.2			$	1,150.9
Product sales		2,163.6			1,742.9			1,278.3			535.7		|		503.4				717.8
Royalties		365.6			264.5			207.3			96.7		|		92.6				229.6
Contract and other		88.7			74.4			160.4			26.4		|		56.8				114.8
Interest income		101.4			130.5			90.4			45.0		|		44.4				88.7
													|
Net income (loss)	$	63.8	(1)	$	150.3	(2)	$	(74.2)	(4)	$	(1,245.1)	(6)	|	$	87.6	(8)		$	181.9
													|
Basic earnings (loss) per share:	$	0.12		$	0.29		$	(0.14)		$	(2.43)		|	$	0.17			$	0.36
Diluted earnings (loss) per share:		0.12			0.28			(0.14)			(2.43)		|		0.16				0.35
													|
Total assets	$	6,777.3		$	7,146.9		$	6,728.4		$	6,549.8		|		-			$	2,855.4
Long-term debt		-	(3)		-	(3)		149.7			149.7		|		-				150.0
Stockholders' equity		5,338.9			5,919.8			5,674.2			5,269.8	(7)	|		-				2,343.8

___________

	We have paid no dividends.
	All per share amounts reflect two-for-one stock splits that were effected in 2000 and 1999.
(1)	Net income in 2002 includes $543.9 million of litigation-related special charges and $155.7 million of recurring charges related to the Redemption. The special charges were comprised of the City of Hope litigation judgment in the second quarter of 2002, including accrued interest and costs related to obtaining a surety bond, and certain other litigation-related matters. Net income in 2002 also reflects our adoption of Statement of Financial Accounting Standards (or FAS) 141 and 142 on January 1, 2002. As a result of our adoption, reported net income increased by approximately $157.6 million (or $0.30 per share) due to the cessation of goodwill amortization and the amortization of our trained and assembled workforce intangible asset.
(2)	Net income in 2001 includes $321.8 million of recurring charges related to the Redemption, and also reflects a $5.6 million charge (net of tax) as a cumulative effect of a change in accounting principle and changes in fair value of certain derivatives ($10.0 million gain) recorded in contract and other revenues as a result of our adoption of FAS 133 on January 1, 2001.
(3)	The $149.7 million of convertible subordinated debentures was reclassified to current liabilities in 2001 to reflect the March 27, 2002 maturity. We redeemed the debentures in cash at maturity.
(4)	Net loss in 2000 includes recurring charges of $375.3 million related to the Redemption, costs of $92.8 million related to the sale of inventory that was written up at the Redemption and a $57.8 million (net of tax) cumulative effect of a change in accounting principle as a result of our adoption of Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" on January 1, 2000.

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(5)	The June 30, 1999 Redemption created our New Basis of accounting. The Redemption was effective as of June 30, 1999; however, the transaction was reflected as of the end of the day on June 30, 1999 in the financial statements. As such, a vertical black line is inserted to separate the "Old Basis" and "New Basis" presentation. Accordingly, the Old Basis reflects the period January 1 through June 30, 1999, and all periods prior to the Redemption, and the New Basis reflects the period from June 30 through December 31, 1999, and all subsequent periods.
(6)	Net loss for the period from June 30, 1999 to December 1999, New Basis, includes all amounts related to the Redemption of our Special Common Stock transaction. The net loss includes charges of $1,207.7 million related to the Redemption, legal settlements of $180.0 million, recurring charges of $197.7 million related to the Redemption and costs of $93.4 million related to the sale of inventory that was written up at the Redemption.
(7)	Reflects the impact of the Redemption and related push-down accounting of $5,201.9 million of excess purchase price over net book value, net of charges and accumulated amortization of goodwill and other intangible assets at December 31, 1999.
(8)	Net income for the period from January 1, 1999 to June 30, 1999, Old Basis, includes charges of $50.0 million related to legal settlements.

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

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

            The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. The following are critical accounting policies important to our financial condition and results of operations presented in the financial statements and require management to make judgments, assumptions and estimates that are inherently uncertain:

Operating Leases

            We lease various real properties under operating leases that generally require us to pay taxes, insurance, maintenance and minimum lease payments. Four of our operating leases are commonly referred to as "synthetic leases." A synthetic lease is a form of off-balance sheet financing under which an unrelated third-party funds 100% of the costs for the acquisition and/or construction of the property and leases the asset to a lessee (Genentech), and at least 3% of the third-party funds represent at-risk equity. As the lessee, our synthetic leases are treated as operating leases for accounting purposes and financing leases for tax purposes. We periodically review the fair values of the properties we lease in order to determine potential accounting ramifications. Adverse changes in the fair value of the properties we lease and changes in the equity participation of third-parties could affect the classification of these leases from operating to financing for accounting purposes. In addition, our adoption of the Financial Accounting Standards Board's Interpretation No. 46, "Consolidation of Variable Interest Entities," and the consolidation of our synthetic leases may have a material impact on our financial condition and results of operations. See the "Liquidity and Capital Resources" section below for a more complete discussion of our synthetic leases.

Legal Contingencies

            We are currently involved in certain legal proceedings as discussed in the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K. As of December 31, 2002, we have accrued our estimate of the costs for the current resolution of these matters. We developed these estimates in consultation with outside counsel handling our defense in these matters and it is based upon the facts and circumstances of these matters known to us at that time. 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 outcome of these matters.

Revenue Recognition

• We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Allowances are established for estimated uncollectible amounts, product returns and discounts.

• We receive royalties from licensees, which are based on third-party sales of licensed products or technologies. Royalties are recorded as earned in accordance with the contract terms when third-party results can be reliably measured and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends.

• Contract revenue for research and development (or R&D) is recorded as earned based on the performance requirements of the contract. Non-refundable license fees for which no further performance obligations exist, and there is no continuing involvement by Genentech, are recognized on the earlier of when the payments are received or when collection is assured.

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Revenue from non-refundable upfront license fees and certain guaranteed payments where we continue involvement through development collaboration or an obligation to supply product is recognized ratably over the development period when, at the execution of the agreement, the development period involves significant risk due to the incomplete stage of the product's development, or over the period of the manufacturing obligation, when, at the execution of the agreement, the product is approved for marketing, or nearly approvable, and development risk has been substantially eliminated. Deferred revenues related to manufacturing obligations are recognized on a straight-line basis over the longer of the contractual term of the manufacturing obligation or the expected period over which we will supply the product.

Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements. Revenue under R&D cost reimbursement contracts is recognized as the related costs are incurred.

Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

Research and Development Expenses

            Research and development (or R&D) expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and other outside service fees, 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 fund R&D at other companies and research institutions under agreements, which we can generally terminate at will. R&D expenses also include activities such as product registries and investigator sponsored trials. R&D costs, including some upfront fees and milestones paid to collaborative partners, are expensed as incurred. The timing of upfront fees and milestone payments in the future may cause variability in our future R&D expenses.

Income Taxes

            Income tax expense (benefit) is based on pretax financial accounting income (loss) under the liability method. 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 (benefit) for income taxes. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of R&D spending, future levels of capital expenditures, and changes in overall levels of pretax earnings. We believe that our reserves for these uncertainties are adequate.

Inventories

            Our inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach, which approximates the first-in first-out method. If inventory costs exceeds expected market value due to obsolescence or unmarketability, reserves are recorded for the difference between the cost and the market value. These reserves are determined based on significant estimates.

            Inventories consist of currently marketed products and product candidates awaiting regulatory approval, which are capitalized based on management's judgment of probable near term commercialization. We would be required to expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other potential factors, a denial or delay of approval by the necessary regulatory bodies. At December 31, 2002, net capitalized inventories related to Xolair and Raptiva, which have not yet received regulatory approval, were $36.0 million.

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Marketable Equity Securities and Other

            Marketable equity securities and other debt securities are carried at fair value with unrealized gains and losses included in accumulated other comprehensive income in stockholders' equity. If the fair value of a security has declined below its carrying value for each trading day for six consecutive months or if the decline is due to a significant adverse event, the impairment is considered to be other-than-temporary. An other-than-temporary decline in fair value of a debt or equity security of a biotechnology company is written down to its estimated fair value with a charge to marketing, general and administrative expenses. Other-than-temporary declines in fair value of all other short-term or long-term marketable securities are charged against interest income. Some of the factors we consider in determining whether a significant adverse event has occurred with an issuer include, among other things, unfavorable cli nical trial results and the prospect for new products, a denial of a product approval by a regulatory body, the termination of a major collaborative partnership and the liquidity position and financing activities of the issuer. The determination of whether a decline in fair value is other-than-temporary requires significant judgment, and can have a material impact on our financial results.

Nonmarketable Equity Securities

            Nonmarketable equity securities are carried at cost. We periodically monitor the liquidity position and financing activities of the respective issuers to determine if impairment write-downs are necessary. In the event that impairment write-downs are taken and subsequently recovered upon the sale of a security or otherwise, our financial results will be favorably impacted.

RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)

            This discussion of our Results of Operations contains forward-looking statements regarding royalties, sales of Rituxan, cost of sales, Research and Development (or R&D) expenses, Marketing, General and Administrative (or MG&A) expenses, collaboration profit sharing, timing of completion of phases for projects in product development and costs related to the completion of in-process projects. Actual results could differ materially For a discussion of the risks and uncertainties associated with the timing of completion of product development phases, costs related to the completion of in-process projects and R&D expenses, see "The Successful Development of Biotherapeutics is Highly Uncertain," "We May Be Unable to Obtain or Maintain Regulatory Approvals for Our Products," "Difficulties or Delays in Product Manufacturing Could Harm Our Business," "Protecting Our Proprietary Rights Is Difficult and Costly" and "We May Be Unable to Retain Skilled Personnel and Maintain Key Relationships" sections of "Forward-Looking Information and Cautionary Factors That May Affect Future Results" (or "Forward-Looking Information") below; for sales of Rituxan, costs of sales, MG&A and collaboration profit sharing expenses, see all of the foregoing and "We Face Growing and New Competition," "Other Competitive Factors Could Affect Our Product Sales," "The Outcome of, and Costs Relating to, Pending Litigation are Uncertain," "We May Incur Material Product Liability Costs" and "Insurance Coverage is Increasingly More Difficult to Obtain or Maintain" sections of Forward-Looking Information below and for royalties, see "Our Royalty and Contract Revenues Could Decline" section of Forward-Looking Information below.

							Annual Percent Change
Revenues	2002		2001		2000		02/01		01/00
Revenues	$	2,719.3	$	2,212.3	$	1,736.4	23	%	27	%

      Total Revenues

            Total revenues for 2002 reached $2,719.3 million, a 23% increase from 2001 primarily due to higher product sales, royalties and contract and other revenues, partially offset by lower interest income. Total revenues for 2001 were $2,212.3 million, a 27% increase from 2000 primarily due to higher product sales, royalties and interest income, partially offset by lower contract and other revenues. These revenue changes are further discussed below.

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										Annual Percent Change
Product Sales	2002			2001			2000			02/01		01/00
Rituxan	$	1,162.9		$	818.6		$	444.1		42	%	84	%
Herceptin		385.2			346.7			275.9		11		26
Growth Hormone		297.2			250.2			226.6		19		10
Thrombolytics		180.2			197.1			206.2		(9)		(4)
Pulmozyme		138.1			123.0			121.8		12		1
Actimmune		-			7.3			3.7		(100)		97
Total product sales	$	2,163.6		$	1,742.9		$	1,278.3		24	%	36		%
Percent of total revenues		80	%		79	%		74	%

      Total Product Sales

            Total net product sales were $2,163.6 million in 2002, an increase of 24% from 2001 primarily as a result of higher sales of our bio-oncology products, Rituxan and Herceptin, and higher sales of our growth hormone and Pulmozyme products. Increased sales volume accounted for a 20% increase, or $343.3 million in 2002, and higher sales prices accounted for the remainder of the increase. Total net product sales were $1,742.9 million in 2001, an increase of 36% from 2000 primarily as a result of higher sales of Rituxan and Herceptin and of our growth hormone products. Increased sales volume accounted for a 33% increase, or $422.0 million in 2001, and higher sales prices accounted for the remainder of the increase. Product sales in connection with our licensing agreement with F. Hoffmann-La Roche (or Hoffmann-La Roche) were $117.3 million in 2002, $76.3 million in 2001, and $67.4 million in 2000. See "Relationship With Roche" below for further information about our licensing agreement with Hoffmann-La Roche.

      Rituxan

            Net sales of Rituxan were $1,162.9 million in 2002, a 42% increase from 2001, and $818.6 million in 2001, an 84% increase from 2000. The increase in 2002 was primarily due to increased use of the product for the treatment of B-cell non-Hodgkin's lymphoma. The increase was also due to a lesser extent, a price increase in March 2002. The increase in use of the product was for both approved and unapproved uses of the product. The increase in 2001 was primarily due to increased market penetration for the treatment of B-cell non-Hodgkin's lymphoma and chronic lymphocytic leukemia. In addition, sales of Rituxan increased in 2001 and in the last quarter of 2000 due to the announcement at the American Society of Hematology of the results of a study conducted by the Groupe d'Etude des Lymphomes de l'Adulte (or GELA) reporting on the benefits of using Rituxan, combined with standard chemotherapy, for treating aggressive non - -Hodgkin's lymphoma. We expect these factors to continue to positively impact Rituxan sales in 2003, however, the rate of sales growth is expected to be more modest than that seen in 2002.

            We co-developed Rituxan with IDEC Pharmaceuticals Corporation (or IDEC) from which we license Rituxan. IDEC and Genentech jointly promote Rituxan in the United States. Hoffmann-La Roche markets rituximab under the tradename MabThera® in the European Union. Hoffmann-La Roche holds marketing rights for Rituxan in Canada and for MabThera outside of the U.S., excluding Japan, and has agreed to pay us royalties and cost plus a mark-up on the product we supply them. We receive net sales of MabThera from Zenyaku Kogyo Co., Ltd., a pharmaceutical company that markets MabThera in Japan in conjunction with Hoffmann-La Roche and its Japanese subsidiary, Chugai, through a separate marketing arrangement with Zenyaku.

      Herceptin

            Net sales of Herceptin were $385.2 million in 2002, an 11% increase from 2001, and $346.7 million in 2001, a 26% increase from 2000. The increase in 2002 was primarily due to an increase in first-line use in the metastatic breast cancer market and the extension of the average treatment duration. While there was a price increase on sales of Herceptin in the U.S. in March 2002, this increase was partially offset by a decrease in the price at which we sell the product to Hoffmann-La Roche. The net sales increase in 2001 was primarily due to increased penetration in the

25

metastatic breast cancer market. In addition, the increase in 2001 included approximately $19.5 million related to a change in our distribution process for Herceptin. During the fourth quarter of 2001, we began shipping Herceptin to drug wholesaler distributors rather than direct shipment to customers. As is typical with this process, Herceptin was purchased by the wholesalers in order to stock sufficient inventory to assume product distribution. The initial stocking orders resulted in unusually higher sales in the fourth quarter of 2001 that may not be experienced in future periods.

            We have granted Hoffmann-La Roche exclusive marketing rights to Herceptin outside of the United States. Hoffmann-La Roche markets Herceptin for the treatment of HER2-positive metastatic breast cancer in Europe and Japan. We receive royalties from Hoffmann-La Roche for these European and Japanese Herceptin product sales.

            In late September 2002, Hoffmann-La Roche received approval from the European Committee for Proprietary Medicinal Products to manufacture Herceptin at its Penzberg, Germany facility. Starting in 2003, the Penzberg facility will become the primary site for the manufacture of Herceptin to supply the ex-U.S. territories. This will affect our ex-U.S. sales to Hoffmann-La Roche starting in the first quarter of 2003. During 2003, we expect our sales of Herceptin to Hoffmann-La Roche to decline. However, we will continue to receive royalties from their ex-U.S. Herceptin sales. In 2002, ex-U.S. sales of Herceptin to Hoffmann-La Roche were $40.3 million.

      Growth Hormone

            Net sales of our four growth hormone products, Nutropin Depot, Nutropin AQ, Nutropin and Protropin, were $297.2 million in 2002, an increase of 19% from 2001. Net sales were $250.2 million in 2001, an increase of 10% from 2000. The increase in 2002 was primarily due to our focus on new patient starts, dose optimization, higher dosing during puberty and an incremental increase in the length of therapy and, to a lesser extent, a price increase in January 2002. In late April 2002, the U.S. Food and Drug Administration (or FDA) approved Nutropin AQ Pen, a new delivery system for Nutropin AQ. The Nutropin AQ Pen was launched in July 2002. The net sales growth in 2001 primarily reflects an increase in adult new patient starts, patients staying on the product longer and to a lesser extent, the effects of a price increase in January 2001 and an increase in sales of Nutropin Depot. Nutropin Depot is a long-acting dosage f orm of recombinant growth hormone approved for pediatric growth hormone deficiency.

      Thrombolytics

            Combined net sales of our three thrombolytic products, Activase, TNKase and Cathflo Activase, were $180.2 million in 2002, a decrease of 9% from 2001. Net sales of our three thrombolytic products were $197.1 million in 2001, a decrease of 4% from 2000 on net sales of just two products, Activase and TNKase. The decreases in Activase and TNKase sales in 2002 and 2001 were attributable to the decline in the overall size of the thrombolytic market as a result of increasing use of mechanical reperfusion as well as early intervention with other therapies in the treatment of acute myocardial infarction and preventative therapies. Our sales were also impacted by continued competition from Centocor, Inc.'s Retavase® (reteplase) and its aggressive price discounting. These decreases were offset in part by new sales of Cathflo Activase in 2002. Cathflo Activase received FDA approval and was launched in September 2001. Th ese factors are expected to continue to impact sales of our thrombolytic products in 2003.

      Pulmozyme

            Net sales of Pulmozyme were $138.1 million in 2002, a 12% increase over 2001. This increase primarily reflects an increased focus on aggressive treatment of cystic fibrosis early in the course of the disease and, to a lesser extent, a price increase in December 2001. Net Pulmozyme sales were $123.0 million in 2001, a slight increase over 2000, which primarily reflects fluctuations in distributor ordering patterns.

      Actimmune

            Net sales of Actimmune were $7.3 million in 2001 and $3.7 million in 2000. As of January 1999, we no longer sold Actimmune directly in the U.S. We sold packaged drug product at cost plus a mark-up through December 31, 2001 to InterMune Pharmaceuticals, Inc., who holds the U.S. marketing and development rights to interferon gamma, including Actimmune. As of January 1, 2002, we no longer manufacture, use or sell Actimmune.

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Royalties, Contract and Other, and Interest Income							Annual Percent Change
	2002		2001		2000		02/01		01/00
Royalties	$	365.6	$	264.5	$	207.3	38	%	28	%
Contract and other		88.7		74.4		160.4	19		(54)
Interest income		101.4		130.5		90.4	(22)		44

      Royalties

            Royalty income was $365.6 million in 2002, an increase of 38% from 2001. Royalty income was $264.5 million in 2001, an increase of 28% from 2000. The increase in 2002 was due to higher third-party sales by various licensees, primarily Hoffmann-La Roche for higher sales of Herceptin, including a one-time milestone (see below), and Rituxan products. The increase was also due to new royalties earned under a patent that was recently issued to Genentech and our collaborator relating to methods using recombinant DNA technology to make antibodies, and gains related to foreign currency exchange rates. The increase in 2001 was primarily due to higher third-party sales by Hoffmann-La Roche and various licensees, offset in part by lower sales by several licensees including one that had been addressing manufacturing issues which had temporarily impacted their ability to manufacture product for sale. Royalty income from Hoffman n-La Roche totaled $152.6 million in 2002, $87.9 million in 2001, and $46.8 million in 2000.

            As part of our licensing and marketing agreement, in the fourth quarter of 2002, we received a one-time royalty milestone of $10.0 million as a result of Hoffmann-La Roche reaching $200.0 million in net sales of Herceptin outside of the U.S.

            We expect that in 2003, the increase in royalty income will be at a slower rate than 2002. This is partially due to the expiry of certain royalties and the one-time Herceptin milestone received in 2002.

            Cash flows from royalty income include revenues denominated in foreign currencies. We currently purchase simple foreign currency put option contracts (or options) to hedge these foreign royalty cash flows. The term of these options is generally one to five years. See the "We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and Foreign Economic Conditions" section of the Forward-Looking Information below for a discussion of market risks related to these financial instruments.

      Contract and Other Revenues

            Contract and other revenues were $88.7 million in 2002, an increase of 19% from 2001. Contract and other revenues were $74.4 million in 2001, a decrease of 54% from 2000. The increase in 2002 was primarily due to higher revenues from collaborators, including Hoffmann-La Roche, a new out-licensing arrangement, and higher gains from the sale of biotechnology equity securities. The decrease in 2001 from 2000 was primarily due to lower gains from the sale of biotechnology equity securities, partially offset by higher contract revenues and the recognition of $10.0 million in gains related to the change in the time value of certain hedging instruments in the first quarter of 2001. (See the "Derivative Financial Instruments" note of the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for more information on our derivative and hedging activities.) The increase in the contract revenue compon ent of this line in 2001 was due to the recognition of $21.2 million of revenues from collaborators that were previously recognized then deferred under the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (or SAB 101), offset in part by lower contract revenues from third-party collaborators.

            Contract revenues from Hoffmann-La Roche, including reimbursement for ongoing development expenses after the option exercise date, totaled $7.6 million in 2002, $5.8 million in 2001, and $3.5 million in 2000. Contract revenues from Novartis AG, including reimbursements for ongoing development expenses, totaled $5.7 million in 2002. We had no such revenues from Novartis in 2001 and 2000.

            We expect quarterly fluctuations in contract and other revenues depending on milestone payments, the number of new contract arrangements, Hoffmann-La Roche's potential opt-ins for products and sales of biotechnology equity securities.

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      Interest Income

            Interest income was $101.4 million in 2002, a 22% decrease from 2001. Interest income was $130.5 million in 2001, a 44% increase from 2000. The decrease in 2002 was primarily due to lower portfolio yields and, to a lesser extent, lower average portfolio balances. The lower portfolio balances were primarily due to the repurchase of 18.2 million shares of our common stock at a cost of approximately $692.8 million during 2002. (See the "Capital Stock" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K.) The increase in 2001 was primarily due to higher average portfolio balances. Our fixed income portfolio includes cash and cash equivalents, short-term and long-term investments, excluding marketable equity securities. Interest income will depend on fluctuations of interest rates, our use of cash for working capital and repurchasing shares of our common stock and potential all iances in 2003.

										Annual Percent Change
Costs and Expenses	2002			2001			2000			02/01		01/00
Cost of sales	$	441.6		$	354.5		$	364.9		25	%	(3)	%
Research and development		623.5			526.2			489.9		18		7
Marketing, general and administrative		573.3			474.4			368.2		21		29
Collaboration profit sharing		350.7			246.7			128.8		42		92
Recurring charges related to redemption		155.7			321.8			375.3		(52)		(14)
Special charges: litigation-related		543.9			-			-		100		-
Interest expense		0.8			5.7			5.3		(86)		8
Total costs and expenses	$	2,689.5		$	1,929.3		$	1,732.4		39	%	11	%
Percent of total revenues		99	%		87	%		100	%
COS as a % of product sales		20			20			29
R&D as % of total revenues		23			24			28
MG&A as % of total revenues		21			21			21

      Cost of Sales

            Cost of sales (or COS) was $441.6 million in 2002, an increase of 25% from 2001. COS as a percentage of product sales in 2002 was 20%, which was comparable to 2001. COS was $354.5 million in 2001, a decrease of 3% from 2000. COS as a percentage of product sales was 20% in 2001, a decrease from 29% in 2000. The decrease in 2001 from 2000 primarily reflects a decline in the costs recognized on the sale of inventory that was written up at the Redemption due to push-down accounting, lower reserves for nonuseable inventory, a change in the product mix and lower overall costs due to manufacturing efficiencies. The inventory written up at the Redemption was sold by December 31, 2000.

            As a result of Hoffmann-La Roche's Penzberg facility receiving approval in September 2002 to manufacture Herceptin to supply the ex-U.S. territories, our ex-U.S. Herceptin sales to Hoffmann-La Roche will decline starting in the first quarter of 2003. Accordingly, our costs as a percent of sales is expected to decline due to lower ex-U.S. Herceptin sales, which generate lower gross margins.

            COS for products sold to Hoffmann-La Roche totaled $99.1 million in 2002, $63.8 million in 2001, and $56.7 million in 2000.

      Research and Development

            Research and development (or R&D) expenses in 2002 were $623.5 million, an increase of 18% from 2001. R&D expenses in 2001 were $526.2 million, an increase of 7% from 2000. The increase in 2002 was largely due to higher clinical development expenses related to products primarily in late-stage development, including Xolair, Raptiva, Avastin and Tarceva, as well as expenses related to rhuFab V2 (for age-related macular degeneration). The increase in 2002 was also due to increased manufacturing of development products, including Avastin, and process implementation for contract manufacturing of ENBREL (under a manufacturing agreement with Immunex described

28

below). These increases were offset in part by lower in-licensing expenses. The increase in 2001 was primarily due to higher expenses related to late-stage clinical trials, higher repairs and maintenance expenses, higher reserves for pre-launch commercial inventory, offset in part by lower in-licensing expenses.

            The major components of R&D expenses for 2002, 2001 and 2000 were as follows (in millions):

Research and Development	2002		2001		2000
Research	$	131.9	$	122.5	$	118.4
Development		462.6		362.9		309.6
In-licensing		29.0		40.8		61.9
Total	$	623.5	$	526.2	$	489.9

            R&D is expected to trend higher in 2003 due to increased spending on development and in-licensing activities.

            In-licensing expenses in 2002 included a $4.0 million upfront payment for the purchase of in-process research and development (or IPR&D) under an in-licensing agreement with a collaborator.

            In-licensing expenses in 2001 included $19.0 million in upfront payments for the purchase of IPR&D under in-licensing agreements with collaborators. Of this amount, $15.0 million relates to an upfront payment to OSI Pharmaceuticals, Inc. (or OSI) under an agreement with us, OSI and Hoffmann-La Roche for the global co-development and commercialization of Tarceva for the potential treatment of solid tumor cancers. One of the members of the Board of Directors of OSI is also a member of the Board of Directors of Genentech.

            In-licensing expenses in 2000 included a $25.0 million upfront payment to Actelion Ltd., for the purchase of IPR&D under an agreement with Actelion to develop and co-promote Tracleer in the U.S. for the potential treatment of acute and chronic heart failure. Actelion led the development efforts for Tracleer. In February 2002, Genentech and Actelion announced that the Phase III clinical trial of Tracleer did not meet its primary objective of significantly improving symptoms associated with chronic heart failure. We have discontinued our development efforts in support of Tracleer. In-licensing expenses in 2000 also included a $15.0 million payment for the purchase of IPR&D under an agreement with Actelion for the rights to develop and co-promote Veletri in the U.S. for the potential treatment of acute heart failure. In April 2001, Genentech and Actelion announced that the second pivotal Phase III clinical tr ial of Veletri did not meet its primary objective of significantly improving symptoms associated with acute heart failure. Actelion is conducting an additional Phase III trial of Veletri in acute heart failure. We have discontinued our development efforts in support of Veletri.

            We determined that the above acquired IPR&D was not yet technologically feasible and that the acquired technology had no future alternative uses.

            Biopharmaceutical products that we develop internally generally take 10 to 15 years (an average of 12 years) to research, develop and bring to market a new prescription medicine in the United States. Drug development in the U.S. is a process that includes several steps defined by the FDA. The process begins with the filing of an Initial Drug Application (or IND) which, if successful, allows opportunity for clinical study of the potential new medicine. Clinical development typically involves three phases of study: Phase I, II, and III, and we have found that it accounts for an average of seven years of a drug's total development time. The most significant costs associated with clinical development are the Phase III trials as they tend to be the longest and largest studies conducted during the drug development process. The successful development of our products is highly uncertain. An estimation of product completi on dates and completion costs can vary significantly for each product and are difficult to predict. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could have a material adverse affect on our business. In responding to a New Drug Application (or NDA) or a Biologic License Application (or BLA), the FDA may grant marketing

29

approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. We can not assure you that any approval required by the FDA will be obtained on a timely basis, if at all. For additional discussion of the risks and uncertainties associated with completing development of potential products, see "The Successful Development of Biotherapeutics is Highly Uncertain" section of our Forward-Looking Information below.

            Below are a summary of products and the related stages of development for each product in clinical development:

Product	Description/Indication	Phase of Development in U.S.	Collaborator	Estimate of Completion of Phase*
Xolair (Anti-IgE antibody)	allergic asthma	Awaiting regulatory approval	Novartis Pharmaceuticals Corporation and Tanox	2003
Raptiva (Anti-CD11a    antibody)	psoriasis	Awaiting regulatory approval	XOMA Ltd. and Serono S.A.	2003
Rituxan antibody	intermediate- and high-grade non-Hodgkin's lymphoma	Phase III	F. Hoffmann-La Roche and IDEC Pharmaceuticals	2003
Avastin (Anti-VEGF    antibody)	colorectal cancer; non-small cell lung cancer; first-line metastatic breast cancer	Phase III		2003-2007
Herceptin antibody	adjuvant early-stage breast cancer	Phase III	F. Hoffmann-La Roche and cooperative groups	2006-2007
Tarceva	non-small cell lung cancer, pancreatic cancer, other solid tumor cancers	Phase III	OSI Pharmaceuticals and F. Hoffmann-La Roche	2003 - 2005
Nutropin Depot	Adults with growth hormone deficiency	Phase III	Alkermes, Inc.	2003
Avastin (Anti-VEGF    antibody)	renal cell carcinoma	Preparing for Phase III		2003
rhuFab V2 AMD	age-related macular degeneration	Preparing for Phase III		2003
Rituxan	rheumatoid arthritis (or RA)	Preparing for Phase II and III	F. Hoffmann-La Roche and IDEC Pharmaceuticals	2003
Raptiva (Anti-CD11a    antibody)	rheumatoid arthritis	Phase II	XOMA Ltd. and Serono S.A.	2003
MLN-02 (formerly LDP-02)	inflammatory bowel diseases	Phase II	Millennium Pharmaceuticals, Inc.	2003

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Rituxan ITP	idiopathic thrombocytopenic purpura	Preparing for Phase II	F. Hoffmann-La Roche and IDEC Pharmaceuticals	2003
2C4	cancer	Preparing for Phase II	F. Hoffmann-La Roche	2003
Anti-Tissue Factor    antibody	acute coronary syndrome	Preparing for Phase I		2003

___________

* Note: For those projects preparing for a Phase, the estimated date of completion refers to the date the project enters the Phase.

            Additionally, in the second quarter of 2002, we entered into a manufacturing agreement with Immunex Corporation, a wholly-owned subsidiary of Amgen, to provide Immunex with additional manufacturing capacity for ENBREL® (etanercept) at Genentech's manufacturing facility in South San Francisco, California. As part of the agreement, we are responsible for facility modifications needed to manufacture ENBREL, including the internal labor costs and development production runs. The cost of equipment and outside service costs are reimbursable by Immunex. However, if certain milestones are not met, we are required to reimburse Immunex for up to 45% of the total equipment and outside service costs. Costs associated with development runs are reflected in R&D expense as incurred. Milestones will be paid to us upon the achievement of certain events. If the FDA approves the manufacturing of the product at Genentech, sh ipment of the product to Immunex would be recorded as product sales based on an agreed upon price with the associated costs reflected in cost of sales.

            We establish strategic alliances with various companies to gain additional access to potential new products and technologies, and to utilize companies to help develop potential new products. These companies are developing technologies that may fall outside our research focus and through technology exchanges and investments with these companies, we may have the potential to generate new products. As part of certain of these strategic alliances, we have acquired equity or convertible debt securities of such companies. We have also entered into product-specific collaborations to acquire development and marketing rights for potential products as discussed below.

            In August 2002, we entered into an agreement with Serono S.A. to market Raptiva internationally outside the United States, Japan, and certain other Asian countries. In February 2003, we amended the agreement with Serono to expand Serono's marketing rights to include certain Asian countries other than Japan. Development and marketing rights in the United States remain with us and our U.S. partner XOMA (US) LLC and we retain exclusive marketing rights in Japan. Under the agreement, we and Serono may collaborate on co-developing additional indications of Raptiva and will share certain global development costs. In addition, we have a supply agreement with Serono, under which we have a loss exposure up to a maximum of $10.0 million.

            We entered into a research collaboration agreement with CuraGen Corporation in November 1997, as amended and restated in March 2000, and agreed to provide a convertible equity loan to CuraGen of up to $21.0 million. In October 1999, CuraGen exercised its right to borrow $16.0 million. Simultaneously, with this draw down, CuraGen repaid the loan by issuing common shares of CuraGen stock valued at $16.0 million. Our remaining commitment to CuraGen on the convertible equity loan is $5.0 million. At December 31, 2002, there were no outstanding loans to CuraGen.

            In December 1997, we entered into a research collaboration agreement with Millennium to develop and commercialize Millennium's MLN-02 (formerly LDP-02). Under the terms of the agreement, we have agreed to provide a convertible equity loan for approximately $15.0 million to fund Phase II development costs. Upon successful completion of Phase II, if Millennium agrees to fund 25% of Phase III development costs, we have agreed to provide a second loan to Millennium for such funding. As of December 31, 2002, there were no outstanding loans to Millennium.

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            In April 1996, we entered into a research collaboration agreement with XOMA to develop and commercialize Raptiva. In connection with our collaboration with XOMA, we have agreed to provide a convertible equity loan to XOMA of up to $80.0 million (outstanding at any one time) to fund XOMA's share of development costs for Raptiva through FDA approval, and a cash loan of up to $15.0 million to fund XOMA's share of U.S. marketing and sales costs prior to the date of regulatory approval of Raptiva. As of December 31, 2002, XOMA had an aggregate outstanding loan balance of approximately $60.0 million, of which we have reserved $20.7 million. There is no revenue impact on our statements of operations as it relates to the funding of the loan. However, provisions are recorded when we determine that recoverability of the loan has been impaired.

      Marketing, General and Administrative

            Marketing, general and administrative (or MG&A) expenses in 2002 increased 21% from 2001. The increase in 2002 was primarily related to higher general and administrative (or G&A) expense. The increase in G&A was primarily due to a $32.5 million increase in royalty expenses associated with higher sales by various licensees, a $15.9 million charge primarily for the redesign of research facilities and the write-off of building improvements and equipment, and a $13.3 million increase in write-downs of certain biotechnology equity securities as a result of other-than-temporary impairment; partially offset by a $16.7 million reversal of reserves primarily related to the repayment of a note from an earlier collaboration for which a reserve had been previously created and a $9.3 million reimbursement of legal costs. Marketing and sales expense was higher by $40.0 million in 2002 as compared to 2001 primarily in support of our bio-oncology and pipeline products, new information technology and increased headcount in support of all products. MG&A expenses in 2001 increased 29% from 2000. The increase in 2001 was largely due to a $65.9 million increase in G&A expense. This increase was due to a $27.5 million increase in write-downs of certain biotechnology equity investments as a result of other than temporary impairment, a $25.1 million increase in royalty expenses and the remaining increase was primarily related to legal and other corporate expenses. Marketing and sales expense was higher by $40.3 million in 2001 primarily in support of our bio-oncology and pipeline products, new information technology and increased headcount in support of all products.

            MG&A expenses are expected to increase in 2003, driven by marketing and sales expense as we prepare for potential product launches in 2003 and 2004.

            Depending on market conditions during 2003, certain of our unhedged equity security investments may become impaired, which could result in additional write-downs of those equity security investments.

      Collaboration Profit Sharing

            Collaboration profit sharing consists primarily of the net operating profit sharing with IDEC on Rituxan sales and, to a much lesser extent, the sharing of costs with collaborators related to the commercialization of potential future products. Collaboration profit sharing expenses increased to $350.7 million in 2002, a 42% increase from 2001. Collaboration profit sharing expenses increased to $246.7 million in 2001, a 92% increase from 2000. These increases were primarily driven by increased Rituxan profit sharing with IDEC due to higher Rituxan sales.

            Collaboration profit sharing expense is expected to increase in 2003 consistent with our expectations of higher Rituxan sales and the commercialization of potentially new product sales.

      Recurring Charges Related to Redemption

            We began recording recurring charges related to the Redemption and push-down accounting in the third quarter of 1999. These charges were $155.7 million in 2002, $321.8 million in 2001, and $375.3 million in 2000. In 2002, the charges were due to the amortization of other intangible assets. In 2001, $317.6 million and in 2000, $364.2 million of the charges were due to the amortization of other intangible assets and goodwill. In 2001, $4.2 million and in 2000, $11.1 million of the charges were due to compensation expense related to alternative arrangements provided at the time of the Redemption for certain holders of some of the unvested options. See also the "Redemption of our Special Common Stock" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K.

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            On January 1, 2002, we adopted Statement of Financial Accounting Standards (or FAS) 141, "Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets." In accordance with FAS 141 and 142, we discontinued the amortization of goodwill and our trained and assembled workforce intangible asset, which resulted in an increase in reported net income by approximately $157.6 million (or $0.30 per share) in 2002 as compared to the accounting prior to the adoption of FAS 141 and 142. We performed an impairment test of goodwill at transition on January 1, 2002, and an annual impairment test on September 30, 2002, and found no impairment. We will continue to evaluate our goodwill for impairment on an annual basis each September and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. See also the "Goodwill and Other Intangible Assets" note in the Notes to Consolidate d Financial Statements of Part II, Item 8 of this Form 10-K.

      Special Charges: Litigation-Related

            In 2002, we recognized $543.9 million of litigation-related special charges. These special charges were comprised of the City of Hope Medical Center (or City of Hope) litigation judgment in the second quarter of 2002, including accrued interest and costs related to obtaining a surety bond, and certain other litigation-related matters. We expect that we will continue to incur interest charges on the judgment and service fees on the surety bond each quarter through the process of appealing the City of Hope trial results. These special charges represent our estimate of the costs for the current resolution of these matters and are included in other long-term liabilities in the consolidated balance sheet at December 31, 2002. We developed this estimate in consultation with outside counsel handling our defense in these matters and is based upon the facts and circumstances of these matters known to us at that time. The a mount of our liability for certain of these matters could exceed or be less than the amount of our current estimate, depending on the outcome of these matters. The amount of cash, if any, to be paid in connection with the City of Hope matter will depend on the outcome of the appeal. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for further information regarding our litigations.

      Interest Expense

            Interest expense has fluctuated depending on the amounts invested and the level of interest capitalized on construction projects. Interest expense, net of amounts capitalized, was related to our 5% convertible subordinated debentures. Interest expense was $0.8 million in 2002, a $4.9 million decrease from 2001. The decrease in 2002 was a result of the repayment of our debentures, which matured on March 27, 2002, and were redeemed in cash. See the "Debt Obligations" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for further information regarding these debentures.

Income (Loss) Before Taxes and Cumulative Effect of Accounting Change, Income Taxes and Cumulative Effect of Accounting Change	2002		2001		2000
Income before taxes and cumulative effect of accounting change	$	29.8	$	283.0	$	4.0
Income tax (benefit) provision		(34.0)		127.1		20.4
Income (loss) before cumulative effect of accounting change		63.8		155.9		(16.4)
Cumulative effect of accounting change, net of tax		-		(5.6)		(57.8)

      Changes in Accounting Principles

            On January 1, 2002, we adopted FAS 141, "Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria for the recognition of intangible assets separately from goodwill. Under the new rules, goodwill is no longer amortized but is subject to an impairment test at least annually. FAS 141 specifically identified assembled workforce as an intangible asset that is not to be recognized apart from goodwill and it was subsumed into goodwill on January 1, 2002. Other intangible assets that meet the new criteria continue to be amortized over their useful lives.

            In accordance with FAS 141 and 142, we discontinued the amortization of goodwill and our trained and assembled workforce intangible asset, which resulted in an increase in reported net income by approximately $157.6

33

million (or $0.30 per share) in 2002, as compared to the accounting prior to the adoption of FAS 141 and 142. See also the "Goodwill and Other Intangible Assets" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for further information.

            We adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," on January 1, 2002. FAS 144 supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The primary objectives of FAS 144 are to develop one accounting model based on the framework established in FAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. Our adoption of FAS 144 did not have a material impact on our financial position or results of operations.

            In November 2002, the Financial Accounting Standards Board (or FASB) issued Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN 45 did not have a material impact on our results of operations and financial position. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K regarding our disclosures on residual value guarantees and our exposure related to our agreement with Serono S.A.

            In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on beh alf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for expanded disclosures required by FIN 46.

            See also the "Description of Business and Summary of Significant Accounting Policies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for information on our adoption of FAS 141, 142, 144 and the FASB Interpretation on No. 45 and 46.

            We adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. Upon adoption, we recorded a $5.6 million charge, net of tax, ($0.01 per share) as a cumulative effect of a change in accounting principle, recognized $6.0 million in gains, net of tax, ($0.01 per share) in contract and other revenues related to certain hedging instruments and increased other comprehensive income by $5.0 million, net of tax, as a result of recording derivative instruments at fair value. See the "Description of Business and Summary of Significant Accounting Policies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for further information on our adoption of FAS 133.

            We adopted the Securities and Exchange Commission's (or SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" on January 1, 2000, and recorded a $57.8 million charge (net of tax) as a cumulative effect of a change in accounting principle related to contract revenues recognized in prior periods.

34

The related deferred revenue is being recognized over the appropriate terms in each of the effected agreements. For the year ended December 31, 2000, the impact of the change in accounting principle was to increase net loss by $52.6 million (or $0.10 per share) comprised of $57.8 million cumulative effect of an accounting change, net of tax, (or $0.11 per share) net of $5.2 million of the related deferred revenue, net of tax, (or $0.01 per share) that was recognized as revenue during the year ended December 31, 2000.

      Income Tax Provision (Benefit)

            The income tax benefit was $34.0 million in 2002 as compared to the income tax provisions of $127.1 million in 2001 and $20.4 million in 2000. The income tax benefit of $34.0 million was due to substantially reduced pretax income, tax credits and the favorable resolution of prior years items. The income tax benefit of $34.0 million in 2002 differed from the income tax provision of $127.1 million in 2001 due primarily to substantially reduced pretax income and the elimination of non-deductible goodwill pursuant to the adoption of FAS 141 and FAS 142 in January 2002. The income tax provision of $127.1 million in 2001 increased over the income tax provision of $20.4 million in 2000 primarily due to increased pretax income before non-deductible goodwill amortization related to the Redemption. The 2001 income tax provision reflects decreased benefit of R&D tax credits, which was offset by prior years items. Prior y ears items relate principally to changes in estimate resulting from events that provided greater certainty as to the expected outcome of these matters.

            Other factors may have favorable or unfavorable effects upon our effective tax rate in 2003 and subsequent years. These factors include, but are not limited to, interpretations of existing tax laws, changes in tax laws and rates, future levels of R&D spending, future levels of capital expenditures, and changes in overall levels of pretax earnings.

Net Income (Loss)	2002		2001		2000
Net income (loss)	$	63.8	$	150.3	$	(74.2)
Earnings (loss) per share:
Basic:
Earnings (loss) before cumulative effect of accounting change	$	0.12	$	0.30	$	(0.03)
Cumulative effect of accounting change, net of tax		-		(0.01)		(0.11)
Net earnings (loss) per share	$	0.12	$	0.29	$	(0.14)
Diluted:
Earnings (loss) before cumulative effect of accounting change	$	0.12	$	0.29	$	(0.03)
Cumulative effect of accounting change, net of tax		-		(0.01)		(0.11)
Net earnings (loss) per share	$	0.12	$	0.28	$	(0.14)

      Net Income (Loss)

            Net income decreased in 2002 to $63.8 million, or $0.12 per diluted share, from a net income of $150.3 million in 2001, or $0.28 per diluted share. The decrease in 2002 from 2001 primarily reflects the litigation-related special charges, and also reflects increased collaboration profit sharing, R&D, MG&A and COS expenses and decreased interest income. These unfavorable changes were partially offset by increased product sales, royalties and contract and other revenues and decreased recurring charges related to the Redemption.

            Net income increased in 2001 to $150.3 million, or $0.28 per diluted share, from a net loss of ($74.2) million in 2000, or ($0.14) per diluted share. The increase from 2000 primarily reflects higher revenues largely from increased product sales, a decrease in costs related to the sale of inventory written up at the Redemption, a decrease in recurring charges related to the Redemption, and the cumulative effect of an accounting change impact in 2001 related to the adoption of FAS 133 as compared to the adoption of SAB 101 in 2000. These favorable variances were offset in part by increased collaboration profit sharing expenses, higher MG&A, R&D and income tax expenses and a decrease in contract and other revenues.

      In-Process Research and Development

            At June 30, 1999, the Redemption date, we determined that the acquired in-process technology was not technologically feasible and that the in-process technology had no future alternative uses. In 1990 and 1991 through

35

1997, Roche Holdings, Inc. (or Roche) purchased 60% and 5%, respectively, of our outstanding common stock. The push-down effect of Roche's aggregate purchase price is allocated based on Roche's ownership percentages as if the purchases had occurred at the original purchase dates for the 1990 and 1991 through 1997 purchases. Therefore, 65% of the purchase price allocated to IPR&D as of September 7, 1990, or 65% of $770.0 million ($500.5 million) was recorded as an adjustment to additional paid-in capital related to the 1990-1997 acquisitions. The remaining 35% of our outstanding common stock not owned by Roche was purchased in 1999. Accordingly, 35% of $2,150.0 million of total fair value at the Redemption date, or $752.5 million, was expensed on June 30, 1999.

            The amounts of IPR&D were determined based on an analysis using the risk-adjusted cash flows expected to be generated by the products that result from the in-process projects. The analysis included forecasted future cash flows that were expected to result from the progress made on each of the in-process projects prior to the purchase dates. These cash flows were estimated by first forecasting, on a product-by-product basis, total revenues expected from sales of the first generation of each in-process product. A portion of the gross in-process product revenues was then removed to account for the contribution provided by any core technology, which was considered to benefit the in-process products. The net in-process revenue was then multiplied by the project's estimated percentage of completion as of the purchase dates to determine a forecast of net IPR&D revenues attributable to projects completed prior to t he purchase dates. Appropriate operating expenses, cash flow adjustments and contributory asset returns were deducted from the forecast to establish a forecast of net returns on the completed portion of the in-process technology. Finally, these net returns were discounted to a present value at discount rates that incorporate both the weighted-average cost of capital (relative to the biotech industry and us) as well as the product-specific risk associated with the purchased IPR&D products. The product-specific risk factors included each product in each phase of development, type of molecule under development, likelihood of regulatory approval, manufacturing process capability, scientific rationale, pre-clinical safety and efficacy data, target product profile and development plan. The discount rates ranged from 16% to 19% for the 1999 valuation and 20% to 28% for the 1990 purchase valuation, all of which represent a significant risk premium to our weighted-average cost of capital.

            The forecast data in the analysis was based on internal product level forecast information maintained by our management in the ordinary course of managing the business. The inputs used by us in analyzing IPR&D were based on assumptions, which we believed to be reasonable but which were inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur.

            A brief description of projects that were included in the IPR&D charge is set forth below, including an estimated percentage of completion as of the Redemption date. Projects subsequently added to the research and development pipeline are not included. Except as otherwise noted below, since the Redemption date there have been no significant changes to the phase of development for the projects listed. We do not track all costs associated with research and development on a project-by-project basis. Therefore, we believe a calculation of cost incurred as a percentage of total incurred project cost as of FDA approval is not possible. We estimated, however, that the R&D expenditures that will be required to complete the in-process projects will total at least $410.0 million as of December 31, 2002, as compared to $700.0 million as of the Redemption date. This estimate reflects costs incurred since the Redempti on date, discontinued projects, and decreases in cost to complete estimates for other projects, partially offset by an increase in certain cost estimates related to early stage projects and changes in expected completion dates.

            At the Redemption date, we estimated percentage complete data for each project based on weighing of three indicators, as follows:

            PTS:  Probability of technical success (or PTS) is a project level statistic maintained by us on an ongoing basis, which is intended to represent the current likelihood of project success, i.e., FDA approval. This is a quantitative calculation based on the stage of development and the complexity of the project, and it is highly correlated with the project's phase of development. PTS is periodically adjusted to reflect actual experiences over a reasonable period of time.

            Status Compared to Baseline Model:  We developed a baseline model, which allocated percentages of a standard development project to each major phase of the project based on our experience. We then overlaid the time-based status of each project to this baseline model, in order to calculate a percentage complete for each project.

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            Management's Estimate of Percentage Complete:  Below is a list of the projects and their estimated percentage complete included in the IPR&D charge related to the Redemption:

		As of the Redemption Date, June 30, 1999
Product	Description/Indication	Phase of Development	Substantial Completion Date	% Complete
Nutropin Depot	long-acting dosage form of recombinant growth hormone	Awaiting regulatory approval	2000	85%
TNKase, second   generation t-PA	acute myocardial infarction	Awaiting regulatory approval	2000	90%
Anti-IgE antibody	allergic asthma, seasonal allergic rhinitis	Phase III	2001	75%
Pulmozyme	early-stage cystic fibrosis	Phase III	2003	75%
Dornase alfa AERx™   Delivery System	cystic fibrosis	Preparing for Clinical Testing	2003	45%
Rituxan antibody	intermediate- and high-grade non-Hodgkin's lymphoma	Phase III	2004	60%
Xubix (sibrafiban)   oral IIb/IIIa antagonist	orally administered inhibitor of platelet aggregation	Phase III	2000	65%
Cathflo Activase t-PA	intravenous catheter clearance	Preparing for Phase III	1999	90%
Raptiva (Anti-CD11a   antibody) (hull24)	psoriasis	Preparing for Phase III	2003	50%
Herceptin antibody	adjuvant therapy for breast cancer	Preparing for Phase III	2007	45%
Thrombopoietin (TPO)	thrombocytopenia related to cancer treatment	Preparing for Phase III	2002	55%
Anti-CD18 antibody	acute myocardial infarction	Phase II	2004	55%
Avastin (formerly Anti-   VEGF antibody)	colorectal and lung cancer	Phase II	2003	35-40%
Herceptin antibody	other tumors	Phase II	2004	40-45%
rhuFab V2 (formerly AMD   Fab)	age-related macular degeneration	Preparing for Phase I	2004	20%
MLN-02 (formerly LDP-02)	inflammatory bowel disease	Phase Ib/IIa	2005	30%

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            We also identified five additional product programs that were at different stages of IPR&D. As of June 30, 1999, the Redemption date, we estimated that these projects would be substantially complete in years 1999 through 2004. The percent completion for each of these additional programs ranged from an estimated 35% to 90%. These projects did not receive material allocations of the purchase price.

            In addition, our IPR&D at the Redemption date included a process technology program. The process technology program included the R&D of ideas and techniques that could improve the bulk production of antibodies, including cell culture productivity, and streamlined and improved recovery processes, and improvements in various areas of pharmaceutical manufacturing. We estimated that the process technology program was approximately 50% complete at the Redemption date. Material cash inflows from significant projects are generally expected to commence within one to two years after the substantial completion date has been reached.

            The significant changes to the projects included in the IPR&D charge since the Redemption date include:

• Nutropin Depot long-acting growth hormone - project received FDA approval in December 1999.

• TNKase second generation t-PA - project received FDA approval in June 2000.

• Anti-IgE antibody - A complete response letter was received from the FDA and an amendment to the BLA seeking approval for allergic asthma in adults and adolescents was submitted in December 2002.

• Pulmozyme - Phase III trial in early stage cystic fibrosis has been completed and the study results were published in December 2001.

• Dornase alfa AERx - project has been discontinued.

• Xubix (sibrafiban) oral IIb/IIIa antagonist - project has been discontinued.

• Activase t-PA for intravenous catheter clearance - project received FDA approval in September 2001.

• Raptiva (efalizumab) - An additional Phase III trial in moderate to severe psoriasis has been completed and did achieve its primary endpoint. A BLA seeking approval for moderate to severe psoriasis was submitted in December 2002.

• Herceptin antibody for adjuvant therapy for breast cancer - project has moved to Phase III.

• Thrombopoietin (or TPO) - There is an agreement with Pharmacia that development efforts will be discontinued.

• Anti-CD18 antibody - project has been discontinued.

• Avastin (bevacizumab) - A Phase III study of Avastin plus Xeloda® (capecitabine) in relapsed metastatic breast cancer patients did not meet its primary efficacy endpoint of progression-free survival. We continue to pursue a broad late-stage clinical development program with Avastin to evaluate its potential use in colorectal, metastatic breast, non-small cell lung and kidney cancer.

• Herceptin antibody for non-small cell lung cancer (or NSCLC) - project has been discontinued for this indication.

• rhuFab V2 (ranibizumab) - We announced positive preliminary data from a Phase Ib/II randomized, single-agent study for patients with the wet form of age-related macular degeneration. Based on these results, and pending discussions with the FDA, we are preparing for Phase III randomized trials.

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• MLN-02 (formerly LDP-02) - Our partner Millennium Pharmaceuticals, Inc. announced a Phase II trial in patients with mild to moderate Crohn's Disease did not meet its primary endpoint. A Phase II trial in patients with ulcerative colitis is ongoing.

RELATIONSHIP WITH ROCHE

            As a result of the Redemption of our Special Common Stock, the then-existing governance agreement between us and Roche terminated, except for provisions relating to indemnification and stock options, warrants and convertible securities. In July 1999, we entered into certain affiliation arrangements with Roche, amended our licensing and marketing agreement with Hoffmann-La Roche, and entered into a tax sharing agreement with Roche as follows:

      Affiliation Arrangements

            Our board of directors consists of two Roche directors, three independent directors nominated by a nominating committee currently controlled by Roche, and one Genentech employee. However, under our bylaws, Roche has the right to obtain proportional representation on our board at any time. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot ensure that Roche will not implement a new business plan in the future.

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

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

• in all other cases, with consideration that has a value per share not less than the weighted-average value per share received by Roche and its affiliates as determined by a nationally recognized investment bank.

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

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

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

• in the event such a favorable vote is not obtained, the value of the consideration to be received by non-Roche stockholders would be equal to or greater than the average of the means of the ranges of fair values for the Common Stock as determined by two nationally recognized investment banks.

            We have agreed not to approve, without the prior approval of the directors designated by Roche:

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

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

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

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      Licensing Agreement

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

• Hoffmann-La Roche's option expires in 2015;

• Hoffmann-La Roche may exercise its option to license our products upon the occurrence of any of the following: (1) our decision to file an IND for a product, (2) completion of a Phase II trial for a product or (3) if Hoffmann-La Roche previously paid us a fee of $10.0 million to extend its option on a product, completion of a Phase III trial for that product;

• if Hoffmann-La Roche exercises its option to license a product, it has agreed to reimburse Genentech for development costs as follows:  (1) if exercise occurs at the time an IND is filed, Hoffmann-La Roche will pay 50% of development costs incurred prior to the filing and 50% of development costs subsequently incurred, (2) if exercise occurs at the completion of a Phase II trial, Hoffmann-La Roche will pay 50% of development costs incurred through completion of the trial and 75% of development costs subsequently incurred, (3) if the exercise occurs at the completion of a Phase III trial, Hoffmann-La Roche will pay 50% of development costs incurred through completion of the trial and 75% of development costs subsequently incurred, and $5.0 million of the option extension fee paid by Hoffmann-La Roche to preserve its right to exercise its option at the completion of a Phase III trial will be credited against the total development costs payable to Genentech upon the e xercise of the option;

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

• Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-La Roche exercises its option upon either a decision to file an IND with the FDA or completion of the Phase II trials, a royalty of 12.5% on the first $100.0 million on its aggregate sales of that product and thereafter a royalty of 15% on its aggregate sales of that product in excess of $100.0 million until the later in each country of the expiration of our last relevant patent or 25 years from the first commercial introduction of that product; and

• Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, a royalty of 15% on its sales of that product until the later in each country of the expiration of our relevant patent or 25 years from the first commercial introduction of that product; however, $5.0 million of any option extension fee paid by Hoffmann-La Roche will be credited against royalties payable to us in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of that product exceed $100.0 million.

      Tax Sharing Agreement

            Since the redemption of our Special Common Stock in June 1999, and until Roche completed its second public offering of our Common Stock in October 1999, we were included in Roche's U.S. federal consolidated income tax group. Accordingly, we entered into a tax sharing agreement with Roche. Pursuant to the tax sharing agreement, we and Roche were to make payments such that the net amount paid by us on account of consolidated or combined income taxes was determined as if we had filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns.

            Effective with the consummation of the second public offering 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 Roche is the common parent. Accordingly, our tax sharing agreement with Roche now pertains

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only to the state and local tax returns in which we are consolidated or combined with Roche. We will continue to calculate our tax liability or refund with Roche for these state and local jurisdictions as if we were a stand-alone entity.

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

            We expect from time to time to issue additional 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 Roche provides, among other things, that we establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. The affiliation agreement provides that we will repurchase a sufficient number of shares pursuant to this program such that, with respect to any issuance of common stock by Genentech in the future, the percentage of Genentech common stock owned by Roche immediately after such issuance will be no lower than Roche's lowest percentage ownership of Genentech common stock at any time after the offering of common stock occurring in July 1999 and prior to the time of such issuance, except that Genentech may issue shares up to an amount that would caus e Roche's lowest percentage ownership to be no more than 2% below the "Minimum Percentage." The Minimum Percentage equals the lowest number of shares of Genentech common stock owned by Roche since the July 1999 offering (to be adjusted in the future for dispositions of shares of Genentech common stock by Roche as well as for stock splits or stock combinations) divided by 509,194,352 (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 the two-for-one splits of Genentech common stock in November 1999 and October 2000. As long as Roche's percentage ownership is greater than 50%, prior to issuing any shares, the affiliation agreement provides that we will repurchase a sufficient number of shares of our common stock such that, immediately after our issuance of shares, Roche's percentage ownership will be greater than 50%. The affiliation agreement also provides that, upo n Roche's request, we will repurchase shares of our common stock to increase Roche's ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. On December 31, 2002, Roche's percentage ownership of our common stock was 59.8%, which was 0.4% below the Minimum Percentage.

RELATED PARTY TRANSACTIONS

            We enter into transactions with Roche, Hoffmann-La Roche and its affiliates in the ordinary course of business. In July 1998, we entered into an agreement with Hoffmann-La Roche to provide them with exclusive marketing rights outside of the U.S. for Herceptin. Under the agreement, Hoffmann-La Roche paid us $40.0 million and has agreed to pay us cash milestones tied to future product development activities, to share equally global development costs up to a maximum of $40.0 million and to make royalty payments on product sales. In addition, in the fourth quarter of 2002, Hoffmann-La Roche paid us a one-time royalty milestone of $10.0 million as a result of reaching $200.0 million in net sales of Herceptin outside of the U.S. In 2000, we received $10.0 million from Hoffmann-La Roche to extend its opt-in rights on Avastin. This amount is classified as deferred revenue on our balance sheet.

            Contract revenue from Hoffmann-La Roche, including reimbursement for ongoing development expenses after the option exercise date, totaled $7.6 million in 2002, $5.8 million in 2001 and $3.5 million in 2000. All other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, totaled $269.9 million in 2002, $164.1 million in 2001 and $114.2 million in 2000.

            During 2001, Novartis AG (or Novartis) acquired 21.3% of the outstanding voting shares of Roche Holding Ltd. During 2002, Novartis acquired an additional 11.4%, bringing its total holdings of the outstanding voting shares of Roche Holding Ltd to 32.7%. As a result of this investment, Novartis is deemed to have an indirect beneficial ownership interest under FAS 57 "Related Party Disclosures" of more than 10% of Genentech's voting stock. During 2000, we entered into an arrangement with our collaboration partner, Novartis, whereby Novartis is required to fund a portion of the cost of our Xolair inventory until the product is approved for marketing by the FDA. This amount is required to be returned to Novartis upon the earlier of regulatory approval of Xolair in the U.S. or the European Union, and has been recorded in other accrued liabilities in our financial statements. The amount payable to Novartis was $37.8 mill ion at December 31, 2002 and $38.4 million at December 31, 2001 (no amounts were

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payable at December 31, 2000). Reimbursements for ongoing development expenses, net of expenses incurred by Novartis, totaled $4.0 million in 2002. In 2000, $3.6 million was payable to Novartis for development and commercial expenses, net of expenses incurred by us. The net expense in 2001 was not material.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources	2002		2001		2000
December 31:
Cash, cash equivalents, short-term investments, long-term    marketable debt and equity securities, and nonmarketable    debt securities	$	1,601.9	$	2,864.9	$	2,459.4
Working capital		1,436.1		1,557.6		1,340.1
Current ratio		3.2:1		3.3:1		4.0:1
Year Ended December 31:
Cash provided by (used in):
Operating activities		587.7		480.6		193.5
Investing activities		(6.5)		(704.0)		(160.2)
Financing activities		(768.3)		67.2		180.4
Capital expenditures (included in investing activities above)		(322.8)		(213.4)		(112.7)

            In 2002 and 2001, we used cash generated from operations, income from investments and proceeds from stock issuances to fund operations, purchase marketable securities, make capital and equity investments, redeem our debentures which matured in the first quarter of 2002, and to make stock repurchases. In addition, in 2002, we pledged $630.0 million in cash and investments to secure the surety bond related to the City of Hope Medical Center judgment. (See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Statements of Part II, Item 8 of this Form 10-K for further information regarding the City of Hope litigation and related surety bond.)

            On October 31, 2001, our Board of Directors authorized a stock repurchase program to repurchase up to 13.0 million shares for an amount not to exceed $625.0 million of our common stock over a 12 month period. On August 15, 2002, our Board of Directors authorized an extension of the stock repurchase program through June 30, 2003, for the repurchase of additional shares for an amount not to exceed an additional $375.0 million of our common stock, increasing the program to a total of approximately 29.6 million shares and an amount not to exceed a total of $1.0 billion. Purchases may be made in the open market or in privately negotiated transactions from time to time at management's discretion. We may also engage in transactions in other Genentech securities in conjunction with the repurchase program, including derivative securities. We also entered into a 10b5-1 insider trading plan on February 8, 2002, to repurchase shares in the open market during those periods each quarter when trading in our stock by insiders is restricted under our insider trading policy. Under its terms, the 10b5-1 plan terminated on October 11, 2002, the date on which a total of 3.0 million shares had been purchased under the plan during the period from February 8, 2002 to October 11, 2002. Due to the extension of the stock repurchase program, another 10b5-1 trading plan was entered into on November 13, 2002, to repurchase shares in the open market during those periods each quarter when trading in our stock is restricted under our insider trading policy. This plan covers 2.5 million shares. Under the stock repurchase program approved by our Board of Directors, we repurchased approximately 18.2 million shares of our common stock in 2002 at a cost of approximately $692.8 million. Of those shares repurchased, the number of shares repurchased under our 10b5-1 trading plans were approximately 3.6 million during 2002. In 2001, we repurchased 900,00 0 shares of our common stock at a cost of $39.7 million, of which 800,000 shares were repurchased with the approval of our Board of Directors at a cost of $34.0 million prior to our adoption of the stock repurchase program, and 100,000 shares were repurchased at a cost of $5.7 million under the stock repurchase program approved by our Board of Directors. Under the stock repurchase program to date, we repurchased approximately 18.3 million shares of our common stock at a cost of approximately $698.4 million during the period from November 1, 2001, through December 31, 2002.

            Capital expenditures in 2002 were primarily due to the purchase of land, and an increase in the construction of and improvements to manufacturing and R&D facilities. Capital expenditures in 2001 primarily consisted of equipment purchases and improvements to existing manufacturing and service facilities.

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            Our short-term debt at December 31, 2001, consisted of $149.7 million of convertible subordinated debentures, with interest payable at 5%, matured on March 27, 2002. We redeemed the debentures in cash at maturity.

            We believe that our cash, cash equivalents and short-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet our foreseeable operating cash requirements including any cash utilized under our stock repurchase program. In addition, we believe we could access additional funds from the debt and, under certain circumstances, capital markets. See also "Our Affiliation Agreement With Roche Could Adversely Affect Our Cash Position" below for factors that could negatively affect our cash position and the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Statements of Part II, Item 8 of this Form 10-K.

            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 renewable options. Four of our operating leases are commonly referred to as synthetic leases. A synthetic lease represents a form of off-balance sheet financing under which an unrelated third-party funds 100% of the costs of the acquisition and/or construction of the property and leases the asset to a lessee (Genentech), and at least 3% of the third-party funds represent at-risk equity. As the lessee, our synthetic leases are treated as operating leases for accounting purposes and as financing leases for tax purposes. (See also below regarding FASB's, Interpretation No. 46). Under our synthetic lease structures, upon termination or expiration, at our option, we must either purchase the property from the lessor at a predetermined amount that doe s not constitute a purchase at less than fair market value, sell the real property to a third-party, or renew the lease arrangement. If the property is sold to a third-party at an amount less than the amount financed by the lessor, we have agreed under residual value guarantees to pay the lessor up to an agreed upon percentage of the amount financed by the lessor.

            Three of our synthetic leases were entered into with BNP Paribas Leasing Corporation (or BNP), a wholly-owned subsidiary of BNP Paribas, who leases directly to us various buildings that we occupy in South San Francisco, California. Under one of these BNP leases, we are required to maintain cash collateral of $56.6 million, which we have included in our consolidated balance sheets as restricted cash. In May 2002, we paid the remaining balance on a fourth synthetic lease with BNP and exercised our purchase option to buy the leased property at its estimated fair value of $22.5 million. The purchased property has been included in property, plant and equipment in our consolidated balance sheet as of December 31, 2002.

            The most significant of our synthetic leases relates to our manufacturing facility located in Vacaville, California. In November 2001, we completed a synthetic lease transaction for this facility, which had previously been leased to us under a predecessor synthetic lease. This new synthetic lease is structured differently from our other synthetic leases with BNP. As the lessee, we lease the property from an unrelated special purpose trust (owner/lessor) under an operating lease agreement for five years ending November 2006. Third-party financing is provided in the form of a 3% at-risk equity participation from investors and 97% debt commitment. Investors' equity contributions were equal to or greater than 3% of the fair value of the property at the lease's inception and are required to remain so for the term of the lease. A bankruptcy remote, special purpose corporation (SPC) was formed to fund the debt portion th rough the issuance of commercial paper notes. The SPC lends the proceeds from the commercial paper to the owner/lessor, who issues promissory notes to the SPC. The SPC loans mature in November 2006. The SPC promissory notes are supported by a credit facility provided by financing institutions and draws are generally available under that credit facility to repay the SPC's commercial paper. The collateral for the SPC loans includes the leased property, and an interest in the residual value guarantee provided by us. As the lessee, at any time during the lease term, we have the option to purchase the property at an amount that does not constitute a purchase at less than fair market value. Our off-balance sheet contingent liability under the residual value guarantees is summarized in the table below.

            Under all of our synthetic leases, Genentech, as the lessee, is also required to maintain certain pre-defined financial ratios and are limited to the amount of additional debt we can assume. In addition, no Genentech officers or employees have any financial interest with regards to these synthetic lease arrangements or with any of the special purpose entities used in these arrangements. In the event of a default, the maximum amount payable under the

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residual value guarantee would equal 100% of the amount financed by the lessor, and our obligation to purchase the leased properties or pay the related residual value guarantees could be accelerated. We believed at the lease's inception and continue to believe that the occurrence of any event of default that could trigger our purchase obligation is remote.

            Future minimum lease payments under operating leases, exclusive of the residual value guarantees, executory costs and sublease income, at December 31, 2002, are as follows (in millions). These minimum lease payments were computed based on interest rates current at that time which are subject to fluctuations in certain market-based interest rates:

	2003		2004		2005		2006		2007		Thereafter		Total
Synthetic leases	$	9.6	$	9.4	$	8.8	$	8.8	$	1.3	$	-	$	37.9
Other operating leases		4.8		3.3		3.1		2.6		2.4		5.2		21.4
Total	$	14.4	$	12.7	$	11.9	$	11.4	$	3.7	$	5.2	$	59.3

            The following summarizes the approximate assumed carrying values of the leased properties as of December 31, 2002, which represents the initial fair values of the facilities at the inception of the related lease, less assumed depreciation through June 30, 2003, and residual value guarantee amounts for our synthetic leases (in millions):

	Approximate Initial Fair Value of Leased Property			Estimated Accumulated Depreciation			Estimated Carrying Value			Lease Expiration		Maximum Residual Value Guarantee
South San Francisco Lease 1		$	56.6		$	21.4		$	35.2		07/2004		$	48.1
South San Francisco Lease 2			152.0			29.2			122.8		06/2007			129.2
South San Francisco Lease 3			25.0			4.9			20.1		01/2004			21.3
Vacaville Lease			425.0			66.0			359.0		11/2006			371.8
Total		$	658.6		$	121.5		$	537.1				$	570.4

            We believe that there have been no impairments in the fair value or use of the properties that we lease under synthetic leases wherein we believe that we would be required to pay amounts under any of the residual value guarantees. We will continue to assess the fair values of the underlying properties and the use of the properties for impairment on an annual basis.

            The maximum exposure to loss on our synthetic leases include (i) residual value guarantee payments as shown above, (ii) certain tax indemnifications in the event the third-parties are obligated for certain federal, state or local taxes as a result of their participation in the transaction, and (iii) indemnification for various losses, costs and expenses incurred by the third-party participants as a result of their ownership of the leased property or participation in the transaction, and as a result of the environmental condition of the property. The additional taxes, losses and expenses as describe in (ii) and (iii) are contingent upon the existence of certain conditions and, therefore, would not be quantifiable at this time. However, we do not expect these additional taxes, losses and expenses to be material. In the case of Lease 1, the lessor (BNP) holds cash collateral of $56.6 million as a source of payment for Genentech's obligation for the residual value guarantee payments and other amounts we owe under the lease.

            Under the FASB's new rule, Interpretation No. 46 (or FIN46), "Consolidation of Variable Interest Entities," it is likely that some or all of the above synthetic leasing structures qualify as variable interest entities of which Genentech, as the primary beneficiary, would be required to consolidate these entities. We have determined that the leasing structure used in the Vacaville Lease will likely qualify as a variable interest entity under FIN 46. Accordingly, with respect to our Vacaville Lease, we estimate that we will need to consolidate assets of $359.0 million, net of accumulated depreciation, liabilities of $412.3 million and noncontrolling interests of $12.7 million, and expect to record a charge of $39.6 million, net of tax, as a cumulative effect of an accounting change on July 1, 2003. With regard to BNP Lease 1, 2 and 3, we are currently evaluating these leases and are seeking additional

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information from the lessor and its advisors and have not concluded whether it is reasonably possible that we would be required to record the specific assets and liabilities associated with these leases in our financial statements on July 1, 2003.

            Alternatively, we may restructure or repay these leasing obligations prior to our adoption of FIN 46 on July 1, 2003.

STOCK OPTIONS

Option Program Description

            Our 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 amended and restated 1999 Stock Plan (the "Plan"), a broad-based plan under which stock options are 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 1996 Stock Option/Stock Incentive Plan, our amended and restated 1994 Stock Option Plan and our amended and restated 1990 Stock Option/Stock Incentive Plan. Although we no longer grant options under these plans, exercisable options granted under these plans are still outstanding.

            We also have a stock repurchase program in place and one purpose of the program is to manage the dilutive effect generated by the exercise of stock options. All stock option grants are made after a review by, and with the approval of, the Compensation Committee of the Board of Directors. See "The Compensation Committee Report" appearing in our 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

		Options Outstanding
(Shares in thousands)	Shares Available for Grant	Number of Shares	Weighted Average Exercise Price
December 31, 2000	8,131	40,945	$	39.84
Grants	(10,740)	10,740		42.58
Exercises	-	(2,899)		24.69
Cancellations(1)	2,118	(2,146)		45.84
Additional shares reserved	15,000	-		-
December 31, 2001	14,509	46,640		41.06
Grants	(12,655)	12,655		28.98
Exercises	-	(1,673)		23.43
Cancellations(1)	2,195	(2,203)		53.16
Additional shares reserved	-	-		-
December 31, 2002	4,049	55,419	$	38.37

(1) We currently only grant shares under our amended and restated 1999 Stock Plan. Cancellations from options granted under previous plans are not added back to the shares reserved for issuance under the 1999 Stock Plan.

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

	Exercisable				Unexercisable				Total
As of December 31, 2002 (Shares in thousands)	Shares	Wtd. Avg. Exercise Price			Shares	Wtd. Avg. Exercise Price			Shares	Wtd. Avg. Exercise Price
In-the-Money	18,226		$	22.86	12,616		$	28.37	30,842		$	25.11
Out-of-the-Money(1)	12,096			56.03	12,481			53.99	24,577			55.00
Total Options Outstanding	30,322				25,097				55,419

(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, $33.16, at the close of business on December 31, 2002.

Distribution and Dilutive Effect of Options

Employee and Executive Officer Option Grants

	2002			2001			2000
Net grants during the year as % of outstanding shares		1.98	%		1.64	%		1.48	%
Grants to Named Executive Officers* during the period     as % of outstanding shares		0.25	%		0.22	%		0.24	%
Grants to Named Executive Officers during the year     as % of total options granted		10.27	%		10.52	%		12.32	%

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

Equity Compensation Plan Information

            All of our equity compensation plans under which options are currently outstanding have been approved by our stockholders.

FORWARD-LOOKING INFORMATION AND CAUTIONARY FACTORS
THAT MAY AFFECT FUTURE RESULTS

            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 made by or on behalf of Genentech, 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 revenues, expenses, net income (loss) and earnings (loss) per share.

The Successful Development of Biotherapeutics is Highly Uncertain

            Successful development of biotherapeutics is highly uncertain and is dependent on numerous factors, many of which are beyond our control. Products that appear promising in the early phases of development may fail to reach the market for several reasons including:

• Preclinical and clinical trial results that may show the product to be less effective than desired (e.g., the trial failed to meet its primary objectives) or to have harmful or problematic side effects.

• Failure to receive the necessary regulatory approvals or a delay in receiving such approvals. Among other things, such delays may be caused by slow enrollment in clinical studies, length of time to achieve study endpoints, additional time requirements for data analysis, Biologics License Application (or BLA) preparation, discussions with the U.S. Food and Drug Administration (or FDA), an FDA request for additional preclinical or clinical data, or unexpected safety or manufacturing issues.

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• Manufacturing costs, pricing or reimbursement issues, or other factors that make the product uneconomical.

• The proprietary rights of others and their competing products and technologies that may prevent the product from being 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.

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

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

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

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

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

• As part of our strategy, we invest in R&D. R&D as a percent of revenues can fluctuate with the changes in future levels of revenue. Lower revenues can lead to more limited spending on R&D efforts.

• Future levels of revenue.

We May Be Unable to Obtain or Maintain Regulatory Approvals for Our Products

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

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

• Significant delays in obtaining or failing to obtain required approvals as described in "The Successful Development of Biotherapeutics is Highly Uncertain" above.

• Loss of, or changes to, previously obtained approvals.

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• Failure to comply with existing or future regulatory requirements.

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

            Moreover, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may affect our ability to obtain or maintain approval of our products.

Difficulties or Delays in Product Manufacturing Could Harm Our Business

            We currently produce all of our products at our manufacturing facilities located in South San Francisco, California and Vacaville, California or through various contract manufacturing arrangements. Problems with any of our or our contractors' manufacturing processes could result in failure to produce adequate product supplies or product defects, which could require us to delay shipment of products, recall products previously shipped or be unable to supply products at all.

            In addition, any prolonged interruption in the operations of our or our contractors' manufacturing facilities could result in cancellations of shipments, loss of product in the process of being manufactured, or a shortfall of available product inventory. A number of factors could cause interruptions, including equipment malfunctions or failures, damage to a facility due to natural disasters, including earthquakes as our South San Francisco facilities are located in an area where earthquakes could occur, changes in FDA regulatory requirements or standards that require modifications to our manufacturing processes, action by the FDA that results in the halting of production of one or more of our products due to regulatory issues, a contract manufacturer going out of business or other similar factors. Because our manufacturing processes and those of our contractors are highly complex and are subject to a lengthy FDA appr oval process, alternative qualified production capacity may not be available on a timely basis or at all. Difficulties or delays in our and our contractors' manufacturing and supply of existing or new products could increase our costs, cause us to lose revenue or market share and damage our reputation. We may also experience insufficient available capacity to manufacture existing or new products which could cause shortfalls of available product inventory or we may have an excess of available capacity (for example, if we are unable to manufacture ENBREL in our facilities) which could lead to an idling of a portion of our manufacturing facilities and incurring idle plant costs, resulting in an increase in our costs of sales.

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 the breadth of claims allowed in these companies' patents. Patent disputes are frequent and can preclude the commercialization of products. We have in the past been, are currently, and may in the future be, involved in material patent litigation, such as the matters discussed in "Legal Proceedings," in Part I, Item 3 of this Form 10-K. Patent litigation is costly in its own right and could subject us to significant liabilities to third parties. In addition, an adverse decision could force us to either obtain third-party licenses at a material cost or cease using the technology or product in dispute.

            The presence of patents or other proprietary rights belonging to other parties may lead to our termination of the R&D of a particular product.

            We believe that we have strong patent protection or the potential for strong patent protection for a number of our products that generate sales and royalty revenue or that we are developing. However, it is for the courts in the U.S. and in other jurisdictions ultimately to determine the strength of that patent protection.

The Outcome of, and Costs Relating to, Pending Litigation are Uncertain

            Litigation to which we are currently or have been subjected relates to, among other things, our patent and other intellectual property rights, licensing arrangements with other persons, product liability and financing activities.

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We cannot predict with certainty the eventual outcome of pending litigation, which may include an injunction of the manufacture or sale of a product or potential product or a significant jury verdict or punitive damages award, 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 defending these lawsuits.

We May Be Unable to Retain Skilled Personnel and Maintain Key Relationships

            The success of our business depends, in large part, on our continued ability to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, and on our ability to develop and maintain important relationships with leading research institutions and key distributors. Competition for these types of personnel and relationships is intense.

            Roche has the right to maintain its percentage ownership interest in our common stock. Our affiliation agreement with Roche provides that, among other things, we will establish a stock repurchase program designed to maintain Roche's percentage ownership in our common stock if we issue or sell any shares. This could have an effect on the number of shares we are able to grant under our stock option plans. We therefore cannot assure you that we will be able to attract or retain skilled personnel or maintain key relationships.

We Face Growing and New Competition

            We face growing competition in two of our therapeutic markets and expect new competition in a third market. First, in the thrombolytic market, Activase has lost market share and could lose additional market share to Centocor's Retavase® either alone or in combination with the use of another Centocor product, ReoPro® (abciximab) and to the use of mechanical reperfusion therapies to treat acute myocardial infarction; the resulting adverse effect on sales has been and could continue to be material. Retavase received approval from the FDA in October 1996 for the treatment of acute myocardial infarction. We expect that the use of mechanical reperfusion in lieu of thrombolytic therapy for the treatment of acute myocardial infarction will continue to grow. In addition, we face potential increased competition in the catheter clearance market from the reintroduction of Abbott Laboratories' Abbokinase® (urokinase) .

            Second, in the growth hormone market, we continue to face competition from other companies currently selling growth hormone products and delivery devices. As a result of that competition, we have experienced a loss in market share in the past. Competitors have also received approval to market their existing human growth hormone products for additional indications. As a result of this competition, market share of our growth hormone products may decline.

            Third, in the non-Hodgkin's lymphoma market, Corixa Corporation filed a revised BLA and received a positive review by the FDA's Oncology Drugs Advisory Committee in December 2002, for Bexxar™ (tositumomab and iodine I 131 tositumomab), which may potentially compete with our product Rituxan. IDEC received marketing approval from the FDA and began commercial shipments in late March 2002 for Zevalin™ (ibritumomab tiuxetan), a product which could also potentially compete with Rituxan. Both Bexxar and Zevalin are radiolabeled molecules while Rituxan is not. We are also aware of other potentially competitive biologic therapies for non-Hodgkin's lymphoma in development.

Other Competitive Factors Could Affect Our Product Sales

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

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

• Our pricing decisions, including a decision to increase or decrease the price of a product, and the pricing decisions of our competitors.

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

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• Negative data from new clinical studies could cause the utilization and sales of our products to decrease.

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

• The outcome of litigation involving patents of other companies concerning our products or processes related to production and formulation of those products or uses of those products. For example, as described in "Legal Proceedings," in Part I, Item 3 of this Form 10-K, at various times other companies have filed patent infringement lawsuits against us alleging that the manufacture, use and sale of certain of our products infringe their patents.

• The increasing use and development of alternate therapies. For example, the overall size of the market for thrombolytic therapies, such as our Activase product, continues to decline as a result of the increasing use of mechanical reperfusion.

• The rate of market penetration by competing products. For example, we have lost market share to new competitors in the thrombolytic and, in the past, growth hormone markets.

Our Royalty and Contract Revenues Could Decline

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

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

• Variations in Hoffmann-La Roche's sales and other licensees' sales of licensed products.

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

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

• Fluctuations in foreign currency exchange rates.

• The initiation of new contractual arrangements with other companies.

• Whether and when contract benchmarks are achieved.

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

• The expiration or invalidation of our patents or licensed intellectual property.

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

We May Incur Material Product Liability Costs

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

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Insurance Coverage is Increasingly More Difficult to Obtain or Maintain

            While we currently have insurance for our business, property and our products, first- and third-party insurance is increasingly more costly and narrower in scope, and we may be required to assume more risk in the future. If we are subject to third-party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to share that risk in excess of our insurance limits. Furthermore, any first- or third-party claims made on our insurance policy may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all in the future.

Other Risks

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

Fluctuations in Our Operating Results Could Affect the Price of Our Common Stock

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

• The overall competitive environment for our products as described in "We Face Growing and New Competition" above.

• The amount and timing of sales to customers in the United States. For example, sales of a product may increase or decrease due to fluctuations in distributor buying patterns or sales initiatives that we may undertake from time to time.

• The amount and timing of our sales to Hoffmann-La Roche and our other partners of products for sale outside of the United States and the amount and timing of sales to their respective customers, which directly impact both our product sales and royalty revenues.

• The timing and volume of bulk shipments to licensees.

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

• The extent of product discounts extended to customers.

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

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

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

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

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

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Our Stock Price, Like That of Many Biotechnology Companies, Is Highly Volatile

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

            In addition, the following factors may have a significant impact on the market price of our common stock:

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

• Developments or outcome of litigation concerning proprietary rights, including patents.

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

• Regulatory developments or delays concerning our products in the United States and foreign countries.

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

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

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

In Connection With the Redemption of Our Special Common Stock, We Recorded Substantial Goodwill and Other Intangibles, the Amortization or Impairment of Which May Adversely Affect Our Earnings

            As a result of the redemption of our Special Common Stock, Roche owned all of our outstanding common stock. Consequently, push-down accounting under generally accepted accounting principles in the U.S. was required. Push-down accounting required us to establish a new accounting basis for our assets and liabilities, based on Roche's cost in acquiring all of our stock. In other words, Roche's cost of acquiring Genentech was "pushed down" to us and reflected on our financial statements. Push-down accounting required us to record goodwill of approximately $1,685.7 million and other intangible assets of $1,499.0 million on June 30, 1999. The other intangible assets are being amortized over their estimated useful lives ranging from 5 to 15 years. See the "Goodwill and Other Intangible Assets" note in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further information on these oth er intangible assets.

            Statement of Financial Accounting Standards (or FAS) No. 142, "Goodwill and Other Intangible Assets," which was adopted January 1, 2002, requires that goodwill not be amortized, but rather be subject to an impairment test at least annually. Separately identified and recognized intangible assets resulting from business combinations completed before July 1, 2001, that did not meet the new criteria under FAS 141, "Business Combinations," for separate recognition of intangible assets have been reclassified into goodwill upon adoption. These intangible assets included our trained and assembled workforce. In addition, the useful lives of recognized intangible assets acquired in transactions completed before July 1, 2001, will be reassessed at each reporting date and the remaining amortization periods adjusted accordingly. At least annually, we will evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill and other intangible assets may not be recoverable. If our evaluation of the assets results in a possible impairment, we may have to reduce the carrying value of our intangible assets. This could have a material adverse effect on our financial condition and results of operations during the periods in which we recognize a reduction. We may have to write down intangible assets in future periods. We performed an impairment test of goodwill at transition on January 1, 2002, and an annual impairment test on September 30, 2002, and found no impairment. For more information about push-down accounting, see the "Redemption of Our Special Common Stock" note in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. For more information regarding FAS 142 and 141, see the "Description of Business and Summary of Significant Accounting Policies" and the "Goodwill and Other Intangible Assets" notes in the Notes to Consolidated Financial Statements in Part II , Item 8 of this Form 10-K.

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Future Stock Repurchases Could Adversely Affect Our Cash Position

            On October 31, 2001, our Board of Directors authorized a stock repurchase program to repurchase up to 13.0 million shares for an amount not to exceed $625.0 million of our common stock over a 12 month period. On August 15, 2002, our Board of Directors authorized an extension of the stock repurchase program through June 30, 2003, for the repurchase of additional shares for an amount not to exceed an additional $375.0 million of our common stock, increasing the program to a total of approximately 29.6 million shares and an amount not to exceed a total of $1.0 billion. Purchases may be made in the open market or in privately negotiated transactions from time to time at management's discretion. We may also engage in transactions in other Genentech securities in conjunction with the repurchase program, including derivative securities. We also entered into a 10b5-1 insider trading plan on February 8, 2002, to repurchase shares in the open market during those periods each quarter when trading in our stock by insiders is restricted under our insider trading policy. Under its terms, the 10b5-1 plan terminated on October 11, 2002, the date on which a total of 3.0 million shares had been purchased under the plan during the period from February 8, 2002 to October 11, 2002. Due to the extension of the stock repurchase program, another 10b5-1 trading plan was entered into on November 13, 2002, to repurchase shares in the open market during those periods each quarter when trading in our stock is restricted under our insider trading policy. This plan covers 2.5 million shares. Under the stock repurchase program approved by our Board of Directors, we repurchased approximately 18.2 million shares of our common stock in 2002 at a cost of approximately $692.8 million. Of those shares repurchased, the number of shares repurchased under our 10b5-1 trading plans were approximately 3.6 million during 2002. In 2001, we repurchased 900,00 0 shares of our common stock at a cost of $39.7 million, of which 800,000 shares were repurchased with the approval of our Board of Directors at a cost of $34.0 million prior to our adoption of the stock repurchase program, and 100,000 shares were repurchased at a cost of $5.7 million under the stock repurchase program approved by our Board of Directors. Under the stock repurchase program to date, we repurchased approximately 18.3 million shares of our common stock at a cost of approximately $698.4 million during the period from November 1, 2001, through December 31, 2002.

            While the dollar amounts associated with these future stock repurchases cannot currently be estimated, these stock repurchases could have a material adverse effect on our cash position, credit rating and ability to access capital in the financial markets, and could limit our ability to use our capital stock as consideration for acquisitions. For more information on our stock repurchase program, see the "Liquidity and Capital Resources" section above and the item immediately following.

Our Affiliation Agreement With Roche Could Adversely Affect Our Cash Position

            Our affiliation agreement with Roche provides that we establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock based on an established Minimum Percentage. For more information on our stock repurchase program, see the "Capital Stock" note in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. See the "Relationship With Roche -- Roche's Ability to Maintain Its Percentage Ownership Interest in Our Stock" note in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for information regarding the Minimum Percentage.

            While the dollar amounts associated with these future stock repurchases cannot currently be estimated, these stock repurchases could have a material adverse effect on our cash position, and may have the effect of limiting our ability to use our capital stock as consideration for acquisitions.

Future Sales of Our Common Stock by Roche Could Cause the Price of Our Common Stock to Decline

            As of December 31, 2002, Roche owned 306,594,352 shares of our common stock or 59.8% of our outstanding shares. All of our shares owned by Roche are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon Roche's request, we will file one or more registration statements under the Securities Act in order to permit Roche to offer and sell shares of our common stock. Sales of a substantial number of shares of our common stock by Roche in the public market could adversely affect the market price of our common stock.

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Roche Holdings, Inc., Our Controlling Stockholder, May Have Interests That Are Adverse to Other Stockholders

            Roche as our majority stockholder, controls the outcome of actions requiring the approval of our stockholders. Our bylaws provide, among other things, that the composition of our board of directors shall consist of two Roche directors, three independent directors nominated by a nominating committee and one Genentech employee nominated by the nominating committee. As long as Roche owns in excess of 50% of our common stock, Roche directors will comprise two of the three members of the nominating committee. However, at any time until Roche owns less than 5% of our stock, Roche will have the right to obtain proportional representation on our board. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot assure stockholders that Roche will not institute a new business plan in the future. Roche's interests may conflict with minorit y shareholder interests.

Our Affiliation Agreement With Roche Could Limit Our Ability to Make Acquisitions and Could Have a Material Negative Impact on Our Liquidity

            The affiliation agreement between us and Roche contains provisions that:

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

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

• Require us to establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock based on an established Minimum Percentage. For information regarding Minimum Percentage, see the "Relationship With Roche -- Roche's Ability to Maintain Its Percentage Ownership Interest in Our Stock" note in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. For more information on our stock repurchase program, see the "Capital Stock" note in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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

Our Stockholders May Be Unable to Prevent Transactions That Are Favorable to Roche but Adverse to Us

Our certificate of incorporation includes provisions relating to:

• Competition by Roche with us.

• Offering of corporate opportunities.

• Transactions with interested parties.

• Intercompany agreements.

• Provisions limiting the liability of specified employees.

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

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Potential Conflicts of Interest Could Limit Our Ability to Act on Opportunities That Are Adverse to Roche

            Persons who are directors and/or officers of Genentech and who are also directors and/or officers of Roche may decline to take action in a manner that might be favorable to us but adverse to Roche. Two of our directors, Dr. Franz B. Humer and Dr. Jonathan K.C. Knowles, currently serve as officers and employees of Roche Holding Ltd and its affiliates, and Dr. Humer is a director of Roche Holding Ltd.

We Are Exposed to 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 relating to these exposures, we enter into various derivative hedging transactions pursuant to our investment and risk management policies and procedures. We do not use derivatives for speculative purposes.

            We maintain risk management control systems to monitor the risks associated with interest rates, foreign currency exchange rates and equity investment price changes, and our derivative and financial instrument positions. The risk management control systems use analytical techniques, including sensitivity analysis and market values. Though we intend for our risk management control systems to be comprehensive, 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 maximum amount 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 estimation as fair market value loss. The exposures to interest rate, foreign currency exchange rate and equity investment price changes are calculated based on proprietary modeling techniques from a Monte Carlo simulation value at risk model using a 21-trading days holding period and a 95% confidence level. The value at risk model assumes non-linear financial returns and generates potential paths various market prices could take and tracks the hypothetical performance of a portfolio under each scenario to approximate its financial return. The value at risk model takes into account correlations and diversificat ion across market factors, including interest rates, foreign currencies and equity prices. Hedge instruments are modeled as positions on the actual underlying securities. No proxies were used. Market volatilities and correlations are based on one year historical times-series provided by J.P. Morgan Riskmetrics™ as of December 31, 2002.

      Our Interest Income is Subject to Fluctuations in Interest Rates

            Our material interest-bearing assets, or interest-bearing portfolio, consisted of cash, cash equivalents, restricted cash, short-term investments, convertible preferred stock investments, nonmarketable debt securities, long-term investments and interest-bearing forward contracts. The balance of our interest-bearing portfolio was $2,011.8 million or 30% of total assets at December 31, 2002. Interest income related to this portfolio was $101.4 million or 4% of total revenues. Our interest income is sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest-bearing portfolio. To mitigate the impact of fluctuations in U.S. interest rates, for a portion of our portfolio, we may enter into swap transactions which involve the receipt of fixed rate interest and the payment of floating rate interest without the exchange of t he underlying principal.

            Based on our overall interest rate exposure at December 31, 2002, including derivative and other interest rate sensitive instruments, a near-term change in interest rates, within a 95% confidence level based on historical interest rate movements could result in a potential loss in fair value of our interest rate sensitive instruments of $14.1 million. At December 31, 2001, the potential loss in fair value of our interest rate sensitive instruments was $32.2 million. At December 31, 2000, we estimated that the potential losses in fair value of our interest rate sensitive instruments were not material.

55

      We Are Exposed to Risks Relating to Foreign Currency Exchange Rates and Foreign Economic Conditions

            We receive royalty revenues 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. We are exposed to changes in exchange rates in Europe, Asia (primarily Japan) and Canada. Our exposure to foreign exchange rates primarily exists with the Swiss franc. 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 revenues increases. Accordingly, changes in exchange rates, and in particular a strengthening of the dollar, may adversely affect our royalty revenues as expressed in dollars. Exchange rate exposures on these royalties are be ing offset by expenses arising from our foreign manufacturing facility as well as non-dollar expenses incurred in our collaborations. Currently, our foreign royalty revenues exceed our foreign expenses. In addition, as part of our overall investment strategy, a portion of our portfolio is primarily in non-dollar denominated investments. As a result, we are exposed to changes in the exchange rates of the countries in which these non-dollar denominated investments are made.

            To mitigate our net foreign exchange exposure, our policy allows us to hedge certain of our anticipated royalty revenues by purchasing option contracts with expiration dates and amounts of currency that are based on 25% to 90% of probable future revenues so that the potential adverse impact of movements in currency exchange rates on the non-dollar denominated revenues will be at least partly offset by an associated increase in the value of the option. Generally, the term of these options is one to five years. To hedge the non-dollar expenses arising from our foreign manufacturing facility, we may enter into forward contracts to lock in the dollar value of a portion of these anticipated expenses.

            Based on our overall currency rate exposure at December 31, 2002, 2001 and 2000, including derivative and other foreign currency sensitive instruments, a near-term change in currency rates within a 95% confidence level based on historical currency rate movements would not materially affect the fair value of our foreign currency sensitive instruments.

      Our Investments in Equity Securities Are Subject to Market Risks

            As part of our strategic alliance efforts, we invest in equity instruments of biotechnology companies. Our biotechnology equity investment portfolio totaled $276.6 million or 4% of total assets at December 31, 2002. These investments are subject to fluctuations from market value changes in stock prices. For example, in 2002 and 2001, we recorded charges related to the write-down of certain equity security investments that had other than temporary impairments.

            To mitigate the risk of market value fluctuation, certain equity securities are hedged with zero-cost collars and forward contracts. A zero-cost collar is a purchased put option and a written call option in which 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 at the time of purchase. The purchased put protects us from a decline in the market value of the security below a certain minimum level (the put "strike" level), while the call effectively limits our potential to benefit from an increase in the market value of the security above a certain maximum level (the call "strike" level). A forward contract is a derivative instrument where we lock-in the termination price 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. In addition, as part of our strategic alliance efforts, we hold dividend-bearing convertible preferred stock and have made interest-bearing loans that are convertible into the equity securities of the debtor. Depending on market conditions, we may determine that in 2003 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 at December 31, 2002, a near-term change in equity prices within a 95% confidence level based on historic volatilities

56

could result in a potential loss in fair value of our equity securities portfolio of $23.0 million. We estimated that the potential loss in fair value of our equity securities portfolio was $22.7 million at December 31, 2001 and $94.0 million at December 31, 2000.

      We Are Exposed to Credit Risk of Counterparties

            We could be exposed to losses related to the financial instruments described above should one of our counterparties default. We attempt to mitigate this risk through credit monitoring procedures.

The Company's Effective Tax Rate May Vary Significantly

            Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include but are not limited to changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of R&D spending, future levels of capital expenditures, and our success in R&D and commercializing biotherapeutics.

New and Potential New Accounting Pronouncements May Impact Our Future Financial Position and Results of Operations

            On June 30, 2002, the Financial Accounting Standards Board (or FASB) issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring, discontinued operation, plant closing, or other exit or disposal activity. FAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 is not expected to have a significant impact on our financial position and results of operations.

            In November 2002, the FASB issued Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN 45 is not expected to have a material impact on our results of operations and financial position. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K regarding our disclosures on residual value guarantees and our exposure related to our agreement with Serono S.A.

            In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on beh alf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for expanded disclosures.

57

            There may be potential new accounting pronouncements or regulatory rulings which may have an impact on our future financial position and results of operations. In particular, there are a number of rule changes and proposed legislative initiatives following the recent corporate bankruptcies and failures which could result in changes in accounting rules, including the accounting of employee stock options as an expense. These and other potential changes could materially impact our assets and liabilities, and the expenses we report under generally accepted accounting principles, and could adversely affect our operating results or financial condition.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            Refer to the section labeled "Forward-Looking Information and Cautionary Factors That May Affect Future Results-We Are Exposed to Market Risk" of Part II, Item 7 of this Form 10-K.

58

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Genentech, Inc.

            We have audited the accompanying consolidated balance sheets of Genentech, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the 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, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. 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.

            As discussed in the notes to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities, and in 2000 the Company changed its method of accounting for revenue recognition.

/s/ ERNST & YOUNG LLP

Palo Alto, California
January 14, 2003,
except for the note titled
Subsequent Event, as
to which the date is
February 12, 2003

59

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

	Year Ended December 31,
	2002		2001		2000
Revenues
Product sales (including amounts from related party:       2002-$117,257; 2001-$76,290; 2000-$67,392)	$	2,163,665	$	1,742,897	$	1,278,344
Royalties (including amounts from related party:       2002-$152,642; 2001-$87,854; 2000-$46,795)		365,550		264,475		207,241
Contract and other (including amounts from related parties:       2002-$13,348; 2001-$5,754; 2000-$3,506)		88,652		74,361		160,363
Interest income		101,379		130,544		90,408
Total revenues		2,719,246		2,212,277		1,736,356
Costs and expenses
Cost of sales (including amounts for related party:       2002-$99,150; 2001-$63,761; 2000-$56,674)		441,630		354,442		364,892
Research and development (including contract related:       2002-$24,060; 2001-$9,434; 2000-$25,709)		623,482		526,230		489,879
Marketing, general and administrative		573,289		474,410		368,224
Collaboration profit sharing		350,725		246,657		128,812
Recurring charges related to redemption		155,713		321,816		375,300
Special charges: litigation-related		543,905		-		-
Interest expense		753		5,736		5,276
Total costs and expenses		2,689,497		1,929,291		1,732,383
Income before taxes and cumulative effect of accounting change		29,749		282,986		3,973
Income tax (benefit) provision		(34,038)		127,112		20,414
Income (loss) before cumulative effect of accounting change		63,787		155,874		(16,441)
Cumulative effect of accounting change, net of tax		-		(5,638)		(57,800)
Net income (loss)	$	63,787	$	150,236	$	(74,241)
Earnings (loss) per share:
Basic:
Earnings (loss) before cumulative effect of accounting change	$	0.12	$	0.30	$	(0.03)
Cumulative effect of accounting change, net of tax		-		(0.01)		(0.11)
Net earnings (loss) per share	$	0.12	$	0.29	$	(0.14)
Diluted:
Earnings (loss) before cumulative effect of accounting change	$	0.12	$	0.29	$	(0.03)
Cumulative effect of accounting change, net of tax		-		(0.01)		(0.11)
Net earnings (loss) per share	$	0.12	$	0.28	$	(0.14)
Weighted-average shares used to compute basic earnings    (loss) per share		519,192		527,022		522,179
Weighted-average shares used to compute diluted earnings    (loss) per share		524,408		535,291		522,179
Pro forma amounts assuming the new revenue recognition    policy was applied retroactively (unaudited):
Net loss		-		-	$	(16,441)

___________

See Notes to Consolidated Financial Statements.

60

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Year Ended December 31,
	2002		2001		2000
Cash flows from operating activities:
Net income (loss)	$	63,787	$	150,236	$	(74,241)
Adjustments to reconcile net income (loss) to net cash       provided by operating activities:
Depreciation and amortization		274,955		428,091		463,004
Deferred income taxes		(196,644)		29,357		(196,782)
Gain on sales of securities available-for-sale		(53,710)		(30,001)		(132,307)
Loss on sales of securities available-for-sale		5,868		2,011		3,957
Write-down of securities available-for-sale		40,759		27,504		4,800
Loss on fixed asset dispositions		15,883		4,211		1,123
Changes in assets and liabilities:
Litigation-related liability		552,185		-		-
Investments in trading securities		(121,986)		(85,712)		(20,963)
Receivables and other current assets		(107,483)		(59,512)		(103,863)
Inventories, including inventory write-up effect		(36,596)		(91,116)		9,415
Accounts payable, other current liabilities and other          long-term liabilities		150,682		105,558		239,388
Net cash provided by operating activities		587,700		480,627		193,531
Cash flows from investing activities:
Purchases of securities available-for-sale		(806,444)		(1,559,230)		(560,405)
Proceeds from sales and maturities of securities available-for-sale		1,746,198		1,084,546		574,145
Purchases of nonmarketable equity securities		(6,290)		(5,830)		(5,663)
Capital expenditures		(322,832)		(213,351)		(112,681)
Change in other assets		12,875		(10,105)		(55,604)
Transfer to restricted cash		(630,000)		-		-
Net cash used in investing activities		(6,493)		(703,970)		(160,208)
Cash flows from financing activities:
Stock issuances		74,164		106,866		180,379
Stock repurchases		(692,752)		(39,704)		-
Repayment of short-term debt		(149,692)		-		-
Net cash (used in) provided by financing activities		(768,280)		67,162		180,379
Net (decrease) increase in cash and cash equivalents		(187,073)		(156,181)		213,702
Cash and cash equivalents at beginning of year		395,203		551,384		337,682
Cash and cash equivalents at end of year	$	208,130	$	395,203	$	551,384
Supplemental cash flow data:
Cash paid during the year for:
Interest	$	7,482	$	7,493	$	7,493
Income taxes paid (received)		128,108		36,450		(5,005)
Stock received as consideration for outstanding loans		-		6,490		5,000

___________

See Notes to Consolidated Financial Statements.

61

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)

	December 31,
	2002		2001
Assets:
Current assets:
Cash and cash equivalents	$	208,130	$	395,203
Short-term investments		826,442		952,875
Accounts receivable - trade (net of allowances of: 2002-$16,827; 2001-$17,337)		224,343		193,203
Accounts receivable - other (net of allowances of: 2002-$5,004; 2001-$5,005)		87,244		55,270
Accounts receivable - related parties		106,894		66,867
Inventories		393,542		356,946
Deferred tax assets		82,299		139,567
Hedge receivable		103,148		22,567
Prepaid expenses and other current assets		50,742		38,896
Total current assets		2,082,784		2,221,394
Long-term marketable securities and other		567,286		1,516,813
Property, plant and equipment, net		1,068,734		865,668
Goodwill (net of accumulated amortization of: 2001-$996,779)		1,334,219		1,302,493
Other intangible assets (net of accumulated amortization of:    2002-$1,578,884; 2001-$1,459,285)		927,538		1,113,299
Restricted cash		686,600		56,600
Other long-term assets		110,158		70,622
Total assets	$	6,777,319	$	7,146,889
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable	$	51,380	$	33,348
Short-term debt		-		149,692
Accrued liabilities - related parties		51,116		45,259
Deferred revenue		20,044		19,543
Other accrued liabilities		524,120		415,955
Total current liabilities		646,660		663,797
Deferred tax liabilities		167,514		447,809
Deferred revenue		69,533		68,033
Litigation-related and other long-term liabilities		554,728		47,431
Total liabilities		1,438,435		1,227,070
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.02 par value; authorized: 100,000,000 shares; none issued		-		-
Common stock, $0.02 par value; authorized: 1,200,000,000 shares;       outstanding: 2002-512,810,225 and 2001-528,313,286		10,256		10,566
Additional paid-in capital		6,650,352		6,794,831
Accumulated deficit, since June 30, 1999		(1,590,366)		(1,197,300)
Accumulated other comprehensive income		268,642		311,722
Total stockholders' equity		5,338,884		5,919,819
Total liabilities and stockholders' equity	$	6,777,319	$	7,146,889

See Notes to Consolidated Financial Statements.

62

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

	Common Stock Shares	Common Stock		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income		Total
Balance December 31, 1999	516,221	$	10,324	$	6,245,146	$	(1,245,112)	$	259,499	$	5,269,857
Comprehensive loss
Net loss							(74,241)				(74,241)
Changes in unrealized gain on securities      available-for-sale, net of tax									72,119		72,119
Comprehensive loss											(2,122)
Issuance of stock upon exercise of options	8,259		166		148,241						148,407
Issuance of stock under employee stock plan	997		20		31,968						31,988
Income tax benefits realized from employee    stock option exercises					226,073						226,073
Balance December 31, 2000	525,477		10,510		6,651,428		(1,319,353)		331,618		5,674,203
Comprehensive income
Net income							150,236				150,236
Changes in unrealized (loss) on securities      available-for-sale, net of tax									(27,741)		(27,741)
Cumulative effect of adopting FAS 133,      net of tax									5,020
Changes in fair value of derivatives, net      of tax									5,757
Derivative gains reclassified from      other comprehensive income, net of tax									(2,932)		7,845
Comprehensive income											130,340
Issuance of stock upon exercise of options	2,898		57		71,538						71,595
Issuance of stock under employee stock plan	838		17		35,254						35,271
Repurchase of common stock	(900)		(18)		(11,503)		(28,183)				(39,704)
Income tax benefits realized from employee    stock option exercises					48,114						48,114
Balance December 31, 2001	528,313		10,566		6,794,831		(1,197,300)		311,722		5,919,819
Comprehensive income
Net income							63,787				63,787
Changes in unrealized (loss) on securities      available-for-sale, net of tax									(38,778)		(38,778)
Changes in fair value of derivatives, net      of tax									(4,302)		(4,302)
Comprehensive income											20,707
Issuance of stock upon exercise of options	1,672		34		39,018						39,052
Issuance of stock under employee stock plan	1,066		21		35,091						35,112
Repurchase of common stock	(18,241)		(365)		(235,534)		(456,853)				(692,752)
Income tax benefits realized from employee    stock option exercises					16,946						16,946
Balance December 31, 2002	512,810	$	10,256	$	6,650,352	$	(1,590,366)	$	268,642	$	5,338,884

___________

See Notes to Consolidated Financial Statements.

63

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 and "Redeemable Common Stock" refers to Genentech's redeemable common stock, par value $0.02 per share.

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            Genentech is a leading biotechnology company using human genetic information to discover, develop, manufacture and commercialize biotherapeutics for significant unmet medical needs. Fifteen of the approved products of biotechnology originated from or are based on our science. We manufacture and commercialize 10 biotechnology products directly in the United States and license several additional products to other companies.

      Principles of Consolidation

            The consolidated financial statements include the accounts of Genentech and all subsidiaries. Material intercompany balances and transactions are eliminated.

      Use of Estimates

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

      Stock Award Plans

            We have elected to continue to follow Accounting Principles Board Opinion No. 25 (or APB 25), "Accounting for Stock Issued to Employees," to account for employee stock options because the alternative fair value method of accounting prescribed by Statement of Financial Accounting Standards (or FAS) No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, the intrinsic value method of accounting, no compensation expense is recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant.

      Changes in Accounting Principles

            On January 1, 2002, we adopted FAS 141, "Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also specifies the criteria for the recognition of intangible assets separately from goodwill. Under the new rules, goodwill is no longer amortized but is subject to an impairment test at least annually. FAS 141 specifically identified assembled workforce as an intangible asset that is not to be recognized apart from goodwill and it was subsumed into goodwill on January 1, 2002. Other intangible assets that meet the new criteria continue to be amortized over their useful lives.

            In accordance with FAS 141 and 142, we discontinued the amortization of goodwill and our trained and assembled workforce intangible asset, which resulted in an increase in reported net income by approximately $157.6 million (or $0.30 per share) in 2002, as compared to the accounting prior to the adoption of FAS 141 and 142. See also the "Goodwill and Other Intangible Assets" note below for further information.

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            A reconciliation of previously reported net income (loss) and earnings per share to the amounts adjusted for the exclusion of goodwill amortization and the amortization of our trained and assembled workforce intangible asset follows (in millions, except per share amounts):

	2002		2001		2000
Reported net income (loss)	$	63.8	$	150.2	$	(74.2)
Add back: Goodwill amortization		-		153.3		153.3
Trained and assembled workforce amortization		-		4.3		4.3
Adjusted net income	$	63.8	$	307.8	$	83.4
Basic earnings (loss) per share:
Reported net income (loss)	$	0.12	$	0.29	$	(0.14)
Goodwill amortization		-		0.29		0.29
Trained and assembled workforce amortization		-		-		0.01
Adjusted net income	$	0.12	$	0.58	$	0.16
Diluted earnings (loss) per share:
Reported net income (loss)	$	0.12	$	0.28	$	(0.14)
Goodwill amortization		-		0.29		0.29
Trained and assembled workforce amortization		-		0.01		0.01
Adjusted net income	$	0.12	$	0.58	$	0.16

            We adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," on January 1, 2002. FAS 144 supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The primary objectives of FAS 144 are to develop one accounting model based on the framework established in FAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. Our adoption of FAS 144 did not have a material impact on our financial position or results of operations.

            On January 1, 2001, we adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." FAS 133 requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of FAS 133 resulted in a $5.6 million charge, net of tax, ($0.01 per share ) as a cumulative effect of an accounting change and the recognition of $6.0 million in gains, net of tax, ($0.01 per share) related to the change in the time value of certain hedging instruments in the statement of operations in 2001, and an increase of $5.0 million, net of tax, in other comprehensive income.

            We previously recognized non-refundable, upfront product license fees as revenue when the technology was transferred and when all of our significant contractual obligations relating to the fees had been fulfilled. Effective January 1, 2000, we changed our method of accounting for non-refundable upfront product license fees and certain guaranteed payments to recognize such fees over the term of the related development collaboration when, at the execution of the agreement, the development period involves significant risk due to the incomplete stage of the product's development, or over the period of manufacturing obligation when, at the execution of the agreement, the product is approved for marketing, or nearly approvable, and development risk has been substantially eliminated. Deferred revenue related to manufacturing obligations will be recognized on a straight-line basis over the longer of the contractual term of t he manufacturing obligation or the expected period over which we will supply the product. We believe the change in accounting principle is preferable based on guidance provided in the Securities and Exchange Commission's (or SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The cumulative effect of the change in accounting principle was reported as a charge in the year ended December 31, 2000. The cumulative effect was initially recorded as deferred revenue that will be recognized as revenue over the remaining term of the research and development collaboration or distribution agreements, as appropriate. For the year ended December 31, 2000, the impact of the change in accounting was to increase net loss by $52.6 million, or $0.10 per share, comprised of the $57.8 million cumulative effect of the change (net of tax impact) as described above ($0.11 per share), net of $5.2 million of the related deferred revenue (less related tax impact of $3.4 million) that was recognized as revenue during that year ($0.01 per share). The remainder of the related deferred revenue of $90.7 million as of December 31, 2001, will be recognized through 2019. Pro forma amounts of net income (loss) and relate d per share amounts, assuming retroactive application of the accounting change for 2000 are as follows (in millions, except per share amounts):

	2000
As Reported:
Net loss	$	(74.2)
Net loss per share - diluted	$	(0.14)
Pro forma amounts with the change in accounting principle related to revenue    recognition applied retroactively (unaudited):
Net loss	$	(16.4)
Net loss per share - diluted	$	(0.03)

      Recent Accounting Pronouncements

            In June 2002, the Financial Accounting Standards Board (or FASB) issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring, discontinued operation, plant closing, or other exit or disposal activity. FAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 is not expected to have a significant impact on our financial position and results of operations.

            In November 2002, the FASB issued Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN 45 did not have a material impact on our results of operations and financial position. See the "Leases, Commitments and Contingencies" note below regarding our disclosures on residual value guarantees and our exposure related to our agreement with Serono S.A.

            In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on beh alf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. See the "Leases, Commitments and Contingencies" note below for expanded disclosures required by FIN 46.

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." FAS 148 amends FAS 123 "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002. We have elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB 25), "Accounting for Stock Issued to Employees," t o account for employee stock options. See below in the "Capital Stock" note for the disclosures required by FAS 148.

      Cash and Cash Equivalents

            We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

      Short-Term Investments and Long-Term Marketable Securities

            We invest our excess cash balances in short-term and long-term marketable securities, primarily corporate notes, government agencies, preferred stock, asset-backed securities and municipal bonds. 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. All of our equity investments represent less than a 20% ownership position. Marketable equity and nonmarketable debt securities are accounted for as available-for-sale investments as described below. Nonmarketable equity securities are carried at cost. We periodically monitor the liquidity and financing activities of the respective issuers to determine if impairment write downs are necessary.

            Investment securities are classified into one of three categories: held-to-maturity, available-for-sale or trading. Securities are considered held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, including adjustments for amortization of premiums and accretion of discounts. Securities are considered trading when purchased principally for the purpose of selling in the near term. These securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in interest income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. These securities are recorded as either short-term or long-term investments and are carried at fair value with unrealized gains and losses included in accumulated other comprehensive income in stockholders' equity. If the fair value of a security is below its carrying value for each trading day for six consecutive months or if its decline is due to a significant adverse event, the impairment is considered to be other-than-temporary. An other-than-temporary decline in fair value of a debt or equity security of a biotechnology company is written down to its estimated fair value with a charge to marketing, general and administrative expenses. Other-than-temporary declines in fair value of all other short-term or long-term marketable securities are charged against interest income. The cost of all securities sold is based on the specific identification method. We recognized expense of $40.8 million in 2002, $27.5 million in 2001 and $4.8 million in 2000 as a result of charges related to other than temporary declines in the fair values of certain of our marketable equity and debt securities.

      Derivative Instruments

            We use derivatives to partially offset 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 fair value. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the 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 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 deriva tive instrument is

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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. Gain or loss on the derivative instrument 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 the "Derivative Financial Instruments" note below for further information on our accounting for derivatives.

      Inventories

            Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average approach, which approximates the first-in first-out method. If inventory costs exceeds expected market value due to obsolescence or unmarketability, reserves are recorded for the difference between the cost and the market value. These reserves are determined based on significant estimates. Inventories consist of currently marketed products, and product candidates awaiting regulatory approval (i.e. pre-launch inventories), which were capitalized based on management's judgment of probable near term commercialization.

            Inventories were higher in 2002 due to increased production of marketable products. The increase in 2001 was primarily due to higher pre-launch inventories of Xolair and Raptiva and higher Herceptin inventories. As a result of push-down accounting, we recorded $186.2 million related to the write up of inventory to its then fair value, of which we recognized in cost of sales the remaining $92.8 million in 2000 upon the sale of inventory. In anticipation of the launch of Xolair, we produced approximately $76.7 million of Xolair inventory, of which $45.5 million has been paid by our collaborator, Novartis Pharmaceuticals Corporation, or are covered by inventory reserves. In anticipation of the launch of Raptiva, we produced approximately $11.9 million of inventory, of which $7.1 million has been covered by inventory reserves. The Xolair and Raptiva inventories are included in work in process. Due to the launch delay s of Xolair and Raptiva, we continually assess the realizability of these inventories based on expected U.S. Food and Drug Administration (or FDA) approval dates, forecasted sales and product expiration. Inventories at December 31, 2002 and 2001 are summarized below (in thousands):

	2002		2001
Raw materials and supplies	$	30,181	$	23,633
Work in process		329,819		299,717
Finished goods		33,542		33,596
Total	$	393,542	$	356,946

      Property, Plant and Equipment

            The costs of buildings and equipment are depreciated using the straight-line method over the following estimated useful lives of the assets:

	Useful Lives
Buildings	25 years
Certain manufacturing equipment	15 years
Other equipment	4 or 8 years
Leasehold improvements	length of applicable lease

            The costs of repairs and maintenance are expensed as incurred. Capitalized interest on construction-in-progress is included in property, plant and equipment. The repairs and maintenance expenses and capitalized interest were as follows (in millions):

	2002		2001		2000
Repairs and maintenance expenses	$	51.2	$	52.8	$	42.1
Capitalized interest		1.0		1.8		2.2

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            Property, plant and equipment balances at December 31, 2002 and 2001 are summarized below (in thousands):

	2002		2001
At cost:
Land	$	149,533	$	125,029
Buildings		422,790		402,473
Equipment		880,624		788,198
Leasehold improvements		53,589		30,632
Construction-in-progress		289,810		155,563
		1,796,346		1,501,895
Less: accumulated depreciation and amortization		727,612		636,227
Net property, plant and equipment	$	1,068,734	$	865,668

            Depreciation expense was $104.6 million in 2002, $96.3 million in 2001, and $88.8 million in 2000.

      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.

      Restricted Cash

            On October 3, 2002, we entered into an arrangement with third-party insurance companies to post a $600.0 million bond in connection with the City of Hope trial judgment that was issued in the second quarter of 2002. As part of this arrangement, we were required to pledge $630.0 million in cash and investments to secure this bond. The $630.0 million of cash and investments are classified as restricted cash on our consolidated balance sheet at December 31, 2002.

            Under certain lease agreements, we may be required from time to time to set aside cash as collateral. At December 31, 2002 and 2001, we had $56.6 million of restricted cash related to such lease agreements.

      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.

      Goodwill and Other Intangible Assets

            Goodwill represents the difference between the purchase price and the fair value of the net assets when accounted for by the purchase method of accounting arising from Roche's purchases of our Special Common Stock and push-down accounting (refer to the "Redemption of Our Special Common Stock" note below). Prior to 2002, goodwill was amortized using the straight-line method over 15 years. We performed an impairment test of goodwill upon transition to FAS 142 on January 1, 2002, and an annual impairment test on September 30, 2002, and found no impairment. We will continue to evaluate our goodwill for impairment on an annual basis each September and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            FAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We currently amortize our other intangible assets arising from Roche's purchase of our Special Common Stock and push-down accounting over their estimated useful lives ranging from five to 15 years. Costs of patents and patent applications related to products and processes of significant importance to us are capitalized and amortized on a straight-line basis over their estimated useful lives of approximately 12 years. Other intangible assets are generally amortized on a straight-line basis over their estimated useful lives. See also the "Goodwill and Other Intangible Assets" note below.

      Revenue Recognition

      Product Sales

            We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed, and determinable and collectibility is reasonably assured. Allowances are established for estimated uncollectible amounts, product returns and discounts.

      Royalty Revenue

            Royalties from licensees are based on third-party sales of licensed products or technologies and recorded as earned in accordance with contract terms when third-party results can be reliably determined and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends.

            We receive royalties on sales of rituximab outside of the U.S. (excluding Japan), on sales of Pulmozyme and Herceptin outside of the U.S. and on sales of certain of our products in Canada from F. Hoffmann-La Roche Ltd, a subsidiary of Roche (or Hoffmann-La Roche). See "Relationship With Roche" note below for further discussion.

            We receive royalties on sales of growth hormone, tissue-plasminogen activator and tenecteplase products outside of the U.S. and Canada, excluding Japan, through other licensees. We also receive worldwide royalties on additional licensed products that are marketed by other companies.

      Contract Revenue

            Contract revenue for research and development (or R&D) is recorded as earned based on the performance requirements of the contract. Non-refundable license fees for which no further performance obligations exist, and there is no continuing involvement by Genentech, are recognized on the earlier of when the payments are received or when collection is assured.

            Revenue from non-refundable upfront license fees and certain guaranteed payments where we continue involvement through development collaboration or an obligation to supply product is recognized ratably over the development period when, at the execution of the agreement, the development period involves significant risk due to the incomplete stage of the product's development, and/or over the period of the manufacturing obligation, when, at the execution of the agreement, the product is approved for marketing, or nearly approvable, and development risk has been substantially eliminated. Deferred revenues related to manufacturing obligations are recognized on a straight-line basis over the longer of the contractual term of the manufacturing obligation or the expected period over which we will supply the product.

            Revenue associated with performance milestones is recognized based upon the achievement of the milestones, as defined in the respective agreements. Revenue under R&D cost reimbursement contracts is recognized as the related costs are incurred.

            Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      Research and Development Expenses

            Research and development (or R&D) expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and other outside service fees, 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 fund R&D at other companies and research institutions under agreements, which we can generally terminate at will. R&D expenses also include activities such as product registries and investigator sponsored trials. R&D costs, including upfront fees and milestones paid to collaborative partners, are expensed as incurred.

      Collaboration Profit Sharing

            Collaboration profit sharing includes primarily the net operating profit sharing with IDEC Pharmaceuticals Corporation on Rituxan sales, and the sharing of costs with collaborators related to the commercialization of future products.

      Royalty Expenses

            Royalty expenses directly related to product sales are classified in cost of sales. Other royalty expenses, relating to royalty revenue, are classified in marketing, general and administrative expenses and totaled $92.0 million in 2002, $59.5 million in 2001, and $34.4 million in 2000.

      Advertising Expenses

            We expense the costs of advertising, which also includes promotional expenses, as incurred. Advertising expenses were $111.7 million in 2002, $91.9 million in 2001, and $86.5 million in 2000.

      401(k) Plan

            Our 401(k) Plan, or the Plan, covers substantially all of our employees. Under the Plan, eligible employees may contribute up to 15% of their eligible compensation, subject to certain Internal Revenue Service restrictions. We match a portion of employee contributions, up to a maximum of 4% of each employee's eligible compensation. The match is effective December 31 of each year and is fully vested when made. We provided $13.6 million in 2002, $11.9 million in 2001, and $10.1 million in 2000, for our match under the Plan.

      Income Taxes

            Income tax expense (benefit) is based on pretax financial accounting income (loss) under the liability method. 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 (benefit) for income taxes. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of R&D spending, future levels of capital expenditures, and changes in overall levels of pretax earnings. We believe that our reserves for these uncertainties are adequate.

            Effective with the consummation of the second public offering 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 Roche is the common parent. Accordingly, our tax sharing agreement with Roche now pertains only to the state and local tax returns in which we are consolidated or combined with Roche. We will continue to calculate our tax liability or refund with Roche for these state and local jurisdictions as if we were a stand-alone entity.

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      Earnings (Loss) Per Share

            Basic earnings (loss) per share is computed based on the weighted-average number of shares of our common stock outstanding. Diluted earnings (loss) per share is computed based on the weighted-average number of shares of our common stock and other dilutive securities. See also "Earnings (Loss) Per Share" note below. All numbers relating to the number of shares, price per share and per share amounts of Common Stock, Special Common Stock and Redeemable Common Stock give effect to the two-for-one split of our Common Stock that was effected on October 24, 2000.

      Comprehensive Income

            Comprehensive income is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in stockholders' equity that are excluded from net income (loss). Other comprehensive income (loss) includes changes in fair value of derivatives designated as and effective as cash flow hedges and unrealized gains and losses on our available-for-sale securities. Comprehensive income (loss) for the years ended December 31, 2002, 2001, and 2000 has been reflected in the Consolidated Statements of Stockholders' Equity.

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

	2002		2001
Unrealized gains on securities available-for-sales	$	265.1	$	303.9
Changes in fair values of derivatives		3.5		7.8
Accumulated other comprehensive income	$	268.6	$	311.7

      Reclassifications

            Certain reclassifications of prior year amounts have been made to conform with the current year presentation.

REDEMPTION OF OUR SPECIAL COMMON STOCK

            On June 30, 1999, Roche exercised its option to cause us to redeem all of our Special Common Stock held by stockholders other than Roche (the Redemption). The Redemption was reflected as a purchase of a business, which under U.S. generally accepted accounting principles required push-down accounting to reflect in our financial statements the amounts paid for our stock in excess of our net book value. As a result, we were required to push down the effect of the Redemption and Roche's 1990 through 1997 purchases of our Common and Special Common Stock into our consolidated financial statements at the date of the Redemption. In 1990 and 1991 through 1997 Roche purchased 60% and 5%, respectively, of the outstanding stock of Genentech. In June 1999, we redeemed all of our Special Common Stock held by stockholders other than Roche resulting in Roche owning 100% of our Common Stock. The push-down effect of Roche's aggrega te purchase price and the Redemption price in our consolidated balance sheet as of June 30, 1999 was allocated based on Roche's ownership percentages as if the purchases occurred at the original purchase dates for the 1990 and 1991 through 1997 purchases, and at June 30, 1999 for the Redemption. Management of Genentech determined the values of tangible and intangible assets, including in-process research and development (or IPR&D) used in allocating the purchase prices. The aggregate purchase prices for the acquisition of all of Genentech's outstanding shares, including Roche's estimated transaction costs of $10.0 million, was $6,604.9 million, consisting of approximately $2,843.5 million for the 1990 and 1991 through 1997 purchases and approximately $3,761.4 million for the Redemption.

            As a result of the Redemption and push-down accounting, we recorded the following expenses:

• We recorded goodwill amortization expense of $153.3 million in 2001 and $153.3 in 2000. We recorded $4.2 million in 2001 and $11.1 million in 2000 of compensation expense related to alternative arrangements provided for certain holders of some of their unvested options that were cancelled as a result of the Redemption. See the "Goodwill and Other Intangible Assets" section below for the amortization of our other acquisition-related intangible assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

• The estimated useful life of the inventory adjustment to fair value resulting from the Redemption was approximately one year based upon the expected time to sell inventories on hand at June 30, 1999. As the fair-valued inventory was sold, the related write up amount was charged to cost of sales. In 2000, we recognized the remaining $92.8 million of expense related to the inventory write up adjustment. All inventory written up as a result of the Redemption was sold as of December 31, 2000.

GOODWILL AND OTHER INTANGIBLE ASSETS

            Changes in the net carrying amount of goodwill in 2002 are as follows (in millions):

Balance as of December 31, 2001	$	1,302.5
Reclassification of intangible asset - trained and assembled workforce into goodwill, net		31.7
Balance as of December 31, 2002	$	1,334.2

            The components of our other intangible assets at December 31, 2002 and 2001, are as follows (in millions):

	2002						2001
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed product technology	$	1,194.1	$	690.4	$	503.7	$	1,194.1	$	610.8	$	583.3
Core technology		443.5		308.0		135.5		443.5		286.0		157.5
Developed license technology		467.5		394.6		72.9		467.5		364.8		102.7
Tradenames		144.0		55.5		88.5		144.0		46.0		98.0
Key distributor relationships		80.0		58.0		22.0		80.0		43.2		36.8
Trained and assembled workforce		-		-		-		81.5		49.8		31.7
Patents		100.0		36.2		63.8		84.7		29.8		54.9
Other intangible assets		77.3		36.2		41.1		77.3		28.9		48.4
Total	$	2,506.4	$	1,578.9	$	927.5	$	2,572.6	$	1,459.3	$	1,113.3

            Amortization expense of our goodwill and other intangible assets are as follows (in millions):

	2002		2001		2000
Goodwill amortization		-	$	153.3	$	153.3
Acquisition-related intangible assets amortization	$	155.7		164.3		211.0
Patents amortization		6.5		5.5		4.7
Other intangible assets amortization		8.2		8.7		5.2
Total amortization expense	$	170.4	$	331.8	$	374.2

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

For the Year Ending December 31,	Amortization Expense
2003	$	169.8
2004		160.0
2005		137.0
2006		117.1
2007		115.9
Thereafter		227.7
Total expected future annual amortization	$	927.5

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

SEGMENT, SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION

            Our operations are treated as one operating segment as we only report profit and loss information on an aggregate basis to our chief operating decision-makers. Information about our product sales, major customers and material foreign source of revenues is as follows (in millions):

Product Sales	2002		2001		2000
Rituxan	$	1,162.9	$	818.6	$	444.1
Herceptin		385.2		346.7		275.9
Growth Hormone		297.2		250.2		226.6
Thrombolytics		180.2		197.1		206.2
Pulmozyme		138.1		123.0		121.8
Actimmune		-		7.3		3.7
Total product sales	$	2,163.6	$	1,742.9	$	1,278.3

            Three major customers, Amerisource/Bergen, Corp., Cardinal Health, Inc. and McKesson, Inc. each contributed 10% or more of our total revenues in at least two of the last three years. Amerisource/Bergen, a national wholesale distributor of all of our products, contributed 22% in 2002, 21% in 2001 and 20% in 2000 of our total revenues. Cardinal Health, a national wholesale distributor of all our products, contributed 18% in 2002, 18% in 2001 and 15% in 2000 of our total revenues. McKesson, a national wholesale distributor of all of our products, contributed 18% in 2002, 15% in 2001 and less than 10% in 2000 of our total revenues.

            Net foreign revenues by country were as follows (in millions):

	2002		2001		2000
Europe:
Switzerland	$	118.4	$	74.9	$	72.6
Germany		31.7		39.2		22.5
Italy		23.0		18.0		10.4
France		13.5		8.9		7.3
Great Britain		20.9		24.5		9.6
Others		27.9		16.6		7.4
Canada		24.3		24.0		19.8
Japan		46.3		23.9		14.6
Total net foreign revenues	$	306.0	$	230.0	$	164.2

            We currently sell primarily to distributors and health care companies throughout the U.S., perform ongoing credit evaluations of our customers' financial condition and extend credit, generally without collateral, and discounts. In 2002, 2001 and 2000, we did not record any material additions to, or losses against, our allowance for doubtful accounts.

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 convertible debt of companies developing technologies that complement or fall outside our research focus and include companies having the potential to generate new products through technology exchanges and investments. Potential future payments may be due to certain collaborative partners achieving certain benchmarks as defined in the collaborative agreements. We also entered into product-specific collaborations to acquire development and marketing rights for products.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

INCOME TAXES

            The income tax provision (benefit) consists of the following amounts (in thousands):

	2002		2001		2000
Current:
Federal	$	148,419	$	72,731	$	191,334
State		14,187		25,024		25,862
Total current		162,606		97,755		217,196
Deferred:
Federal		(166,008)		47,043		(151,817)
State		(30,636)		(17,686)		(44,965)
Total deferred		(196,644)		29,357		(196,782)
Total income tax provision (benefit)	$	(34,038)	$	127,112	$	20,414

            Tax benefits of $16.9 million in 2002, $48.1 million in 2001 and $226.1 million in 2000 related to employee stock options and stock purchase plans were credited to stockholders' equity.

            A reconciliation between our income tax provision (benefit) and the U.S. statutory rate follows (in thousands):

	2002		2001		2000
Tax at U.S. statutory rate of 35%	$	10,412	$	99,045	$	1,391
Research credits		(31,192)		(24,114)		(32,092)
Prior years items		(9,545)		(14,000)		3,943
Tax benefit of certain realized gains on securities available-for-sale		-		(396)		(6,604)
State taxes		837		16,219		959
Goodwill amortization		-		53,649		53,649
Tax exempt investment income		(4,057)		(3,630)		(2,439)
Other permanent book tax differences		(493)		339		1,607
Income tax provision (benefit)	$	(34,038)	$	127,112	$	20,414

            Prior years items relate principally to changes in estimates resulting from events in 2002, 2001 and 2000 that provided greater certainty as to the expected outcome of prior matters.

            The components of deferred taxes consist of the following at December 31 (in thousands):

	2002		2001
Deferred tax liabilities:
Depreciation	$	(209,144)	$	(179,930)
Unrealized gain on securities available-for-sale		(188,636)		(211,695)
Adjustment to fair value of intangible assets		(348,299)		(410,579)
Other		(22,500)		(17,654)
Total deferred tax liabilities		(768,579)		(819,858)
Deferred tax assets:
Capitalized R&D costs		58,983		66,527
Federal credit carryforwards		43,429		101,052
Expenses not currently deductible		293,444		80,531
Investment basis difference		202,876		187,691
State credit carryforwards		78,052		74,149
Other		6,580		1,666
Total deferred tax assets		683,364		511,616
Total net deferred taxes	$	(85,215)	$	(308,242)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            Total tax credit carryforwards of $121.5 million consist of $77.2 million of California R&D credits and $44.3 million of alternative minimum tax credits, primarily Federal related, which have no expiration dates.

EARNINGS (LOSS) PER SHARE

            The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the years ended December 31, 2002, 2001, and 2000 (in thousands):

	2002		2001		2000
Numerator:
Net income (loss)	$	63,787	$	150,236	$	(74,241)
Denominator:
Weighted-average shares outstanding used for basic earnings        (loss) per share		519,192		527,022		522,179
Effect of dilutive securities:
Stock options		5,216		8,269		-
Weighted-average shares outstanding and dilutive securities        used for diluted earnings (loss) per share		524,408		535,291		522,179

            Options to purchase 24.3 million shares of our Common Stock with exercise prices ranging from $38.25 to $95.66 per share were outstanding during 2002, but were excluded from the computation of diluted earnings per share. Options to purchase 9.7 million shares of our Common Stock with exercise prices ranging from $52.00 to $95.66 per share were outstanding during 2001, but were excluded from the computation of diluted earnings per share. The option exercise prices were greater than the average market price of the Common Stock during 2002 and 2001 and therefore, their effect would have been antidilutive. Options to purchase 40.9 million shares of our Common Stock during 2000 were excluded from the computation of diluted loss per share as their effect would have been antidilutive. See the "Capital Stock" note below for information on option expiration dates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

FAIR VALUES OF INVESTMENT SECURITIES AND FINANCIAL INSTRUMENTS

      Investment Securities

            Securities classified as trading and available-for-sale at December 31, 2002 and 2001 are summarized below. Estimated fair value is based on quoted market prices for these or similar investments.

December 31, 2002	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
TOTAL TRADING SECURITIES    (carried at estimated fair value):	$	466,417	$	19,952	$	(844)	$	485,525
SECURITIES AVAILABLE-FOR-SALE    (carried at estimated fair value):
Equity securities	$	37,788	$	242,172	$	(3,315)	$	276,645
Preferred stock		150,271		7,114		(573)		156,812
U.S. Treasury securities and obligations of other    U.S. government agencies maturing:
within 1 year		5,061		54		-		5,115
between 1-5 years		48,827		3,780		-		52,607
between 5-10 years		69,899		7,801		-		77,700
Corporate debt securities maturing:
within 1 year		407,611		1,121		(425)		408,307
between 1-5 years		346,962		10,809		(64)		357,707
between 5-10 years		134,240		11,350		-		145,590
Other debt securities maturing:
within 1 year		7,433		120		-		7,553
between 1-5 years		32,633		1,978		-		34,611
between 5-10 years		41,653		2,786		-		44,439
Nonmarketable debt securities		43,272		-		-		43,272
TOTAL AVAILABLE-FOR-SALE	$	1,325,650	$	289,085	$	(4,377)	$	1,610,358

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

December 31, 2001	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
TOTAL TRADING SECURITIES    (carried at estimated fair value):	$	365,618	$	2,478	$	(4,557)	$	363,539
SECURITIES AVAILABLE-FOR-SALE    (carried at estimated fair value):
Equity securities	$	86,257	$	498,200	$	(539)	$	583,918
Preferred stock		148,107		4,280		(989)		151,398
U.S. Treasury securities and obligations of other    U.S. government agencies maturing:
between 1-5 years		50,052		1,007		(190)		50,869
between 5-10 years		118,214		5,573		-		123,787
Corporate debt securities maturing:
within 1 year		702,578		486		(144)		702,920
between 1-5 years		405,505		8,324		(492)		413,337
between 5-10 years		203,592		2,724		(1,712)		204,604
Other debt securities maturing:
within 1 year		4,980		-		(72)		4,908
between 1-5 years		58,149		326		(445)		58,030
between 5-10 years		33,576		530		(201)		33,905
Nonmarketable debt securities		48,363		-		-		48,363
TOTAL AVAILABLE-FOR-SALE	$	1,859,373	$	521,450	$	(4,784)	$	2,376,039

            The carrying value of all cash and investment securities held at December 31, 2002 and 2001 is summarized below (in thousands):

Security	2002		2001
Cash	$	135,271		125,313
Securities available-for-sale maturing within three months		72,859		269,890
Total cash and cash equivalents	$	208,130	$	395,203
Trading securities	$	485,525	$	363,539
Securities available-for-sale maturing within one year		184,105		437,938
Preferred stock		156,812		151,398
Total short-term investments	$	826,442	$	952,875
Securities available-for-sale maturing between 1-10 years, including equity securities	$	524,014	$	1,468,450
Nonmarketable debt securities		43,272		48,363
Total long-term marketable securities and other	$	567,286	$	1,516,813
Cash	$	57,304	$	56,600
Securities available-for-sale maturing within one year		164,011		-
Securities available-for-sale maturing between 1-10 years		465,285		-
Total restricted cash	$	686,600	$	56,600

            In 2002, proceeds from the sales of available-for-sale securities totaled $1,746.2 million; gross realized gains totaled $53.7 million and gross realized losses totaled $5.9 million. In 2001, proceeds from the sales of available-for-sale securities totaled $1,084.5 million; gross realized gains totaled $30.0 million and gross realized losses totaled $2.0 million. We recorded charges of $40.8 million in 2002, $27.5 million in 2001 and $0.8 million in 2000, to write down certain available-for-sale biotechnology equity securities for which the decline in fair value below carrying value was deemed other-than-temporary.

            Net change in unrealized holding gains (losses) on trading securities included in net income (loss) totaled $21.2 million in 2002, $0.2 million in 2001 and $0.2 million in 2000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The marketable debt securities 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 2002 and 2001, we did not have charges for credit impairment on marketable debt securities. In 2000, we recorded a charge of $4.0 million for credit impairment on marketable debt securities.

            In addition, as part of our strategic alliances we have made loans to our collaborators in the form of nonmarketable debt securities.

      Financial Instruments

            The fair value of the foreign exchange put options was based on the forward exchange rates as of December 31, 2002 and 2001. The fair value of the equity forwards and collars was determined based on the closing market prices of the underlying securities at each year-end. The table below summarizes the carrying value and fair value at December 31, 2002 and 2001, of our financial instruments (in thousands):

Financial Instrument	2002				2001
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Purchased foreign exchange put options	$	6,404	$	6,404	$	2,326	$	2,326
Equity forwards		154,101		154,101		-		-
Equity collars		13,160		13,160		-		-
Outstanding interest rate swaps		-		-		15,935		15,935
Liabilities:
Current portion of long-term debt		-		-		149,692		155,500
Equity collars		-		-		6,990		6,990
Equity forwards		-		-		8,148		8,148
Purchased foreign exchange forward contracts		5,402		5,402		-		-

            The financial instruments we hold are entered into with a diversified selection of institutions with strong credit ratings which minimizes the risk of loss due to nonpayment from the counterparty. Credit exposure is limited to the unrealized gains on our contracts. We have not experienced any material losses due to credit impairment of our foreign currency or equity financial instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

      Foreign Currency Instruments

            To protect against currency exchange risks on forecasted foreign currency cash flows from royalties to be received from licensees' foreign product sales over the next one to five years and expenses related to our foreign facility and our collaboration development expenses denominated in foreign currencies, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted foreign currency revenues with option contracts and we hedge our foreign currency expenses from our foreign facility with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in value of future foreign currency revenues 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 expenses is offset by gains in t he 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. As of December 31, 2002, there were no outstanding forward contracts relating to our foreign facility.

            During the years ended December 31, 2002 and 2001, the ineffective portion of our foreign currency hedging instruments were not material. Gains and losses related to option and forward contracts that hedge future cash flows are recorded against the hedged revenues or expenses in the statement of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            At December 31, 2002 and 2001, net gains on derivative instruments expected to be reclassified from accumulated other comprehensive income to earnings during the next twelve months due to the receipt of the related net revenues denominated in foreign currencies were not material.

      Interest Rate Swaps

            We enter into interest-rate swap agreements to limit our exposure to fluctuations in U.S. interest rates. Our material interest-bearing assets, or interest-bearing portfolio, consisted of cash, cash equivalents, restricted cash, short-term investments, convertible preferred stock investments, nonmarketable debt securities and long-term investments as of December 31, 2002 and 2001. Our interest-rate swap agreements effectively convert a portion of our short-term investments in our interest-bearing portfolio to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest income. In 2002, we recognized gains of $10.7 million in earnings related to the early termination of certain of our swap agreements when we determined that the forecasted transaction was not likely to occur. We had no such gains in 2001 and 2000. We have no interest rate swaps outstanding as of December 31, 2002.

      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. During 2002, we have zero-cost collars that expire in 2005 through 2007 and will require settlement in equity securities. 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. At December 31, 2002, our zero-cost collars were designated and qualify as cash flow hedges.

            As part of our fair value hedging strategy, we have also entered into equity forwards that mature in 2003 through 2004. An equity forward is a derivative instrument where 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 where we lock-in the termination price 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.

            In the year ended December 31, 2002, we did not recognize any gains or losses related to certain derivative instruments as a result of FAS 133. We record gains in contract and other revenues, and losses in marketing, general and administrative expenses in the statement of operations.

OTHER ACCRUED LIABILITIES

            Other accrued liabilities at December 31 are as follows (in thousands):

	2002		2001
Accrued compensation	$	77,238	$	63,103
Accrued royalties		87,082		69,660
Accrued clinical and other studies		45,965		42,434
Accrued marketing and promotion costs		39,101		28,395
Taxes payable		85,405		64,227
Accrued collaborations		103,432		71,046
Other		85,897		77,090
Total other accrued liabilities	$	524,120	$	415,955

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

DEBT OBLIGATIONS

            Our short-term debt at December 31, 2001 consisted of $149.7 million of convertible subordinated debentures, with interest payable at 5%, due in March 2002. We redeemed the debentures in cash at maturity.

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 renewable options. Rent expense was approximately $11.3 million in 2002, $14.4 million in 2001 and $17.5 million in 2000. Sublease income was not material in any of the three years presented.

            Four of our operating leases are commonly referred to as synthetic leases. A synthetic lease represents a form of off-balance sheet financing under which an unrelated third-party funds 100% of the costs of the acquisition and/or construction of the property and leases the asset to a lessee (Genentech), and at least 3% of the third-party funds represent at-risk equity. As the lessee, our synthetic leases are treated as operating leases for accounting purposes and as financing leases for tax purposes. (See also below regarding FASB's, Interpretation No. 46). Under our synthetic lease structures, upon termination or expiration, at our option, we must either purchase the property from the lessor at a predetermined amount that does not constitute a purchase at less than fair market value, sell the real property to a third-party, or renew the lease arrangement. If the property is sold to a third-party at an amount less than the amount financed by the lessor, we have agreed under residual value guarantees to pay the lessor up to an agreed upon percentage of the amount financed by the lessor.

            Three of our synthetic leases were entered into with BNP Paribas Leasing Corporation (or BNP), a wholly-owned subsidiary of BNP Paribas, who leases directly to us various buildings that we occupy in South San Francisco, California. Under one of these BNP leases, we are required to maintain cash collateral of $56.6 million, which we have included in our consolidated balance sheets as restricted cash. In May 2002, we paid the remaining balance on a fourth synthetic lease with BNP and exercised our purchase option to buy the leased property at its estimated fair value of $22.5 million. The purchased property has been included in property, plant and equipment in our consolidated balance sheet as of December 31, 2002.

            The most significant of our synthetic leases relates to our manufacturing facility located in Vacaville, California. In November 2001, we completed a synthetic lease transaction for this facility, which had previously been leased to us under a predecessor synthetic lease. This new synthetic lease is structured differently from our other synthetic leases with BNP. As the lessee, we lease the property from an unrelated special purpose trust (owner/lessor) under an operating lease agreement for five years ending November 2006. Third-party financing is provided in the form of a 3% at-risk equity participation from investors and 97% debt commitment. Investors' equity contributions were equal to or greater than 3% of the fair value of the property at the lease's inception and are required to remain so for the term of the lease. A bankruptcy remote, special purpose corporation (SPC) was formed to fund the debt portion th rough the issuance of commercial paper notes. The SPC lends the proceeds from the commercial paper to the owner/lessor, who issues promissory notes to the SPC. The SPC loans mature in November 2006. The SPC promissory notes are supported by a credit facility provided by financing institutions and draws are generally available under that credit facility to repay the SPC's commercial paper. The collateral for the SPC loans includes the leased property, and an interest in the residual value guarantee provided by us. As the lessee, at any time during the lease term, we have the option to purchase the property at an amount that does not constitute a purchase at less than fair market value. Our off-balance sheet contingent liability under the residual value guarantees is summarized in the table below.

            Under all of our synthetic leases, Genentech, as the lessee, is also required to maintain certain pre-defined financial ratios and are limited to the amount of additional debt we can assume. In addition, no Genentech officers or employees have any financial interest with regards to these synthetic lease arrangements or with any of the special purpose entities used in these arrangements. In the event of a default, the maximum amount payable under the

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

residual value guarantee would equal 100% of the amount financed by the lessor, and our obligation to purchase the leased properties or pay the related residual value guarantees could be accelerated. We believed at the lease's inception and continue to believe that the occurrence of any event of default that could trigger our purchase obligation is remote.

            Future minimum lease payments under operating leases, exclusive of the residual value guarantees, executory costs and sublease income, at December 31, 2002, are as follows (in millions). These minimum lease payments were computed based on interest rates current at that time which are subject to fluctuations in certain market-based interest rates:

	2003		2004		2005		2006		2007		Thereafter		Total
Synthetic leases	$	9.6	$	9.4	$	8.8	$	8.8	$	1.3	$	-	$	37.9
Other operating leases		4.8		3.3		3.1		2.6		2.4		5.2		21.4
Total	$	14.4	$	12.7	$	11.9	$	11.4	$	3.7	$	5.2	$	59.3

            The following summarizes the approximate assumed carrying values of the leased properties as of December 31, 2002, which represents the initial fair values of the facilities at the inception of the related lease, less assumed depreciation through June 30, 2003, and residual value guarantee amounts for our synthetic leases (in millions):

	Approximate Initial Fair Value of Leased Property			Estimated Accumulated Depreciation			Estimated Carrying Value			Lease Expiration		Maximum Residual Value Guarantee
South San Francisco Lease 1		$	56.6		$	21.4		$	35.2		07/2004		$	48.1
South San Francisco Lease 2			152.0			29.2			122.8		06/2007			129.2
South San Francisco Lease 3			25.0			4.9			20.1		01/2004			21.3
Vacaville Lease			425.0			66.0			359.0		11/2006			371.8
Total		$	658.6		$	121.5		$	537.1				$	570.4

            We believe that there have been no impairments in the fair value or use of the properties that we lease under synthetic leases wherein we believe that we would be required to pay amounts under any of the residual value guarantees. We will continue to assess the fair values of the underlying properties and the use of the properties for impairment on an annual basis.

            The maximum exposure to loss on our synthetic leases include (i) residual value guarantee payments as shown above, (ii) certain tax indemnifications in the event the third-parties are obligated for certain federal, state or local taxes as a result of their participation in the transaction, and (iii) indemnification for various losses, costs and expenses incurred by the third-party participants as a result of their ownership of the leased property or participation in the transaction, and as a result of the environmental condition of the property. The additional taxes, losses and expenses as describe in (ii) and (iii) are contingent upon the existence of certain conditions and, therefore, would not be quantifiable at this time. However, we do not expect these additional taxes, losses and expenses to be material. In the case of Lease 1, the lessor (BNP) holds cash collateral of $56.6 million as a source of payment for Genentech's obligation for the residual value guarantee payments and other amounts we owe under the lease.

            Under the FASB's new rule, Interpretation No. 46 (or FIN46), "Consolidation of Variable Interest Entities," it is likely that some or all of the above synthetic leasing structures qualify as variable interest entities of which Genentech, as the primary beneficiary, would be required to consolidate these entities. We have determined that the leasing structure used in the Vacaville Lease will likely qualify as a variable interest entity under FIN 46. Accordingly, with respect to our Vacaville Lease, we estimate that we will need to consolidate assets of $359.0 million, net of accumulated depreciation, liabilities of $412.3 million and noncontrolling interests of $12.7 million, and expect to record a charge of $39.6 million, net of tax, as a cumulative effect of an accounting change on July 1, 2003. With regard to BNP Lease 1, 2 and 3, we are currently evaluating these leases and are seeking additional information from the lessor and its advisors and have not concluded whether it is reasonably possible that we would be required to record the specific assets and liabilities associated with these leases in our financial statements on July 1, 2003.

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            Alternatively, we may restructure or repay these leasing obligations prior to our adoption of FIN 46 on July 1, 2003.

      Commitments

            In the second quarter of 2002, we entered into a manufacturing agreement with Immunex Corporation, a wholly-owned subsidiary of Amgen, to provide Immunex with additional manufacturing capacity for ENBREL® (etanercept) at Genentech's manufacturing facility in South San Francisco, California. As part of the agreement, we are responsible for facility modifications needed to manufacture ENBREL, including the internal labor costs and development production runs. The cost of equipment and outside service costs are reimbursable by Immunex. However, if certain milestones are not met, we are required to reimburse Immunex for up to 45% of the total equipment and outside service costs. Costs associated with development runs are reflected in R&D expense as incurred.

            We entered into a research collaboration agreement with CuraGen Corporation in November 1997, as amended and restated in March 2000, and agreed to provide a convertible equity loan to CuraGen of up to $21.0 million. In October 1999, CuraGen exercised its right to borrow $16.0 million. Simultaneously, with this draw down, CuraGen repaid the loan by issuing common shares of CuraGen stock valued at $16.0 million. Our remaining commitment to CuraGen on the convertible equity loan is $5.0 million. At December 31, 2002, there were no outstanding loans to CuraGen.

            In December 1997, we entered into a research collaboration agreement with Millennium to develop and commercialize Millennium's MLN-02 (formerly LDP-02). Under the terms of the agreement, we have agreed to provide a convertible equity loan for approximately $15.0 million to fund Phase II development costs. Upon successful completion of Phase II, if Millennium agrees to fund 25% of Phase III development costs, we have agreed to provide a second loan to Millennium for such funding. As of December 31, 2002, there were no outstanding loans to Millennium.

            In April 1996, we entered into a research collaboration agreement with XOMA to develop and commercialize Raptiva. In connection with our collaboration with XOMA, we have agreed to provide a convertible equity loan to XOMA of up to $80.0 million (outstanding at any one time) to fund XOMA's share of development costs for Raptiva through FDA approval, and a cash loan of up to $15.0 million to fund XOMA's share of U.S. marketing and sales costs prior to the date of regulatory approval of Raptiva. As of December 31, 2002, XOMA had an aggregate outstanding loan balance of approximately $60.0 million, of which we have reserved $20.7 million. There is no revenue impact on our statements of operations as it relates to the funding of the loan. However, provisions are recorded when we determine that recoverability of the loan has been impaired.

      Contingencies

            In August 2002, we entered into an agreement with Serono S.A. to market Raptiva internationally outside the United States, Japan, and certain other Asian countries. In February 2003, we amended the agreement with Serono to expand Serono's marketing rights to include certain Asian countries other than Japan. Development and marketing rights in the United States remain with us and our U.S. partner XOMA (US) LLC and we retain exclusive marketing rights in Japan. Under the agreement, we and Serono may collaborate on co-developing additional indications of Raptiva and will share certain global development costs. In addition, we have a supply agreement with Serono, under which we have a loss exposure up to a maximum of $10.0 million.

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

            We and the City of Hope Medical Center are parties to a 1976 agreement relating to work conducted by two City of Hope employees, Arthur Riggs and Keiichi Itakura, and patents that resulted from that work, which are referred to as the "Riggs/Itakura Patents." Since that time, Genentech has entered into license agreements with various companies to make, use and sell the products covered by the Riggs/Itakura Patents. On August 13, 1999, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

City of Hope filed a complaint against us in the Superior Court in Los Angeles County, California, alleging that we owe royalties to the City of Hope in connection with these license agreements, as well as product license agreements that involve the grant of licenses under the Riggs/Itakura Patents. The complaint stated claims for declaratory relief, breach of contract, breach of implied covenant of good faith and fair dealing, and breach of fiduciary duty. On December 15, 1999, we filed our answer to the City of Hope's complaint. The first trial of this suit began on August 28, 2001, in which City of Hope was seeking compensatory damages in the amount of approximately $445 million (including interest) and special damages. On October 24, 2001, the jury hearing the lawsuit announced that it was unable to reach a verdict and on that basis the Court declared a mistrial. City of Hope requested a retrial, and the retrial began on March 20, 2002. On June 10, 2002, the jury voted to award t he City of Hope approximately $300 million in compensatory damages. On June 24, 2002, the jury voted to award the City of Hope an additional $200 million in punitive damages. Such amounts were accrued as an expense in the second quarter of 2002 and were included in other long-term liabilities in the consolidated balance sheet at December 31, 2002. On August 22, 2002, the Superior Court denied Genentech's motion for judgment notwithstanding the verdict and motion for a new trial. Accordingly, on September 13, 2002, Genentech filed a notice of appeal of the verdict and damages awards with the California Court of Appeal. The appeal process is ongoing. The amount of cash, if any, to be paid in connection with the City of Hope matter will depend on the outcome of the appeal.

            On June 7, 2000, Chiron Corporation filed a patent infringement suit against us in the U.S. District Court in the Eastern District of California (Sacramento), alleging that the manufacture, use, sale and offer for sale of our Herceptin antibody product infringes Chiron's U.S. Patent No. 6,054,561. This patent was granted on April 25, 2000, and will expire on June 28, 2005, and it relates to certain antibodies that bind to breast cancer cells and/or other cells. Chiron is seeking compensatory damages for the alleged infringement, additional special damages (e.g., for willful infringement), and attorneys' fees and costs. We filed our answer to Chiron's complaint, and in our answer we also stated counterclaims against Chiron. On April 22, 2002, the Court issued its decision ("Markman Order") construing certain aspects of the patent claims that are in dispute. On June 25, 2002, the Court issued several decisions regar ding summary judgment motions that previously had been filed by Chiron and us. In those decisions, the Court ruled as a matter of law that Herceptin infringes claims 1 to 25 of Chiron's patent, and also ruled as a matter of law in favor of Chiron on some but not all of Genentech's defenses and counterclaims regarding the alleged invalidity and/or unenforceability of the patent. The trial of this suit began on August 6, 2002, with jury selection and opening statements. Following the first phase of the trial, which related to Genentech's remaining defenses and counterclaims regarding the alleged invalidity of the patent, the jury unanimously found that claims 1 to 25 of Chiron's patent were invalid, and on that basis the Court entered judgment in favor of Genentech. On September 23, 2002, Chiron filed a motion for judgment as a matter of law or for a new trial, and on October 14, 2002, Chiron filed a motion for relief from judgment, in each case seeking to overturn or set aside the jury verdict. On Octobe r 23, 2002, the Court denied the first of the motions in its entirety. On November 4, 2002, the Court denied the second motion in its entirety. On November 20, 2002, Chiron filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On December 4, 2002, Genentech filed a notice of cross-appeal with the U.S. Court of Appeals for the Federal Circuit. The appeal process is ongoing.

            On August 12, 2002, the U.S. Patent and Trademark Office (or Patent Office) declared an interference between the Chiron patent involved in the above mentioned lawsuit (U.S. Patent No. 6,054,561) and a patent application exclusively licensed by Genentech from a university relating to anti-HER2 antibodies. An interference proceeding is declared to decide who first made a particular invention where two or more parties claim the same invention, whether the parties' claims are patentable, and consequently who is or is not entitled to a patent on the invention. In declaring this interference, the Patent Office has determined that there is a substantial question as to whether the inventors of the Chiron patent were first to invent and are entitled to this patent. If the Patent Office were to decide that the inventors of the university's patent application were first to invent and that their claims are patentable, a new pat ent would be issued to the university and the Chiron patent would be revoked. On October 24, 2002, the Patent Office redeclared the interference to include, in addition to the above-referenced Chiron patent and university patent application, a number of patents and patent applications owned by either Chiron or Genentech, including Chiron's U.S. Patent No. 4,753,894 that is also at issue in the separate patent infringement lawsuit described below. On November 27, 2002, the parties filed their respective lists of preliminary motions and prior art to be relied on in the interference. The Patent Office has scheduled a tentative date for a hearing on the preliminary motions for October 15, 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            On March 13, 2001, Chiron filed another patent infringement lawsuit against us in the U.S. District Court in the Eastern District of California, alleging that the manufacture, use, sale and/or offer for sale of our Herceptin antibody product infringes Chiron's U.S. Patent No. 4,753,894. Chiron is seeking compensatory damages for the alleged infringement, additional special damages, and attorneys' fees and costs. Genentech filed a motion to dismiss this second lawsuit, which was denied. On November 1, 2002, the parties filed a proposed stipulation to stay all proceedings in this lawsuit until (1) the interference involving U.S. Patent No. 4,753,894 is resolved or (2) two years from entry of the proposed stipulation, whichever is sooner. On or about November 13, 2002, the Court entered the stipulation, staying the proceedings as requested by the parties. This lawsuit is separate from and in addition to the Chiron su it mentioned above.

            On July 24, 2002, Green Equity, LLC filed a shareholder derivative lawsuit in the San Francisco Superior Court against Genentech as nominal defendant and against several members of our Board of Directors (the "individual defendants"). The lawsuit is based upon the claims made by the City of Hope in the contract dispute referred to above. The complaint alleges that the individual defendants breached the fiduciary duty they owe to Genentech by causing us to withhold royalty payments allegedly due to the City of Hope and to conceal third-party licenses that allegedly should have been disclosed to the City of Hope. The plaintiff seeks unspecified damages, costs, and attorneys' fees. The defendants have removed the case to federal court and the case is now pending in the U.S. District Court in the Northern District of California (San Francisco). Defendants filed motions to dismiss the lawsuit, and a hearing on the moti ons is scheduled for February 26, 2003. No answer to the complaint has yet been filed.

            We and Tanox Biosystems, Inc. (or Tanox) are parties to a July 1996 Settlement and Cross-Licensing Agreement relating to the development and manufacture of certain antibody products directed towards immunoglobin E, including Xolair and Hu-901. On February 20, 2002, Tanox filed an amended demand in an ongoing arbitration proceeding between Genentech and Tanox that is being conducted by the American Arbitration Association in San Francisco. In its amended demand, Tanox has claimed breach of the July 1996 Agreement, conversion, tortious interference, unjust enrichment, and unfair competition by Genentech, and requests injunctive relief as well as monetary damages "many times in excess of $100,000,000." On March 14, 2002, Genentech denied all of Tanox's claims, and counterclaimed for breach of contract, theft of trade secrets, misappropriation, breach of confidence, interference with contract, and interference with econ omic expectancies by Tanox. Genentech requested injunctive relief and monetary damages. On October 16, 2002, Tanox announced that in a dispute between it and Novartis, an arbitration panel ruled that Tanox is not entitled to develop independently the Hu-901 antibody product. The Novartis/Tanox panel also ruled that Tanox is entitled to receive certain know-how from Novartis. Tanox contends in its dispute against Genentech that it is entitled to similar information from Genentech. The effect of the October 16 ruling from the Novartis/Tanox arbitration, if any, on Tanox's claims against Genentech cannot be determined since it has not yet been resolved by the arbitrators in the Tanox/Genentech proceedings. The arbitration hearing began on January 13, 2003 and is ongoing.

            We and Pharmacia AB are parties to a 1978 agreement relating to Genentech's development of recombinant human growth hormone products, under which Pharmacia is obligated to pay Genentech royalties on sales of Pharmacia's growth hormone products throughout the world. Pharmacia filed a Request for Arbitration with the International Chamber of Commerce (or ICC) to resolve several disputed issues between Genentech and Pharmacia under the 1978 agreement. One of the claims made by Pharmacia is for a refund of some of the royalties previously paid to Genentech for sales of Pharmacia's growth hormone products in certain countries. On February 14, 2002, the ICC issued a decision in Genentech's favor on that claim, ruling that no refund of royalties is due to Pharmacia. On August 8, 2002, the ICC issued a further decision in Genentech's favor on all remaining claims that had been made by Pharmacia.

            On May 28, 1999, GlaxoSmithKline plc (or Glaxo) filed a patent infringement lawsuit against us in the U.S. District Court in Delaware. The suit asserted that we infringe four U.S. patents owned by Glaxo. Two of the patents relate to the use of specific kinds of antibodies for the treatment of human disease, including cancer. The other two patents asserted against us relate to preparations of specific kinds of antibodies which are made more stable and the methods by which such preparations are made. After a trial, the jury hearing the lawsuit unanimously found that our Herceptin and Rituxan antibody products do not infringe the patents and therefore that Genentech is not required to

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

pay royalties to Glaxo. The jury also unanimously found that all of the patent claims that Glaxo asserted against Genentech were invalid. Glaxo filed an appeal of the jury's verdict with the U.S. Court of Appeals for the Federal Circuit ("CAFC Appeal"). The oral argument of the appeal took place on February 6, 2002. Genentech's claim against Glaxo for inequitable conduct and other related issues remained pending before the District Court.

            On September 14, 2000, Glaxo filed another patent infringement lawsuit against us in the U.S. District Court in Delaware, alleging that we are infringing U.S. Patent No. 5,633,162 owned by Glaxo. The patent relates to specific methods for culturing Chinese Hamster Ovary cells. The complaint failed to specify which of our products or methods of manufacture allegedly infringed that patent. However, the complaint made a general reference to Genentech's making, using and selling "monoclonal antibodies," and so we believed that the suit related to our Herceptin and Rituxan antibody products. We filed our answer to Glaxo's complaint, and in our answer we also stated counterclaims against Glaxo. This lawsuit was separate from and in addition to the Glaxo suit mentioned above.

            In September 2002, we and Glaxo agreed to a settlement of both of the above-referenced lawsuits, pursuant to which we and Glaxo dismissed with prejudice all the claims and/or counterclaims made by each of us in the lawsuits and dismissed with prejudice the CAFC Appeal. The settlement resolved and ended all the patent infringement claims that Glaxo made against Genentech in the above-referenced lawsuits.

            On March 13, 2001, Genentech filed a complaint in the United States District Court in Delaware against Genzyme Corporation seeking a declaratory judgment that Genentech does not infringe Genzyme's U.S. Patent No. 5,344,773 and that Genentech has not breached a 1992 Patent License and Interference Settlement Agreement between Genentech and Genzyme relating to that patent. Genentech was seeking a declaration that Genzyme's patent is not infringed by any Genentech product, that the patent is invalid, that Genzyme be enjoined from further legal action against Genentech regarding the patent, and that Genentech has not breached the 1992 Agreement.

            On or about April 6, 2001, Genzyme filed a complaint in the same court against Genentech alleging that our TNKase product infringes the Genzyme patent and that Genentech is in breach of the 1992 Agreement referred to above. Genzyme's complaint also alleged willful infringement and reckless breach of contract by Genentech. Genzyme was seeking to enjoin Genentech from infringing the patent, and also was seeking compensatory damages for the alleged infringement and breach of contract, additional special damages, and attorneys' fees and costs. In pre-trial proceedings, Genzyme indicated its intention to present evidence in the trial that the compensatory damages for the alleged infringement and breach of contract should equal $41.9 million. Genentech disputed that any damages were owed and also disputed the amount of compensatory damages for which Genzyme indicated an intention to present evidence in the trial.

            In November 2002, we and Genzyme agreed to a settlement of both of the above-referenced lawsuits, pursuant to which we and Genzyme dismissed with prejudice all the claims and/or counterclaims made by each of us in the lawsuits.

            In 2002, we recognized $543.9 million of litigation-related special charges. These special charges were comprised of the City of Hope Medical Center (or City of Hope) litigation judgment in the second quarter of 2002, including accrued interest and costs related to obtaining a surety bond, and certain other litigation-related matters. In conjunction with the City of Hope judgment, we arranged to post a $600.0 million surety bond and as part of this arrangement, we were required to pledge $630.0 million in cash and investments to secure the bond. The $630.0 million cash and investments were classified as restricted cash on our consolidated balance sheet at December 31, 2002. In addition, we accrued $9.1 million of royalty expenses related to the City of Hope judgment, which was reflected in marketing, general and administrative expenses. We expect that we will continue to incur interest charges on the judgment and service fees on the surety bond each quarter through the process of appealing the City of Hope trial results. These special charges represent our estimate of the costs for the current resolution of these matters and are included in other long-term liabilities in the consolidated balance sheet at December 31, 2002. We developed this estimate in consultation with outside counsel handling our defense in these matters and is based upon the facts and circumstances of these matters known to us at that time. The amount of our liability for certain of these matters could exceed or be less than the amount of our current estimate, depending on the outcome of these matters.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The amount of cash, if any, paid in connection with the City of Hope matter will depend on the outcome of the appeal. See the "Leases, Commitments and Contingencies" note in the Notes to Consolidated Financial Statements of Part II, Item 8 of this Form 10-K for further information regarding our litigations.

RELATIONSHIP WITH ROCHE

            As a result of the Redemption on June 30, 1999, Roche owned 100% of our outstanding Common Stock. Subsequently, Roche completed public offerings of our Common Stock whereby reducing their percentage ownership. At December 31, 2002, Roche's percentage ownership of our Common Stock was 59.8%.

            Also as a result of the Redemption, the then-existing governance agreement between us and Roche terminated, except for provisions relating to indemnification and stock options, warrants and convertible securities. In July 1999, we entered into certain affiliation arrangements with Roche, amended our licensing and marketing agreement with Hoffmann-La Roche, and entered into a tax sharing agreement with Roche as follows:

      Affiliation Arrangements

            Our board of directors consists of two Roche directors, three independent directors nominated by a nominating committee currently controlled by Roche, and one Genentech employee. However, under our bylaws, Roche has the right to obtain proportional representation on our board at any time. Roche intends to continue to allow our current management to conduct our business and operations as we have done in the past. However, we cannot ensure that Roche will not implement a new business plan in the future.

      Tax Sharing Agreement

            Effective with the consummation of the second public offering 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 Roche is the common parent. Accordingly, our tax sharing agreement with Roche now pertains only to the state and local tax returns in which we are consolidated or combined with Roche. We will continue to calculate our tax liability or refund with Roche for these state and local jurisdictions as if we were a stand-alone entity.

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

            We expect from time to time to issue additional 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 Roche provides, among other things, that we will establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. The affiliation agreement provides that we will repurchase a sufficient number of shares pursuant to this program such that, with respect to any issuance of common stock by Genentech in the future, the percentage of Genentech common stock owned by Roche immediately after such issuance will be no lower than Roche's lowest percentage ownership of Genentech common stock at any time after the offering of common stock occurring in July 1999 and prior to the time of such issuance, except that Genentech may issue shares up to an amount that would cause Roche's lowest percentage ownership to be no more than 2% below the "Minimum Percentage." The Minimum Percentage equals the lowest number of shares of Genentech common stock owned by Roche since the July 1999 offering (to be adjusted in the future for dispositions of shares of Genentech common stock by Roche as well as for stock splits or stock combinations) divided by 509,194,352 (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 the two-for-one splits of Genentech common stock in November 1999 and October 2000. As long as Roche's percentage ownership is greater than 50%, prior to issuing any shares, the affiliation agreement provides that we will repurchase a sufficient number of shares of our common stock such that, immediately after our issuance of shares, Roche's percentage ownership will be greater than 50%. The affiliation agreement also provides that , upon Roche's request, we will repurchase shares of our common stock to increase Roche's ownership to the Minimum Percentage. In addition, Roche will have a continuing option to buy stock from us at prevailing market prices to maintain its percentage ownership interest. On December 31, 2002, Roche's percentage ownership of our common stock was 0.4% below the Minimum Percentage.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

RELATED PARTY TRANSACTIONS

            We enter into transactions with Roche, Hoffmann-La Roche and its affiliates in the ordinary course of business. In July 1998, we entered into an agreement with Hoffmann-La Roche to provide them with exclusive marketing rights outside of the U.S. for Herceptin. Under the agreement, Hoffmann-La Roche paid us $40.0 million and has agreed to pay us cash milestones tied to future product development activities, to share equally global development costs up to a maximum of $40.0 million and to make royalty payments on product sales. In addition, in the fourth quarter of 2002, Hoffmann-La Roche paid us a one-time royalty milestone of $10.0 million as a result of reaching $200.0 million in net sales of Herceptin outside of the U.S. In 2000, we received $10.0 million from Hoffmann-La Roche to extend its opt-in rights on Avastin. This amount is classified as deferred revenue on our balance sheet.

            Contract revenue from Hoffmann-La Roche, including reimbursement for ongoing development expenses after the option exercise date, totaled $7.6 million in 2002, $5.8 million in 2001 and $3.5 million in 2000. All other revenues from Roche, Hoffmann-La Roche and their affiliates, principally royalties and product sales, totaled $269.9 million in 2002, $164.1 million in 2001 and $114.2 million in 2000.

            During 2001, Novartis AG (or Novartis) acquired 21.3% of the outstanding voting shares of Roche Holding Ltd. During 2002, Novartis acquired an additional 11.4%, bringing its total holdings of the outstanding voting shares of Roche Holding Ltd to 32.7%. As a result of this investment, Novartis is deemed to have an indirect beneficial ownership interest under FAS 57 "Related Party Disclosures" of more than 10% of Genentech's voting stock. During 2000, we entered into an arrangement with our collaboration partner, Novartis, whereby Novartis is required to fund a portion of the cost of our Xolair inventory until the product is approved for marketing by the FDA. This amount is required to be returned to Novartis upon the earlier of regulatory approval of Xolair in the U.S. or the European Union, and has been recorded in other accrued liabilities in our financial statements. The amount payable to Novartis was $37.8 mill ion at December 31, 2002 and $38.4 million at December 31, 2001 (no amounts were payable at December 31, 2000). Reimbursements for ongoing development expenses, net of expenses incurred by Novartis, totaled $4.0 million in 2002. In 2000, $3.6 million was payable to Novartis for development and commercial expenses, net of expenses incurred by us. The net expense in 2001 was not material.

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 Roche. Subsequently, in July and October 1999, and March 2000, Roche consummated public offerings of our Common Stock. On January 19, 2000, Roche completed an offering of zero-coupon notes that are exchangeable for an aggregate of approximately 13.0 million shares of our Common Stock held by Roche. See "Redemption of Our Special Common Stock" and "Relationship With Roche" notes above for a discussion of these transactions.

            On October 24, 2000, we effected a two-for-one stock split of our Common Stock in the form of a dividend of one share of Genentech Common Stock of each share held at the close of business on October 17, 2000. Our stock began trading on a split-adjusted basis on October 25, 2000.

      Stock Repurchase Program

            On October 31, 2001, our Board of Directors authorized a stock repurchase program to repurchase up to 13.0 million shares for an amount not to exceed $625.0 million of our common stock over a 12 month period. On August 15, 2002, our Board of Directors authorized an extension of the stock repurchase program through June 30, 2003, for the repurchase of additional shares for an amount not to exceed an additional $375.0 million of our common stock, increasing the program to a total of approximately 29.6 million shares and an amount not to exceed a total of $1.0 billion. Purchases may be made in the open market or in privately negotiated transactions from time to time at management's discretion. We may also engage in transactions in other Genentech securities in conjunction with the repurchase program, including derivative securities. We also entered into a 10b5-1 insider trading plan on February

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8, 2002, to repurchase shares in the open market during those periods each quarter when trading in our stock by insiders is restricted under our insider trading policy. Under its terms, the 10b5-1 plan terminated on October 11, 2002, the date on which a total of 3.0 million shares had been purchased under the plan during the period from February 8, 2002 to October 11, 2002. Due to the extension of the stock repurchase program, another 10b5-1 trading plan was entered into on November 13, 2002, to repurchase shares in the open market during those periods each quarter when trading in our stock is restricted under our insider trading policy. This plan covers 2.5 million shares. Under the stock repurchase program approved by our Board of Directors, we repurchased approximately 18.2 million shares of our common stock in 2002 at a cost of approximately $692.8 million. Of those shares repurchased, the number of shares repurchased under our 10b5-1 trading plans were approximately 3.6 million du ring 2002. In 2001, we repurchased 900,000 shares of our common stock at a cost of $39.7 million, of which 800,000 shares were repurchased with the approval of our Board of Directors at a cost of $34.0 million prior to our adoption of the stock repurchase program, and 100,000 shares were repurchased at a cost of $5.7 million under the stock repurchase program approved by our Board of Directors. Under the stock repurchase program to date, we repurchased approximately 18.3 million shares of our common stock at a cost of approximately $698.4 million during the period from November 1, 2001, through December 31, 2002.

            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 accumulated deficit.

      Stock Award Plans

            We have a stock option plan adopted in 1999, and amended in 2000, which variously allows for the granting of non-qualified stock options, stock awards and stock appreciation rights to employees, directors and consultants of Genentech. Incentive stock options may only be granted to employees under this plan. Generally, non-qualified options have a maximum term of 10 years. Incentive options have a maximum term of 10 years. In general, options vest in increments over four years from the date of grant, although we may grant options with different vesting terms from time to time. No stock appreciation rights have been granted to date.

            We adopted the 1991 Employee Stock Plan, or the 1991 Plan, on December 4, 1990, and amended it during 1993, 1995, 1997 and 1999. The 1991 Plan 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 first business day of each calendar quarter. Purchases are limited to 15% of each employee's eligible compensation. All full-time employees of Genentech are eligible to participate in the 1991 Plan. Of the 21.2 million shares of Common Stock reserved for issuance under the 1991 Plan, 19.4 million shares have been issued as of December 31, 2002. During 2002, 4,472 of the eligible employees participated in the 1991 Plan.

            We have elected to continue to follow Accounting Principles Board Opinion No. 25 (or APB 25) to account for employee stock options because the alternative fair value method of accounting prescribed by FAS 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, "Accounting for Stock Issued to Employees," no compensation expense is recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant.

            The information regarding net income (loss) and earnings (loss) per share prepared in accordance with FAS 123 has been determined as if we had accounted for our employee stock options and employee stock plan under the fair value method prescribed by FAS 123 and the earnings (loss) per share method under FAS 128. The resulting effect on net income (loss) and earnings (loss) per share pursuant to FAS 123 is not likely to be representative of the effects on net income (loss) and earnings (loss) per share pursuant to FAS 123 in future years, due to subsequent years including additional grants and years of vesting. The fair value of options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively:  risk-free interest rates of 2.6%, 3.9% and 5.3%, dividend yields of 0%; volatility factors of the expected m arket price of our Common Stock of 43.0%, 63.0% and 75.0%, and a weighted-average expected life of the option of five years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

            For purposes of disclosures pursuant to FAS 123 as amended by FAS 148, the estimated fair value of options is amortized to expense over the options' vesting period.

            The following table illustrates the effect on net income (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (in thousands, except per share amounts):

	2002		2001		2000
Net income (loss) - as reported	$	63,787	$	150,236	$	(74,241)
Deduct: Total stock-based employee compensation expense    determined under the fair value based method for all awards,    net of related tax effects		166,624		152,799		84,826
Pro forma net loss	$	(102,837)	$	(2,563)	$	(159,067)
Earnings (loss) per share:
Basic-as reported	$	0.12	$	0.29	$	(0.14)
Basic-pro forma	$	(0.20)	$	0.00	$	(0.31)
Diluted-as reported	$	0.12	$	0.28	$	(0.14)
Diluted-pro forma	$	(0.20)	$	0.00	$	(0.31)

            A summary of our stock option activity and related information is as follows:

	Shares	Weighted-Average Exercise Price
Options outstanding at December 31, 1999	41,551,604	$	25.65
Grants	9,986,353		78.70
Exercises	(8,258,743)		17.96
Cancellations	(2,334,352)		30.82
Options outstanding at December 31, 2000	40,944,862		39.84
Grants	10,740,689		42.58
Exercises	(2,899,135)		24.69
Cancellations	(2,146,446)		45.84
Options outstanding at December 31, 2001	46,639,970		41.06
Grants	12,655,875		28.98
Exercises	(1,672,772)		23.43
Cancellations	(2,203,658)		53.16
Options outstanding at December 31, 2002	55,419,415	$	38.37

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The following table summarizes information concerning currently outstanding and exercisable options:

		As of December 31, 2002
		Options Outstanding						Options Exercisable
Range of Exercise Prices			Number Outstanding	Weighted- Average Years Remaining Contractual Life		Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
	$12.531 - $17.781		2,737,573		6.70	$	15.04	2,737,573	$	15.04
	$20.000 - $28.700		27,969,709		7.93		26.07	15,454,902		24.23
	$30.070 - $44.770		15,374,903		8.10		42.00	7,341,223		42.42
	$45.750 - $66.000		1,424,096		8.11		56.01	641,984		57.51
	$71.250 - $95.655		7,913,134		7.87		79.66	4,146,976		79.70
			55,419,415					30,322,658

            Using the Black-Scholes option valuation model, the weighted-average fair value of options granted was $12.54 in 2002, $24.00 in 2001 and $51.05 in 2000. Shares of Common Stock available for future grants under all stock option plans were 4,048,713 at December 31, 2002. We have reserved a sufficient number of shares of our Common Stock in connection with these stock option programs.

SUBSEQUENT EVENT

            Under our stock repurchase program approved by our Board of Directors on October 31, 2001 and extended on August 15, 2002, we have repurchased approximately 1.3 million shares of our common stock at a cost of approximately $47.0 million during the period from January 1, 2003 through February 12, 2003. Of these shares, 475,000 shares were repurchased at a cost of approximately $16.7 million under our 10b5-1 insider trading plan. For more information on our stock repurchase program, see the "Capital Stock" note above.

91

QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)

	2002 Quarter Ended
	December 31		September 30		June 30		March 31
Total revenues	$	778,314	$	675,168	$	652,312	$	613,452
Product sales		611,766		551,823		523,527		476,549
Gross margin from product sales		491,928		439,342		416,660		374,105
Net income (loss)(1)		92,828		89,304		(213,648)		95,303
Earnings (loss) per share:
Basic		0.18		0.17		(0.41)		0.18
Diluted		0.18		0.17		(0.41)		0.18

	2001 Quarter Ended
	December 31		September 30		June 30		March 31
Total revenues	$	600,156	$	556,165	$	515,874	$	540,082
Product sales		492,036		448,700		410,258		391,904
Gross margin from product sales		393,608		352,670		334,070		308,108
Income before cumulative effect of accounting change(2)		42,097		42,741		38,648		32,388
Cumulative effect of accounting change, net of tax(3)		-		-		-		5,638
Net income		42,097		42,741		38,648		26,750
Earnings per share:
Basic		0.08		0.08		0.07		0.05
Diluted		0.08		0.08		0.07		0.05

___________

(1)	Net income (loss) in 2002 reflects litigation-related special charges of $518.0 million in the second quarter for the City of Hope judgment and other litigation-related matters, $12.5 million in the third quarter for accrued interest related to the City of Hope judgment, and $13.4 million in the fourth quarter for accrued interest and costs related to obtaining a surety bond in conjunction with the City of Hope judgment. Net income (loss) in 2002 also includes recurring charges related to the Redemption for the amortization of other intangible assets of $38.9 million in each quarter of 2002. As a result of our adoption of FAS 141 and 142 on January 1, 2002, reported net income increased in each quarter of 2002 by approximately $39.4 million (or $0.08 per share) due to the cessation of goodwill amortization and the amortization of our trained and assembled workforce intangible asset.
(2)	Includes recurring charges related to the Redemption, primarily the amortization of goodwill and other intangible assets of $79.4 million in each quarter of 2001.
(3)	We adopted the Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities," on January 1, 2001. Upon adoption, we recorded a $5.6 million charge, net of tax, as a cumulative effect of a change in accounting principle and an increase of $5.0 million, net of tax, in other comprehensive income related to recording derivative instruments at fair value.

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

            Not applicable.

92

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            (a) The sections labeled "Nominees for Director" and "Section 16(a) Beneficial Ownership Reporting Compliance" of our Proxy Statement in connection with the 2003 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 "Compensation of Directors," "Compensation of Executive Officers," "Summary of Compensation," "Summary Compensation Table," "Stock Option Grants and Exercises," "Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values," "Change-In-Control Agreements," "Loans and Other Compensation" and "Compensation Committee Interlocks and Insider Participation" of our Proxy Statement in connection with the 2003 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 Plans" and "Beneficial Ownership of Principal Stockholders, Directors and Management" of our Proxy Statement in connection with the 2003 Annual Meeting of Stockholders are incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The sections labeled "Relationship With Roche," "Loans and Other Compensation" and "Certain Relationships and Related Transactions" of our Proxy Statement in connection with the 2003 Annual Meeting of Stockholders is incorporated herein by reference.

Item 14. CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures:  The Company's principal executive and financial officers reviewed and evaluated the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14) as of a date within 90 days before the filing date of this Form 10-K. Based on that evaluation, the Company's principal executive and financial officers concluded that the Company's disclosure controls and procedures are effective in timely providing them with material information relating to the Company, as required to be disclosed in the reports the Company files under the Exchange Act.

(b)  Changes in internal controls:  There were no significant changes in the Company's internal controls or other factors that could significantly affect those controls subsequent to the date of the Company's evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

93

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are included as part of this Annual Report on Form 10-K.

     1.  Index to Financial Statements

Report of Ernst & Young LLP, Independent Auditors

Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000

Consolidated Balance Sheets at December 31, 2002 and 2001

Consolidated Statements of Stockholders' Equity for the year ended December 31, 2002, 2001 and 2000

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, 2002, 2001 and 2000

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

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation.(1)
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation.(8)
3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation.(9)
3.4	Restated Bylaws.
4.4	Form of Common Stock Certificate.(2)
10.1	Form of Affiliation Agreement, dated as of July 22, 1999, between Genentech, Inc. and Roche Holdings, Inc.(2)
10.2	Amendment No. 1, dated October 22, 1999, to Affiliation Agreement between Genentech, Inc. and Roche Holdings, Inc.(6)
10.3	Form of Amended and Restated Agreement, restated as of July 1, 1999, between Genentech, Inc. and F. Hoffmann-La Roche Ltd regarding Commercialization of Genentech's Products outside the United States.(2)
10.4	Form of Tax Sharing Agreement, dated as of July 22, 1999, between Genentech, Inc. and Roche Holdings, Inc.(2)
10.5	Genentech, Inc. Tax Reduction Investment Plan, amended and restated as of January 1, 2002.
10.6	1990 Stock Option/Stock Incentive Plan, as amended and restated as of October 16, 1996.(4)
10.7	1994 Stock Option Plan, as amended and restated as of October 16, 1996.(4)
10.8	1996 Stock Option/Stock Incentive Plan, as amended and restated as of October 16, 1996.(4)
10.9	1999 Stock Plan, as amended and restated as of December 8, 2000.(7)
10.10	1991 Employee Stock Plan, as amended on April 13, 1999.(5)
10.11	Long-Term Key Employee Incentive Program, effective as of July 1, 1999.(6)
10.12	Promissory Note, dated as of December 22, 2000, issued to Genentech, Inc. by Myrtle S. Potter.(8)

94

Exhibit No.	Description
10.13	Change in Control Agreement, dated as of January 20, 2001, between Genentech, Inc. and Myrtle S. Potter.(8)
10.14	Lease, dated as of October 26, 2001, between Genentech, Inc. and Vacaville Real Estate Trust 2001.(10)
10.15	Participation Agreement, dated as of October 26, 2001, among Genentech, Inc., Vacaville Real Estate Trust 2001, Wilmington Trust Company, The Chase Manhattan Bank, J.P. Morgan Securities, Inc., BNP Paribas, Credit Suisse First Boston, UBS AG, Stamford Branch, Wachovia Bank and various financial institutions named therein.(10)
10.16	Amended and Restated Backup Facility Agreement and Amendment to Other Operative Agreements, dated as of November 7, 2002, among DNA Finance Corp, JP Morgan Bank and various financial institutions named therein.
10.17	Guarantee, dated as of October 26, 2001, between Genentech, Inc., DNA Finance Corp and the investors named therein.(10)
23.1	Consent of Ernst & Young LLP, Independent Auditors.
24.1	Power of Attorney. Reference is made to the signature page.
28.1	Description of the Company's capital stock.(3)
99.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

___________

1. Filed as an exhibit to our current report on Form 8-K filed with the Commission on July 28, 1999 and incorporated herein by reference.

2. Filed as an exhibit to Amendment No. 3 to our Registration Statement (No. 333-80601) on Form S-3 filed with the Commission on July 16, 1999 and incorporated herein by reference.

3. 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) under the Securities Act of 1933, as amended, including any amendment or report filed for the purpose of updating that description.

4. Filed as an exhibit to our Registration Statement (No. 333-83157) on Form S-8 filed with the Commission on July 19, 1999 and incorporated herein by reference.

5. Filed as an exhibit to our Post-Effective Amendment No. 1 to our Registration Statement on Form S-8 (No. 333-83989) filed with the Commission on November 2, 1999.

6. Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Commission and incorporated herein by reference.

7. Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Commission and incorporated herein by reference.

8. Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ending March 31, 2001 filed with the Commission and incorporated herein by reference.

9. Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ending June 30, 2001 filed with the Commission and incorporated herein by reference.

10. Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Commission and incorporated herein by reference.

(b)  Reports on Form 8-K:   None.

95

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 13, 2003	By:	/s/ JOHN M. WHITING
			John M. Whiting
			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 Louis J. Lavigne, Jr., Executive Vice President and Chief Financial Officer, and John M. Whiting, Vice President, Controller and Chief Accounting Officer, and each of them, his true and lawful attorneys-in-fact and agents, with the full power of substitution and resubstitution, for him and in his 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 substitute or substitutes, may lawfully do or cause to be done by virt ue 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:

Signature	Title	Date
Principal Executive Officer:
/s/ ARTHUR D. LEVINSON	Chairman, President and	February 13, 2003
Arthur D. Levinson	Chief Executive Officer
Principal Financial Officer:
/s/ LOUIS J. LAVIGNE, JR.	Executive Vice President and	February 13, 2003
Louis J. Lavigne, Jr.	Chief Financial Officer
Principal Accounting Officer:
/s/ JOHN M. WHITING	Vice President, Controller, and	February 13, 2003
John M. Whiting	Chief Accounting Officer

96

Signature	Title	Date
Directors:
/s/ HERBERT W. BOYER	Director	February 13, 2003
Herbert W. Boyer
/s/ JONATHAN K.C. KNOWLES	Director	February 13, 2003
Jonathan K.C. Knowles
/s/ FRANZ B. HUMER	Director	February 13, 2003
Franz B. Humer
/s/ MARK RICHMOND	Director	February 13, 2003
Mark Richmond
/s/ CHARLES A. SANDERS	Director	February 13, 2003
Charles A. Sanders

97

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 annual 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 annual report;

            3.   Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

            4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

       a)   designed such disclosure controls and procedures 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 annual report is being prepared;

       b)   evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

       c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

            5.   The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

       a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

       b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

            6.   The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	February 13, 2003	By:	/s/ ARTHUR D. LEVINSON
			Arthur D. Levinson, Ph.D.   President and Chief Executive Officer

98

I, Louis J. Lavigne, Jr., certify that:

            1.   I have reviewed this annual report on Form 10-K of Genentech, Inc.;

            2.   Based on my knowledge, this annual 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 annual report;

            3.   Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

            4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

       a)   designed such disclosure controls and procedures 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 annual report is being prepared;

       b)   evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

       c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

            5.   The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

       a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

       b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

            6.   The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	February 13, 2003	By:	/s/ LOUIS J. LAVIGNE, JR.
			Louis J. Lavigne, Jr.   Executive Vice President and   Chief Financial Officer

99

SCHEDULE II

GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001 and 2000
(in thousands)

	Balance at Beginning of Period		Addition Charged to Cost and Expenses		Deductions(1)		Balance at End of Period
Allowance for doubtful accounts and returns:
Year Ended December 31, 2002:	$	22,200	$	16,563	$	(17,073)	$	21,690
Year Ended December 31, 2001:	$	17,310	$	16,145	$	(11,255)	$	22,200
Year Ended December 31, 2000:	$	18,951	$	16,167	$	(17,808)	$	17,310
Inventory reserves:
Year Ended December 31, 2002:	$	25,589	$	18,588	$	(23,202)	$	20,975
Year Ended December 31, 2001:	$	11,817	$	16,354	$	(2,582)	$	25,589
Year Ended December 31, 2000:	$	16,384	$	14,500	$	(19,067)	$	11,817
Reserve for nonmarketable debt and equity    securities and convertible equity loans:
Year Ended December 31, 2002:	$	36,137	$	1,465	$	(13,740)	$	23,862
Year Ended December 31, 2001:	$	32,785	$	3,352	$	-	$	36,137
Year Ended December 31, 2000:	$	29,045	$	3,740	$	-	$	32,785

___________

(1) Represents amounts written off or returned against the allowance or reserves, or returned against earnings.

100

EX-3.4

EXHIBIT 3.4

BYLAWS

OF

GENENTECH, INC.

* * * * *

ARTICLE 1

OFFICES

            SECTION 1.01. Registered Office. The registered office shall be Corporation Service Company, 1013 Centre Road, City of Wilmington, County of New Castle, State of Delaware. The name of its registered agent at such address is Corporation Service Company.

            SECTION 1.02. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

            SECTION 1.03. Books. The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE 2

MEETINGS OF STOCKHOLDERS

            SECTION 2.01. Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors).

            SECTION 2.02. Annual Meetings; Election of Directors. An annual meeting of stockholders, commencing with the year 2000, shall be held at such date and time as directors may determine to transact such business as may properly be brought before the meeting. Prior to a Termination Event (as defined below), directors shall be nominated and elected at the annual meeting in accordance with Section 3.02 and Section 3.03. After a Termination Event has occurred, directors shall (subject to Section 3.03(c)) be elected by stockholders by ballot at the annual meeting, unless they are elected by written consent in lieu of an annual meeting as permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("Delaware Law"). For purposes of these bylaws, a "Termination Event" means the disposition by Roche and its "Affiliates" (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of beneficial ownership of Common Stock of the Corporation which disposition has the effect of causing Parent's Voting Interest (as defined herein) to be less than 40%.

            SECTION 2.03. Special Meetings. Special meetings of stockholders may be called by the Board of Directors or the Chairman of the Board and shall be called by the Secretary at the request in writing of holders of record of a majority of the outstanding capital stock of the Corporation entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.

            SECTION 2.04. Notice of Meetings and Adjourned Meetings; Waivers of Notice. (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by Delaware Law, such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

            (b) A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

            SECTION 2.05. Quorum. Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person or represented by proxy shall adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified.

            SECTION 2.06. Voting. (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Any share of capital stock of the Corporation held by the Corporation shall have no voting rights. Unless otherwise provided in Delaware Law, the certificate of incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by written proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders.

            (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by written proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

            SECTION 2.07. Action by Consent. (a) Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corpor ation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take the action were delivered to the Corporation as provided in Section 2.07(b).

            (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section and Delaware Law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

            SECTION 2.08. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or in his absence or if one shall not have been elected, the director designated by the vote of the majority of the directors present at such meeting, shall act as chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof.

            SECTION 2.09. Order of Business; Conduct of Meetings. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. In addition, the Board may adopt by resolution such rules and regulations for the conduct of meetings of stockholders as it shall deem appropriate. Except to the extent inconsistent with law and such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations, or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rul es and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting may determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The chairman of the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and, if such chairman should so determine, declare to the meeting that any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board or the chairman of the meeting, meetin gs of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

            SECTION 2.10. Inspectors of Election. The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital s tock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election.

ARTICLE 3

DIRECTORS

            SECTION 3.01. General Powers. Except as otherwise provided in Delaware Law or the certificate of incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

            SECTION 3.02. Composition of Board of Directors; Terms of Directors. (a) Subject to the other provisions hereof, the number of directors comprising the Board shall be six, and shall include two nominees of Roche Holdings, Inc. ("Roche"), one executive officer of the Corporation nominated by the nominating or proxy committee, and three Independent Directors (as defined herein) nominated by the nominating or proxy committee. The Board shall at all times include at least two Independent Directors, and one executive officer of the Corporation. For purposes of these bylaws, the term "Independent Director" means a director of the Corporation who is not (i) an officer of the Corporation, (ii) an employee, director, principal stockholder or partner of Roche or any affiliate of Roche, or (iii) an employee, director, principal stockholder or partner of an entity (other than the Corporation or any of its subsidiaries) that w as dependent upon Roche or any affiliate of Roche for more than 10% of its revenues or earnings in its most recent fiscal year. After a Termination Event has occurred, this Section 3.02(a) shall be of no further force or effect, and directors shall be elected as set forth in Section 2.02.

            (b) The directors of the Corporation shall be nominated as provided in these bylaws, and shall serve until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and these bylaws. The term of office of each director shall be one year, provided that this shall not prevent any director from serving multiple or successive terms.

            SECTION 3.03. Roche's Right to Proportional Representation. (a) Upon the request of Roche at any time by notice to the Corporation (a "Governance Notice"), Roche shall be immediately entitled to representation on the Board such that Roche shall have a number of directors designated by Roche equal to Parent's Voting Interest times the total number of directors, rounded up to the next whole number if Parent's Voting Interest is greater than 50% and rounded down to the next whole number if Parent's Voting Interest is less than or equal to 50%. For purposes of these bylaws, "Parent's Voting Interest" means the percentage of the outstanding common stock, par value $0.02 per share ("Common Stock"), of the Corporation beneficially owned by Roche and its affiliates. Notwithstanding any other provisions of these Bylaws, and without limiting the Corporation's obligations pursuant to Section 4.04(g) of the Affiliatio n Agreement between the Corporation and Roche Holdings, Inc. dated as of July 22, 1999, as amended as of October 22, 1999 (as so amended and as hereafter amended by the Corporation and Roche, the "Affiliation Agreement"), (a) Parent's Voting Interest, (b) the ownership of Roche and/or its affiliates and (c) Roche's total voting power for purpose of Section 3.04(d)(i)(A) and (B) shall at all times be calculated for purposes of the Bylaws as if the Corporation had, as of the time of such calculation, purchased all shares that would, as of such time, have been required to be purchased by the Corporation pursuant to Section 4.04(g) of the Affiliation Agreement (determined without regard to the exception at the end of Section 4.04(g)(2) of the Affiliation Agreement).

            (b) Upon receipt of a Governance Notice, the Board and the Corporation shall immediately take or cause to be taken all action not previously taken to cause the numbers of directors constituting the Board to be increased, and to cause the Board to fill the vacancies created by any such increase by electing Roche's nominees for such vacancies, as necessary in order to achieve the proportionality required by Section 3.03(a). Any directors elected to fill a vacancy shall serve until the next annual meeting of stockholders.

            (c) After a Termination Event has occurred, Sections 3.03(a) and 3.03(b) shall be of no further force or effect, and Roche shall thereafter be entitled to nominate a number of directors (and their successors) which is proportional to Parent's Voting Interest, rounded down to the next whole number, until and unless Parent's Voting Interest is less than 5%. Both prior to and after a Termination Event, Roche may designate an affiliate of Roche to make nominations of directors and committee members on its behalf.

            SECTION 3.04. Committees. (a) The Board shall designate a nominating or proxy committee, an executive committee, an audit committee and a compensation committee. No action by any such committee shall be valid unless taken at a meeting for which adequate notice has been duly given to or waived by the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting and no other business may be transacted at such meeting. Any committee member unable to participate in person at any meeting shall be given the opportunity to participate by telephone.

            (b) Any such committee, to the extent provided by resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware Law to be submitted to the stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. The Corporation shall be governed by the provisions of Section 141(c)(2) of Delaware Law, as amended effective July 1, 1996.

            (c) Each committee of the Board (other than any special committee or committee of Independent Directors that may be constituted for purposes of making any determination provided for by agreement between the Corporation and Roche) shall at all times include at least one director designated by Roche (and, following a Governance Notice, no less than a proportional number of directors designated by Roche). Any director designated by Roche to serve on any committee may designate as his or her alternate another director designated by Roche.

            (d) The nominating or proxy committee shall at all times have three members. At any time that Roche owns 80% or more of the total voting power of the Corporation stock (within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended), the nominating or proxy committee shall include two nominees of Roche and one Independent Director. At any time that Roche owns less than 80% of the total voting power, the nominating or proxy committee shall include (i) a number of nominees of Roche that is equal to the product of (A) the percentage owned by Roche of the total voting power and (B) three, rounded up to the next whole number if Roche's total voting power is greater than 50% and rounded down to the next whole number if Roche's total voting power is less than or equal to 50%, provided that (X) Roche shall at no time have more than two nominees, and (Y) if Roche's ownership of less than 80% of the total voting powe r is the result of a breach by the Corporation of any obligation under any agreement with Roche, the nominating or proxy committee shall include two nominees of Roche, and (ii) a number of Independent Directors equal to three minus the number of nominees of Roche determined pursuant to the preceding clause (i).

            (e) After a Termination Event has occurred, Sections 3.04(c) and 3.04(d) shall terminate and be of no further force or effect.

            SECTION 3.05. Nomination of Directors. The nominating or proxy committee shall require, for the nomination of any person not designated by Roche, the approval of a majority of the nominating or proxy committee.

            SECTION 3.06. Quorum and Manner of Acting. Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat shall adjourn the meeting, from time to time, without notice other than announcement at the m eeting, until a quorum shall be present.

            SECTION 3.07. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors).

            SECTION 3.08. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 3.10 herein or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice.

            SECTION 3.09. Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given.

            SECTION 3.10. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or Secretary on the written request of three directors. Notice of special meetings of the Board of Directors shall be given to each director at least three days before the date of the meeting in such manner as is determined by the Board of Directors.

            SECTION 3.11. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

            SECTION 3.12. Telephonic Meetings. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

            SECTION 3.13. Resignation. Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

            SECTION 3.14. Vacancies. Except as otherwise provided in the certificate of incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof (or any particular holder or holders) are entitled to elect one or more directors by the certificate of incorporation or these bylaws, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof (or particular holder or holders) then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his succes sor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law.

            SECTION 3.15. Removal. Directors may be removed only as provided in the Certificate of Incorporation.

            SECTION 3.16. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses.

ARTICLE 4

OFFICERS

            SECTION 4.01. Principal Officers. The principal officers of the Corporation shall be a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary.

            SECTION 4.02. Election, Term of Office and Remuneration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine.

            SECTION 4.03. Subordinate Officers. In addition to the principal officers enumerated in Section 4.01 herein, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees.

            SECTION 4.04. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors.

            SECTION 4.05. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

            SECTION 4.06. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors.

ARTICLE 5

GENERAL PROVISIONS

            SECTION 5.01. Fixing the Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stock holders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting.

            (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Delaware Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an of ficer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Delaware Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

            (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

            SECTION 5.02. Dividends. Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation.

            SECTION 5.03. Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year.

            SECTION 5.04. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced.

            SECTION 5.05. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock.

            SECTION 5.06. Amendments. These bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors, provided that Sections 2.02, 3.02, 3.03, 3.04, 3.05, 3.14, 3.15 and 5.06 of these bylaws may only be altered, amended, repealed or rescinded as provided in the Certificate of Incorporation.

EX-10.5

EXHIBIT 10.5

GENENTECH, INC.

TAX REDUCTION INVESTMENT PLAN

(January 1, 2002 Restatement)

TABLE OF CONTENTS
			Page
PREAMBLE			1
SECTION 1		DEFINITIONS	2
SECTION 2		ELIGIBILITY AND MEMBERSHIP	12
	2.1	Initial Eligibility	12
	2.2	Employer Aggregation	12
	2.3	Membership	12
	2.4	Voluntary Suspension	13
	2.5	Mandatory Suspension	14
	2.6	Termination of Membership	14
SECTION 3		SALARY DEFERRALS AND FLEX CREDITS	14
	3.1	Salary Deferrals and Flex Credits	14
		3.1.7     Catch-Up Contributions	18
	3.2	Salary Deferral and Flex Credit Elections	18
	3.3	Payment of Salary Deferrals and Excess Flex Credits	22
SECTION 4		MATCHING CONTRIBUTIONS	22
	4.1	Amount of Matching Contributions	22
	4.2	Timing	26
	4.3	Periodic Contributions	26
	4.4	Profits Not Required	27
	4.5	After-Tax Contributions	27
SECTION 5		ALLOCATIONS AND INVESTMENT	27
	5.1	Salary Deferrals, Catch-Up Contributions and Flex Credits	27
	5.2	Matching Contributions	27
	5.3	Investment	28
	5.4	Limitations on Allocations	29
SECTION 6		ACCOUNTS AND COMMINGLED FUNDS	32
	6.1	Members' Accounts	32
	6.2	Trust Fund Assets	33
	6.3	Commingled Funds	33
	6.4	Valuation of Members' Accounts	35
	6.5	Valuation of Shares	35

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TABLE OF CONTENTS
(continued)
			Page
	6.6	Statements of Members' Accounts	36
	6.7	Accounts Nonforfeitable	36
SECTION 7		DISTRIBUTIONS	36
	7.1	Events Permitting Distribution	36
	7.2	Times for Distribution	37
	7.3	Consent Requirement	38
	7.4	Form of Distribution	38
	7.5	Common Stock Restrictions	40
	7.6	Beneficiary Designations	40
	7.7	Payments to Minors or Incompetents	42
	7.8	Undistributable Accounts	42
SECTION 8		WITHDRAWALS, LOANS AND DOMESTIC RELATIONS ORDERS	43
	8.1	General Rules	43
	8.2	Hardship Withdrawal	44
	8.3	Age 59 1/2 Withdrawal	46
	8.4	Loans to Members	46
	8.5	Qualified Domestic Relations Orders	49
SECTION 9		ADMINISTRATION OF THE PLAN	50
	9.1	Plan Administrator	50
	9.2	Committee	51
	9.3	Actions by Committee	51
	9.4	Powers of Committee	51
	9.5	Fiduciary Responsibilities	53
	9.6	Investment Responsibilities	53
	9.7	Voting and Tender Offer Rights in Common Stock	54
	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 AND ROLLOVER CONTRIBUTIONS	59

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TABLE OF CONTENTS
(continued)
			Page
	10.1	Trust Fund	59
	10.2	No Diversion of Assets	60
	10.3	Continuing Conditions	60
	10.4	Change of Investment Alternatives	61
	10.5	Rollover Contributions	61
SECTION 11		MODIFICATION OR TERMINATION OF PLAN	62
	11.1	Employers' Obligations Limited	62
	11.2	Right to Amend or Terminate	62
	11.3	Effect of Termination	63
SECTION 12		TOP-HEAVY PLAN	63
	12.1	Top-Heavy Plan Status	63
	12.2	Top-Heavy Plan Provisions	64
SECTION 13		GENERAL PROVISIONS	65
	13.1	Plan Information	65
	13.2	Inalienability	65
	13.3	Rights and Duties	66
	13.4	No Enlargement of Employment Rights	66
	13.5	Apportionment of Duties	66
	13.6	Merger, Consolidation or Transfer	67
	13.7	Military Service	67
	13.8	Applicable Law	67
	13.9	Severability	67
	13.10	Captions	67
EXECUTION			68
APPENDIX A:  EFFECTIVE DATES			A-1

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GENENTECH, INC.
TAX REDUCTION INVESTMENT PLAN
(January 1, 2002 Restatement)

PREAMBLE

            GENENTECH, INC. (the "Company") having established the Genentech, Inc. Tax Reduction Investment Plan (the "Plan") effective as of January 1, 1985, amended and restated the Plan effective (most recently) as of January 1, 2000, and amended the restated Plan on several occasions, hereby again amends and restates the Plan in its entirety effective (generally) as of January 1, 2002, except as otherwise indicated herein or in the attached Appendix A.

            The Plan is maintained for the benefit of Eligible Employees of the Company and its participating Affiliates, in order (1) to provide Eligible Employees with a means of supplementing their retirement income on a tax-favored basis, (2) to provide Eligible Employees with an incentive to continue and increase their efforts to contribute to the success of the Company, and (3) to enable Eligible Employees to acquire an equity ownership interest in the Company. The Plan is designed to constitute a qualified profit-sharing plan, as described in section 401(a) of the Code, which includes a qualified cash or deferred arrangement, as described in section 401(k) of the Code. The Plan is also designed to qualify as a 404(c) plan (within the meaning of section 404(c) of ERISA).

            With respect to any period during which GenenFlex does not permit an option to contribute to the Plan excess Flex Credits awarded thereunder, the provisions of the Plan related to the deferral of excess Flex Credits shall be suspended.

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     "Affiliate" shall mean 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 any Employer.

            1.2     "Alternate Payee" shall mean any spouse, former spouse, child or other dependent (within the meaning of section 152 of the Code) of a Member who is recognized by a QDRO (as defined in Section 8.5) as having a right to receive any immediate or deferred payment from a Member's Account under this Plan.

            1.3     "Beneficiary" shall mean the person or persons entitled to receive benefits under the Plan upon the death of a Member in accordance with Section 7.6.

            1.4     "Board of Directors" shall mean the Board of Directors of the Company, as from time to time constituted.

            1.5     "Code" shall mean 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.

            1.6     "Commingled Funds" shall mean (collectively) the commingled funds described in Section 6.3.

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            1.7     "Committee" shall mean the administrative committee appointed by the Board of Directors (as provided in Section 9.2) and charged with the general administration of the Plan pursuant to Section 9.

            1.8     "Common Stock" shall mean the common stock of the Company, par value $0.02, as from time to time constituted.

            1.9     "Company" shall mean 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    "Compensation" shall mean all salary, wages, annual cash bonuses, sales bonuses, and commissions paid by any Employer with respect to services performed during any period by an Employee, including Salary Deferrals and "catch-up contributions" made under Section 3.1.7 but excluding (a) contributions made by any Employer (other than Salary Deferrals and "catch-up contributions") under this Plan 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 an Employee's IRS Form W-2, such as income from the exercise of stock options, proceeds from the redemption of Common Stock, tuition reimbursements, reimbursements of health club dues, Genenchecks, referral bonuses, severance payments (if paid on a payroll-by-payroll basis after termination), and relocation expenses; provided, however, that the amount of an Employee's Compensation shall not be increased or decreased by (i) compensation reductions effected or Flex Credits awarded under GenenFlex, or (ii) amounts that are otherwise not includible in the gross income of the Employee by reason of section 132(f)(4) of the Code. No portion of the Compensation of any Member for a Plan Year which exceeds the Compensation Limit (as defined below) shall be taken into account for any purpose under the Plan for any Plan Year. "Compensation Limit"

3

shall mean $200,000 (as adjusted periodically pursuant to sections 401(a)(17) and 415(d) of the Code).

            1.11    "Disability" shall mean the mental or physical inability of a Member 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 Member is disabled under the standards of the Company's long-term disability plan.

            1.12    "Eligible Annual Bonus" shall mean (a) any annual discretionary bonus paid by an Employer to an Employee under the Company's Corporate Bonus Program (or an Employer's similar bonus program), or (b) any fourth calendar quarter payout under any of the Bonus Plans that comprise the Company's Field Sales Incentive Compensation Program. All Eligible Annual Bonus amounts shall be determined net of employee stock purchase plan and mandatory deductions including, without limitation, Employee-paid FICA and SDI withholdings; provided, however, that the term "Eligible Annual Bonus" shall not include any other sales incentive bonus or any special, extraordinary or GenenCheck bonus.

            1.13    "Eligible Employee" shall mean every Employee of an Employer except:

            (a)     An Employee who is employed on a temporary basis as defined by an Employer; provided, however, that any such Employee who is credited with at least 1,000 Hours of Service for a 12-month period beginning on his or her date of hire or any anniversary thereof shall become an Eligible Employee as of the Entry Date that next follows the last day of such 12-month period;

            (b)     A part-time Employee who is not normally scheduled to work at least 20 hours per week; provided, however, that any such Employee who is credited with at least 1,000 Hours of Service for a 12-month period beginning on his or her date of hire or any anniversary thereof shall become an Eligible Employee as of the Entry Date that next follows the last day of such 12-month period;

            (c)     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;

4

            (d)     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;

            (e)     An Employee whose Compensation is not paid from any Employer's U.S. payroll; and

            (f)     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.

For purposes of this Section 1.13, "date of hire" shall mean the date on which an Employee first completes an Hour of Service.

            1.14    "Employee" shall mean an individual who is a (a) employed by an Employer or Affiliate as a common-law employee, 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.

            1.15    "Employer" shall mean the Company and each Affiliate that adopts this Plan with the approval of the Board of Directors.

            1.16    "Entry Date" shall mean the first day of each payroll period.

            1.17    "ERISA" shall mean 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.

            1.18    "Flex Credit" shall have the meaning set forth in GenenFlex.

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            1.19    "GenenFlex" shall mean the cafeteria plan (within the meaning of section 125 of the Code) pursuant to which Flex Credits are awarded to any Employee of an Employer.

            1.20    "Highly Compensated Employee" shall mean a Highly Compensated Active Employee or a Highly Compensated Former Employee, as defined below:

            (a)    "Highly Compensated Active Employee" shall mean any Employee who performs services for an Employer or Affiliate during the Determination Year and who:

            (1)    Received Compensation in excess of $80,000 (as adjusted periodically pursuant to sections 414(q)(1) and 415(d) of the Code) during the Look-Back Year; or

            (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" shall mean 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 (as defined in section 414(q) of the Code as then in effect) 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 shall be made in accordance with section 414(q) of the Code.

            (d)    For purposes of applying this Section 1.20:

            (1)    "Compensation" shall mean Total Compensation (as defined in Section 5.4.2(d) and applied using the definition of "Affiliate" in Section 1.1 rather than in Section 5.4.2(a));

            (2)    "Determination Year" shall mean the Plan Year for which the determination is being made; and

            (3)    "Look-Back Year" shall mean the Plan Year immediately preceding the Determination Year.

            1.21    "Hour of Service" shall mean an hour credited to an Employee under this Section 1.21:

            (a)    Paid Hours. An "Hour of Service" includes each hour for which:

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            (1)    An Employee is directly or indirectly paid or entitled to payment by an Employer or Affiliate for the performance of duties;

            (2)    An Employee is directly or indirectly paid or entitled to payment by an Employer or Affiliate for periods during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including Disability), layoff, jury duty or Leave of Absence (with pay); and

            (3)    Back pay (irrespective of mitigation damages) has been awarded or agreed to by an Employer or Affiliate.

            (b)    No Duties Performed. Except as otherwise provided in subsection (d) below, no Hours of Service shall be credited for periods during which no duties are performed if payment by an Employer or Affiliate is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, unemployment compensation or disability insurance laws, or is made as reimbursement to an Employee for medical or medically related expenses. In no event will more than 501 Hours of Service be credited under this paragraph (b) on account of any single continuous period during which an Employee performs no duties.

            (c)    Crediting Rules. Hours of Service shall be credited under this Section 1.21 in accordance with U.S. Department of Labor Regulation Section 2530.200b-2(b) and (c).

            (d)    Family-Related Absences. In the case of an Employee who is absent from active employment with an Employer or Affiliate for any period,

            (1)    By reason of her pregnancy or the birth of his or her child,

            (2)    By reason of the placement of a child with the Employee in connection with his or her adoption of such child,

            (3)    For purposes of caring for any such child for a period beginning immediately following such birth or placement, or

            (4)    On account of a leave of absence taken pursuant to the Family and Medical Leave Act of 1993 ("FMLA").

"Hour of Service" shall mean any hour that is not credited as an Hour of Service (because the Employee is not paid or entitled to payment therefor) but which would otherwise normally have been credited to the Employee (but for the absence) under paragraphs (a) through (c) above. In any case in which the Committee is unable to determine the number of hours that would otherwise normally have been credited to an Employee (but for the absence) under this paragraph (d), the Employee shall be credited with eight Hours of Service for each day of the absence. Notwithstanding the foregoing, (A) no more than 501 Hours of Service shall be credited under this paragraph (d) to any individual on account of any single pregnancy, birth, placement or other FMLA leave,

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and (B) the hours described in this paragraph (d) shall be treated as Hours of Service (i) for the Plan Year in which the absence begins, to the extent required to credit the Employee with 1,000 Hours of Service for that Plan Year, and (ii) with respect to the remainder of the 501 Hours of Service maximum, for the next following Plan Year.

            1.22    "Investment Manager" shall mean any investment manager appointed by the Committee in accordance with Section 9.6.

            1.23    "Leased Employee" shall mean 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 year, and such services are performed under primary direction or control by the Employer or Affiliate. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the Employer or Affiliate shall be treated as provided by the Employer or Affiliate. A Leased Employee shall not be considered an Employee of the Employer or Affiliate if:

            (a)    Such Leased Employee is covered by a money purchase pension plan providing (i) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Code Section 415(c)(3), but including amounts contributed pursuant to a salary reduction agreement which are excludable from the Leased Employee's gross income under Code Sections 125, 402(e)(3), 402(h)(1)(B) or 403(b), and Code Section 132(f), and (ii) immediate participation, and (iii) full and immediate vesting; and

            (b)    Leased Employees do not constitute more than 20% of the Employers' nonhighly compensated work force.

            1.24    "Leave of Absence" shall mean the period of an Employee's absence from active employment (a) authorized by any 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

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States, provided that the Employee returns to active employment following discharge within the period during which he or she retains reemployment rights under federal law.

            1.25    "Matching Contributions" shall mean as to each Member the amounts contributed under the Plan by the Employers, excluding Salary Deferrals, "catch-up contributions" made under Section 3.1.7 and excess Flex Credits, in accordance with Section 4.1.

            1.26    "Member" shall mean an Eligible Employee who has become a Member of the Plan pursuant to Section 2.1 and has not ceased to be a Member pursuant to Section 2.6.

            (a)    For each Plan Year a Member shall be classified as an "Active Member" (1) if he or she has (A) enrolled in the Plan for any portion of the Plan Year by authorizing the required Salary Deferrals in accordance with Sections 2.3, 3.1 and 3.2, and/or (B) elected under GenenFlex (subject to the rules in effect under GenenFlex) to have at least five dollars ($5.00) worth of excess Flex Credits contributed to his or her GenenFlex Account; or (2) his or her active membership is resumed during the Plan Year after the end of a suspension period in accordance with Section 2.4 or 2.5.

            (b)    A Member who is not an Active Member shall be classified as an "Inactive Member."

            1.27    "Member's Accounts" or "Accounts" shall mean as to any Member the one or more separate accounts maintained in order to reflect his or her interest in the Plan. Each Member's Accounts shall be comprised of up to five separate subaccounts, as follows:

                        1.27.1  "GenenFlex Account" shall mean the subaccount maintained to record any excess Flex Credits that the Member has elected under GenenFlex (subject to the rules in effect under GenenFlex and Section 2.3.1) to have contributed to his or her GenenFlex Account pursuant to Sections 3.1 and 3.2 and any adjustments relating thereto.

                        1.27.2  "Loan Account" shall mean the subaccount maintained to record any loans made to the Member from his or her Accounts pursuant to Sections 5.3.3 and 8.4.

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                        1.27.3  "Matching Account" shall mean the subaccount maintained to record any Matching Contributions made on behalf of the Member pursuant to Sections 4.1 and 4.1 and any adjustments relating thereto.

                        1.27.4  "Rollover Account" shall mean the subaccount maintained to record any transfers to the Plan made by or on behalf of a Member pursuant to Section 10.5 and any adjustments relating thereto.

                        1.27.5  "Salary Deferral Account" shall mean the subaccount maintained to record any Salary Deferrals and "catch-up" contributions made under Section 3.1.7 (which may be maintained as a separate subaccount within the Salary Deferral Account) that the Member has elected to have contributed to his or her Salary Deferral Account pursuant to Sections 3.1 and 3.2 and any adjustments relating thereto.

            1.28    "1934 Act" shall mean 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.

            1.29    "Normal Retirement Age" shall mean age 55.

            1.30    "Plan" shall mean 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.

            1.31    "Plan Year" shall mean the calendar year.

            1.32    "Salary Deferrals" shall mean as to each Member the amounts contributed under the Plan by the Employers in accordance with Section 3.3, pursuant to the salary deferral election made by the Member in accordance with Sections 3.1 and 3.2. A Member's Salary Deferrals

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shall (a) include amounts contributed in respect of his or her regular periodic Compensation and/or Eligible Annual Bonus payments pursuant to Section 3.1(a), but (b) exclude "catch-up contributions" made under Section 3.1.7 and excess Flex Credits contributed pursuant to Section 3.1(b).

            1.33    "Trust Agreement" shall mean the trust agreement entered into by and between the Company and the Trustee, as validly amended from time to time.

            1.34    "Trust Fund" shall mean the trust fund established by and maintained under the Trust Agreement for the purpose of funding the benefits provided by the Plan, as provided in Section 10.

            1.35    "Trustee" shall mean 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.

            1.36    "Valuation Date" shall mean:

            (a)    For purposes of valuing Plan assets and Members' Accounts for periodic reports and statements, the date as of which such reports or statements are made; and

            (b)    For purposes of determining the amount of assets actually distributed to the Member, his or her Beneficiary or an Alternate Payee (or available for loan or withdrawal), the date on which occur the relevant transactions required to liquidate to cash the assets allocated to the Member's Accounts, provided that when such transactions occur on more than one date, there shall be several Valuation Dates, as appropriate.

In any other case, the Valuation Date shall be the date designated by the Committee (in its discretion) or the date otherwise set out in this Plan. In all cases, the Committee (in its discretion) may change the Valuation Date, on a uniform and nondiscriminatory basis, as is necessary or appropriate. Notwithstanding the foregoing, the Valuation Date shall occur at least annually.

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SECTION 2

ELIGIBILITY AND MEMBERSHIP

            2.1     Initial Eligibility. An Employee shall become a Member of 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 Member from employment with an Employer to employment with an Affiliate which is not an Employer shall not be an event entitling the Member to a distribution under Section 7.

            2.3     Membership. Each Member's decision to become an Active Member shall be entirely voluntary.

                        2.3.1  Active Membership. An Employee who has become a Member under Section 2.1 may elect to become an Active Member, effective as of any Entry Date, provided that he or she enrolls in the Plan and elects to make Salary Deferrals, and/or to contribute excess Flex Credits (subject to the rules in effect under GenenFlex), in such manner and within such advance notice period as the Committee (in its discretion) shall specify. Notwithstanding any contrary Plan provision, all Plan provisions relating to the contribution of excess Flex Credits after that date shall be inoperative until such time as the Committee (acting in a non-fiduciary capacity on behalf of the Company) shall determine otherwise in a writing setting forth the date on which such provisions shall again be operative.

                        2.3.2  Inactive Membership. A Member who does not elect to become an Active Member when eligible to do so shall be at all times treated as an Inactive Member until the Entry Date as of which he or she elects to become an Active Member.

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            2.4     Voluntary Suspension. An Active Member may voluntarily suspend his or her Salary Deferrals and "catch-up contributions" and/or contributions of excess Flex Credits (subject to the rules in effect under GenenFlex), for future payroll periods, by giving notice to such person, in such manner and within such advance notice period as the Committee (in its discretion) shall specify.

                        2.4.1  Effect. With respect to the period for which a Member's Salary Deferrals are suspended, he or she shall not make any Salary Deferrals or "catch-up contributions" under Section 3.1.7 nor share in the allocation of Matching Contributions, and he or she may not later make the Salary Deferrals or "catch-up contributions" that he or she might otherwise have made during the suspension period. With respect to the period for which a Member's contributions of excess Flex Credits are suspended, he or she shall not contribute any excess Flex Credits, and he or she may not later contribute the excess Flex Credits that he or she might otherwise have contributed during the suspension period. No distribution shall be made to a Member solely as the result of any suspension of his or her active membership.

                        2.4.2  Resuming Salary Deferrals and/or Excess Flex Credit Contributions. A Member who voluntarily suspended his or her Salary Deferrals or "catch-up contributions" under Section 3.1.7 and/or contributions of excess Flex Credits (subject to the rules in effect under GenenFlex) may voluntarily resume his or her Salary Deferrals or "catch-up contributions" and/or contributions of excess Flex Credits (subject to the rules in effect under GenenFlex), effective with respect to Compensation paid for the payroll period beginning on any Entry Date, by giving notice to such person, in such manner and within such advance notice period as the Committee (in its discretion) shall specify.

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            2.5     Mandatory Suspension. If a Member (1) ceases to be an Eligible Employee because he or she ceases to meet the requirements of Section 1.13, (2) is transferred to employment with an Affiliate which is not an Employer, (3) is granted a Leave of Absence without pay, (4) has been approved for a Hardship Withdrawal pursuant to Section 8.2, (5) is on long-term disability, or (6) is placed on layoff or furlough status, then:

            (a)     His or her status as an Active Member shall be suspended (in accordance with Section 2.4.1) for each payroll period beginning during the continuation of such ineligible status, and

            (b)     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 Member may be resumed only in accordance with Section 2.4.2.

Notwithstanding any contrary Plan provision, a Member's Compensation which is paid for any portion of a payroll period that includes a period of mandatory suspension shall not be subject to any salary deferral election nor contributed under the Plan as Salary Deferrals or "catch-up contributions," nor shall such Member contribute any Flex Credits to his or her GenenFlex Account during such mandatory suspension period.

            2.6     Termination of Membership. An Eligible Employee who has become a Member shall remain a Member until his or her employment with all Employers and Affiliates terminates or, if he or she remains alive, until his or her entire Account balance is distributed (whichever is later).

SECTION 3

SALARY DEFERRALS AND FLEX CREDITS

            3.1     Salary Deferrals and Flex Credits. Each Active Member may elect to defer portions of his or her Compensation payments and to have the amounts of such Salary Deferrals contributed by the Employers to the Trust Fund and credited to his or her Salary Deferral Account under the Plan.

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            (a)     Salary Deferrals. An Active Member may elect under this Plan to defer:

            (1)     A portion of each payment of Compensation (including any Eligible Annual 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 25% (inclusive) of the Compensation payment; and

            (2)     In addition to any election made under paragraph (a)(1) above, a portion of any payment of Eligible Annual Bonus that would otherwise be made to him or her, after the election becomes and while it remains effective, equal to any whole percentage that exceeds the deferral election percentage then in effect under paragraph (a)(1) above but does not exceed 100% (or such lesser percentage as is determined by the Company to comply with mandatory tax withholding and required payroll deductions) of the Eligible Annual Bonus. Any remaining balance attributable to the Eligible Annual Bonus payment shall be immediately payable to the Member.

            (b)     Excess Flex Credits. Instead or in addition, an Active Member may elect under GenenFlex (subject to the rules in effect under GenenFlex) to have at least five dollars ($5.00) worth of excess Flex Credits contributed to his or her GenenFlex Account. Notwithstanding any contrary Plan provision, all Plan provisions relating to the contribution of excess Flex Credits shall be inoperative until such time as the Committee (acting in a non-fiduciary capacity on behalf of the Company) shall determine otherwise in a writing setting forth the date on which such provisions shall again be operative.

            3.1.1  Section 401(k) Ceiling. Notwithstanding the foregoing, the Committee:

            (a)     May suspend or limit any Member's salary deferral election, and/or election under GenenFlex to have any excess Flex Credits contributed to his or her GenenFlex Account, at any time in order to prevent the cumulative amount of the Salary Deferrals and excess Flex Credits contributed on behalf of the Member for any calendar year from exceeding the Section 401(k) Ceiling;

            (b)     Shall cause any amount allocated to the Plan 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 allocable thereto for the calendar year to which the excess deferral relates, to be distributed to the Member no later than the April 15 that next follows the year of deferral in accordance with section 402(g)(2)(A) of the Code; and

            (c)     May cause any other amount allocated to the Member's Salary Deferral and/or GenenFlex Account(s) and designated by the Member as an excess deferral, together with any income allocable thereto for the calendar year to which the excess deferral relates, to be distributed to the Member in accordance with section 402(g)(2)(A) of the Code; provided, however, that any such designation shall be applied last to any

15

contributions of excess Flex Credits that any HCE Member (as defined in Section 3.1.3) has elected under GenenFlex to have contributed to his or her GenenFlex Account.

            (d)     Any Matching Contributions allocated to the Member's Matching Account by reason of any excess deferral distributed pursuant to paragraph (b) or (c), together with any income allocable thereto for the calendar year to which the excess deferral relates, shall be forfeited at the time such distribution is made and applied to reduce the next succeeding Matching Contribution to the Plan, without regard to the extent of the Member's vested interest in his or her Matching Account.

            (e)     The "Section 401(k) Ceiling" is a dollar amount equal to the dollar limit prescribed in section 402(g)(1) of the Code (as adjusted periodically pursuant to sections 402(g)(5) and 415(d) of the Code).

                        3.1.2  Limitations on HCE Members. For any Plan Year, the Committee (in its discretion) may limit (a) the period for which, and/or specify a lesser maximum percentage at which, Salary Deferrals may be elected by HCE Members (as defined in Section 3.1.3) and/or (b) the period for which or the value of the excess Flex Credits that may be contributed to HCE Members' GenenFlex Accounts, in such manner as may be necessary or appropriate in order to assure that the limitation described in Section 3.1.4 will be satisfied.

                        3.1.3  HCE and Non-HCE Members. All Members who are Eligible Employees at any time during the Plan Year (whether or not they are Active Members), and who are Highly Compensated Employees with respect to the Plan Year, shall be "HCE Members" for the Plan Year. All other Members who were Eligible Employees at any time during the immediately preceding Plan Year (whether or not they were Active Members), and who were not Highly Compensated Employees with respect to that Plan Year, shall be "Non-HCE Members" for that Plan Year.

                        3.1.4  Deferral Percentage Limitation. In no event shall the actual deferral percentage, determined in accordance with Section 3.1.5 (the "ADP"), for the HCE Members for a Plan Year exceed the maximum ADP, as determined by reference to the preceding Plan Year's ADP for the preceding Plan Year's Non-HCE Members, in accordance with the following table:

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If the ADP for Non-HCE	Then the Maximum ADP for
Members ("NHCEs' ADP") is:	HCE Members is:
Less than 2%	2.0 x NHCEs' ADP
2% to 8%	NHCEs' ADP + 2%
More than 8%	1.25 x NHCEs' ADP

                        3.1.5  Actual Deferral Percentage. The actual deferral percentage for the HCE or Non-HCE Members for a Plan Year shall be calculated by computing the average of the percentages (calculated separately for each HCE or Non-HCE Member) (the "Deferral Rates") determined by dividing (1) the total for the Plan Year of (i) all Salary Deferrals made by the Member and credited to his or her Salary Deferral Account, and (ii) all excess Flex Credits contributed by the Member (subject to the rules in effect under GenenFlex) and credited to his or her GenenFlex Account, by (2) the Member's Testing Compensation (as defined in Section 3.1.6) for the Plan Year. In computing a Member'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 3.1.4.

            (b)     If an HCE Member is a participant in any other cash or deferred arrangement maintained by any Employer or Affiliate, the separate Deferral Rates determined for the Member under all such cash or deferred arrangements shall be aggregated with the separate Deferral Rate determined for the Member under this Section 3.1.5 for purposes of applying Section 3.1.4.

                        3.1.6  Testing Compensation. For purposes of applying the discrimination tests of sections 401(k)(3) and 401(m)(2) of the Code, "Testing Compensation" shall mean with respect to any Member:

            (a)     His or her Total Compensation (as defined in Section 5.4.2(d) and applied using the definition of "Affiliate" in Section 1.1 rather than in Section 5.4.2(a)); or

            (b)     The amount of his or her compensation calculated by the Committee in a manner which satisfies applicable requirements of Treas. Reg. Section 1.401(k)-1(g)(2)(i).

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            (c)     Notwithstanding the foregoing, no amount in excess of the Compensation Limit (as defined in Section 1.10) shall be taken into account under this Section 3.1.6 for any Plan Year.

            (d)     Compensation for periods prior to the time that an Employee became a Member shall not be taken into account.

                        3.1.6  Catch-Up Contributions. Notwithstanding any contrary Plan provision:

            (a)     Eligible Members. All Employees who are Members eligible to make Salary Deferrals under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make "catch-up contributions" in accordance with, and subject to the limitations of, section 414(v) of the Code.

            (b)     Certain Code Limitations Inapplicable. A Member's "catch-up contributions" shall not be taken into account for purposes of applying Plan provisions implementing required limitations of sections 402(g) and 415 of the Code. 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.

            3.2     Salary Deferral and Flex Credit Elections. Each Active Member shall determine the percentage(s) of his or her regular and/or Eligible Annual Bonus Compensation payments that shall be deferred and contributed to the Trust Fund as his or her Salary Deferrals, in accordance with Section 3.1(a), at the time he or she becomes an Active Member and thereafter may redetermine such percentage(s) from time to time as of any Entry Date. Subject to paragraph (c) below, each Active Member who is also a participant in GenenFlex may also elect under GenenFlex (subject to the rules in effect under GenenFlex) to have at least five dollars ($5.00) worth of excess Flex Credits contributed to his or her GenenFlex Account in accordance with Section 3.1(b). In either event -

            (a)     The Active Member shall make his or her (1) salary deferral election with respect to his or her Compensation (including or excluding Eligible Annual Bonus payments), in such manner and within such advance notice period as the Committee (in its discretion) shall specify, and/or (2) election under GenenFlex (subject to the rules in effect under GenenFlex) to have any such excess Flex Credits contributed to his or her GenenFlex Account;

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            (b)     No Salary Deferrals or "catch-up contributions" under Section 3.1.7 shall be made by any Active Member except in accordance with his or her salary deferral election and the limitations of Section 3.1; and

            (c)     No excess Flex Credits shall be contributed by any Active Member except subject to the limitations of Section 3.1 and in accordance with his or her election under GenenFlex (subject to the rules in effect under GenenFlex) to have excess Flex Credits so contributed. Notwithstanding any contrary Plan provision, effective as of January 1, 2001, all Plan provisions relating to the contribution of excess Flex Credits after that date shall be inoperative until such time as the Committee (acting in a non-fiduciary capacity on behalf of the Company) shall determine otherwise in a writing setting forth the date on which such provisions shall again be operative.

                        3.2.1   Amounts. The amount of Salary Deferrals or "catch-up contributions" under Section 3.1.7 that may be made by each Active Member for each payroll period shall be the amount in dollars and cents that is nearest to the amount of Compensation subject to the salary deferral election multiplied by the percentage elected by the Active Member pursuant to Section 3.1. In addition, each Active Member may elect under GenenFlex (subject to the rules in effect under GenenFlex) to have contributed to his or her GenenFlex Account all or any portion of those Flex Credits which the Member has not used to purchase benefits under GenenFlex, provided that such Member elects to contribute at least five dollars ($5.00) worth of excess Flex Credits to his or her GenenFlex Account.

                        3.2.2   Changes. An Active Member may change the percentage determined under the first sentence of this Section 3.2, effective with respect to Compensation paid for the payroll period beginning on any Entry Date, or such other date as the Committee (in its discretion) may specify, by giving notice in such manner and within such advance notice period as the Committee (in its discretion) shall specify. The salary deferral election made by an Active Member shall remain in effect until his or her active membership in the Plan is terminated, except to the extent that the election is suspended in accordance with Section 2.4, 2.5 or 8.1, changed in accordance with this Section 3.2.2, or reduced pursuant to Section 3.1.1 or 3.1.2.

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However, changes in an Active Member's election to have excess Flex Credits contributed to his or her GenenFlex Account shall be permitted only in accordance with the rules in effect under GenenFlex.

                        3.2.3   Potential Excess ADP. In the event that (but for the application of this Section 3.2.3) the Committee determines that the ADP for HCE Members would exceed the maximum permitted under Section 3.1.4 for a Plan Year (the "ADP Maximum"), then the Committee (in its discretion) may reduce, in accordance with Section 3.1.2, the percentages or amounts of Salary Deferrals and excess Flex Credits subsequently to be contributed on behalf of the HCE Members 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 Salary Deferrals and/or excess Flex Credits contributed on behalf of the HCE Members, the Committee (in its discretion) may permit some or all HCE Members, on a uniform and nondiscriminatory basis, to make (a) new salary deferral elections with respect to their subsequent Compensation payments, and/or (b) new elections under GenenFlex (subject to the rules in effect under GenenFlex) to have excess Flex Credits contributed to their GenenFlex Accounts, and shall establish a policy as to the deferral percentages and/or limitations on the contribution of excess Flex Credits that shall apply with respect to those HCE Members who do not make new elections.

                        3.2.4   Actual Excess ADP. In the event that the Committee determines that the ADP for the HCE Members 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 Member shall be distributed, together with any income allocable thereto

20

for the Plan Year to which the excess contributions relate, to the HCE Member before the close of the Plan Year that next follows that Plan Year.

            (a)     Determination and Allocation of Excess Contributions. The amount of excess contributions for HCE Members for the Plan Year shall be determined and allocated among HCE Members in the following manner:

            (1)     With respect to each HCE Member whose Deferral Rate exceeds the ADP Maximum, the Committee shall calculate an excess contribution amount by calculating the excess of (A) his or her Salary Deferrals and contributions of excess Flex Credits, over (B) the product of the ADP Maximum times his or her Testing Compensation. The aggregate of the excess contributions for all such HCE Members shall be the total excess contributions to be distributed pursuant to this Section 3.2.4.

            (2)     The Salary Deferrals and contributions of excess Flex Credits of the HCE Member with the highest total dollar amount of Salary Deferrals and excess Flex Credits contributed shall be reduced to the extent necessary to cause the total dollar amount of his or her Salary Deferrals and excess Flex Credits contributed to equal the lesser of the dollar amount of excess contributions for all HCE Members calculated pursuant to paragraph (a)(1) above or the dollar amount of Salary Deferrals and contributions of excess Flex Credits of the HCE Member with the next highest total dollar amount of Salary Deferrals and excess Flex Credits contributed; provided, however, that any such reduction shall be applied last to any contributions of excess Flex Credits that the HCE Member has elected under GenenFlex to have contributed to his or her GenenFlex Account. This process shall be r epeated until the total dollar amount of reductions of such Salary Deferral and excess Flex Credit contributions equals the total excess contributions calculated pursuant to paragraph (a)(1) above.

            (3)     The amount of excess contributions to be distributed to an HCE Member pursuant to this Section 3.2.4 shall be equal to the total amount by which his or her actual Salary Deferrals and contributions of excess Flex Credits is reduced under paragraph (a)(2) above, but reduced by the amount of any excess deferrals previously distributed to the HCE Member for the Plan Year under Section 3.1.1.

            (b)      Determination of Allocable Income. The income allocable to any excess contributions for the Plan Year, excluding income for the period between the end of the Plan Year and the date of distribution, shall be determined in accordance with section 401(k)(8)(A)(i) of the Code.

            (c)      Forfeiture of Related Matching Contributions. Any Matching Contributions allocated to the Member's Matching Account by reason of any excess contributions distributed pursuant to this Section 3.2.4, together with any income allocable thereto for the Plan Year to which the excess contributions relate, shall be

21

forfeited and applied to reduce the next succeeding Matching Contribution to the Plan, without regard to the extent of the Member's vested interest in his or her Matching Account.

            (d)      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, Treas. Reg. Section 1.401(k)-1(b) (to the extent not inconsistent with amendments to the Code), and subsequent IRS guidance under section 401(k)(3) of the Code are incorporated herein by reference.

            3.3     Payment of Salary Deferrals and Excess Flex Credits. Subject to the provisions of Sections 3.1, 3.2, 10.3 and 11, the Employers shall pay to the Trust Fund the amounts elected by Members to be contributed as Salary Deferrals, "catch-up contributions" under Section 3.1.7 and excess Flex Credits (subject to the rules in effect under GenenFlex) pursuant to Section 3. Any Salary Deferrals, "catch-up contributions" and excess Flex Credits to be contributed for a payroll period in accordance with the preceding sentence shall be paid to the Trust Fund as soon as practicable and in no event later than the 15th business day of the month that next follows the month in which the Compensation related to such Salary Deferrals, "catch-up contributions" and excess Flex Credits was paid.

SECTION 4

MATCHING CONTRIBUTIONS

            4.1     Amount of Matching Contributions. Subject to the provisions of this Section 4.1 and Sections 5.4, 10.3 and 11, the Employers shall contribute to the Trust Fund as Matching Contributions amounts equal to the Matching Amount (determined pursuant to Section 4.1.2) determined for each payroll period by the Salary Deferrals made by, and the Compensation paid to, each eligible Active Member (determined pursuant to Section 4.1.4).

                        4.1.1  Calculation Rules. Only those Salary Deferrals which are made pursuant to such portion of each eligible Active Member's deferral percentage (determined pursuant to

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Sections 3.1 and 3.2) as does not exceed the Matching Ceiling (determined pursuant to Section 4.1.3) shall be taken into account in calculating the amount of the Matching Contribution (if any) to be made in respect of the Member's Salary Deferrals for any payroll period. For purposes of this Section 4 (including Section 4.1.2), the only Compensation taken into account for such purpose is Compensation paid (or payable if deferred under Section 3) to the eligible Active Member (a) for payroll periods for which he or she made Salary Deferrals or after which the Section 401(k) Ceiling took effect, and (b) as an Eligible Annual Bonus. In no event shall the amount of any (1) excess Flex Credits contributed to any Member's GenenFlex Account, or (2) "catch-up contributions" contributed to any Member's Salary Deferral Account, be taken into account in determining the amount of Matching Contributions to made to the Trust Fund and/or allocated to his or her Matching Account.

                        4.1.2  Matching Amount. The rate at which the amount of Matching Contributions shall be made for any Plan Year (the "Matching Amount") shall be determined as follows:

If the Salary Deferral
Contribution Rate for an Eligible	Then the Matching Amount for the
Active Member is	Member shall be:
Less than or equal to 3%	Equal to 100% of Salary Deferrals
Greater than 3%	Equal to 100% of Salary Deferrals up to 3%
	plus one-half (1/2) of Salary Deferrals
	greater than 3% and less than or equal to 5%

The "Salary Deferral Contribution Rate" for an Active Member is (Salary Deferrals) divided by (Compensation), expressed as a percentage, and determined on a Plan Year basis in accordance with Section 4.1.1. Subject to the limitations of Section 5.4 and as provided in this Section 4.1.2, the Matching Amount may be changed for any Plan Year to such extent (if any) as the Board of Directors (in its discretion) may determine by resolution and without amending the Plan pursuant

23

to Section 11.2; provided, however, that no decrease in the Matching Amount applicable to any Salary Deferral Contribution Rate shall take effect before the first payroll period that begins after the decrease is announced to eligible Active Members.

                        4.1.3  Maximum Matched Rate. For any Plan Year for which a different rate is not determined in accordance with the following sentence, the maximum Salary Deferral Contribution Rate that shall be taken into account in determining the amount of the Matching Contribution (if any) to be made on behalf of any eligible Active Member pursuant to this Section 4.1 (the "Matching Ceiling") shall be 5%, i.e., the amount of Matching Contributions (if any) to be made on behalf of any eligible Active Member shall not exceed 4% of his or her Compensation (determined pursuant to Section 4.1.1). Subject to the limitations of Section 5.4, the Board of Directors (in its discretion) may change for any Plan Year the maximum Salary Deferral Contribution Rate stated in the preceding sentence; provided, however, that no decrease in the Matching Ceiling shall take effect before the first payroll period that begins after the decrease is announced to eligible Active Members.

                        4.1.4  Eligible Members. Notwithstanding the foregoing provisions of this Section 4.1, no Matching Contribution shall be made on behalf of an Active Member for a Plan Year unless (a) he or she remains an Eligible Employee on the last Valuation Date of the Plan Year, or (b) his or her employment with all Employers and Affiliates terminated at any time during the Plan Year by reason of death or Disability.

                        4.1.5  Limitations on HCE Members. For any Plan Year, the Committee (in its discretion) may limit the period for which, and/or specify a lesser Matching Amount and/or Matching Ceiling with respect to the amount of Matching Contributions to be made on behalf of

24

HCE Members (as defined in Section 3.1.3) in such manner as may be necessary or appropriate in order to assure that the limitation described in Section 4.1.6 will be satisfied.

                        4.1.6  Contribution Percentage Limitation. In no event shall the actual contribution percentage, determined in accordance with Section 4.1.7 (the "ACP"), for the HCE Members for a Plan Year exceed the maximum ACP, as determined by reference to the preceding Plan Year's ACP for the preceding Plan Year's Non-HCE Members, in accordance with the following table:

If the ACP for Non-HCE	Then the Maximum ACP for
Members ("NHCEs' ACP") is:	HCE Members is
Less than 2%	2.0 x NHCEs' ACP
2% to 8%	NHCEs' ACP + 2%
More than 8%	1.25 x NHCEs' ACP

                        4.1.7  Actual Contribution Percentage. The actual contribution percentage for the HCE or Non-HCE Members for a Plan Year shall be calculated by computing the average of the percentages (calculated separately for each HCE or Non-HCE Member) (the "Contribution Rates") determined by dividing (a) the total of all Matching Contributions made on behalf of the Member and credited to his or her Matching Account for the Plan Year, by (b) the Member's Testing Compensation (as defined in Section 3.1.6) for the Plan Year. The special testing and aggregation rules set forth in Section 3.1.5 with respect to calculation of the Members' Deferral Rates shall also apply to the calculation of their Contribution Rates.

                        4.1.8  Potential Excess ACP. In the event that (but for the application of this Section 4.1.8) the Committee determines that the ACP for the HCE Members would exceed the maximum permitted under Section 4.1.6 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 Matching Contributions subsequently to be made on behalf of the HCE Members by

25

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 Members exceeds the ACP Maximum for any 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 Member shall be distributed, together with any income allocable thereto for the Plan Year to which the excess aggregate contributions relate, to the HCE Member before the close of the Plan Year that next follows that Plan Year.

            (a)     Determination and Allocation of Excess Aggregate Contributions. The amount of excess aggregate contributions for HCE Members for the Plan Year shall be determined and allocated among HCE Members in the manner provided in Section 3.2.4 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 3.2.4 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) of the Code, Treas. Reg. Section 1.401(m)-1(b) (to the extent not inconsistent with amendments to the Code), and subsequent IRS guidance under section 401(m)(2) of the Code are incorporated herein by reference.

            4.2     Timing. Subject to the provisions of Sections 4.1.5, 10.3 and 11, Matching 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 Matching Contributions are made.

            4.3     Periodic Contributions. Subject to the foregoing provisions of this Section 4, any Matching 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 Matching Contribution payment made to the Trust Fund, the Plan Year to which the

26

payment relates. The Employers intend the Plan to be permanent, but the Employers do not obligate themselves to make any Matching Contributions under the Plan whatsoever

            4.4     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 constitute a qualified profit-sharing plan as described in section 401(a) of the Code.

            4.5     After-Tax Contributions. In no event shall any Member be permitted to make contributions to the Plan or Trust Fund on an after-tax basis.

SECTION 5

ALLOCATIONS AND INVESTMENT

            5.1     Salary Deferrals, Catch-Up Contributions and Flex Credits. Except as provided in Sections 3.1.1 or 3.2.4, the Salary Deferrals or "catch-up contributions" made on behalf of an Active Member for any period shall be allocated to his or her Salary Deferral Account on the business day that is or next follows the date on which such Salary Deferrals or "catch-up contributions" are received by the Trust Fund. In addition, except as provided in Section 3.2.4, the excess Flex Credits contributed on behalf of any Active Member for any period (subject to the rules in effect under GenenFlex) shall be allocated to his or her GenenFlex Account on the business day that is or next follows the date on which such excess Flex Credits are received by the Trust Fund.

            5.2     Matching Contributions. Except as provided in Section 4.1.9, the Matching Contributions made on behalf of an Active Member for a Plan Year shall be allocated to his or her Matching Account on the business day that is or next follows the date on which such Matching Contributions are received by the Trust Fund.

27

            5.3     Investment. Each Member (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 Accounts that are to be invested in each of the Commingled Funds. A Member (or Beneficiary) may specify as to any Commingled Fund any percentage, provided that the total of the percentages specified shall not exceed 100%.

                        5.3.1  Changes. The instructions of a Member (or Beneficiary), concerning the investment of the amounts allocated to his or her Accounts may be changed in accordance with such procedures as the Committee (in its discretion) shall designate from time to time. The designated procedures at all times shall permit Members (and Beneficiaries) to make investment changes in accordance with designated procedures effective at a minimum of four times per each Plan Year, and more frequently if administratively feasible, all in a manner designed to permit the Plan to qualify as a section 404(c) plan (within the meaning of section 404(c) of ERISA).

                        5.3.2  Failure to Elect. If a Member (or Beneficiary) fails to direct the manner in which the amounts allocated to his or her Accounts are to be invested, such amounts shall be invested in the Short-Term Fund (as described in Section 6.3.2).

                        5.3.3  Member Loans. In the event a loan is to be made to a Member in accordance with Section 8.4, the Committee shall direct that an amount, in cash, equal to the amount of the loan be reallocated, as directed by the Committee (in its discretion), from the portions of the Member's Accounts invested in one or more of the other Commingled Funds to a separate subaccount within the Member's Accounts (the "Loan Account"), which shall be maintained for the purpose of accounting for any loans made to the Member from his or her Accounts. Interest and principal payments on loans made to any Member shall be allocated to his or her Loan Account as received by the Trustee and, after appropriate adjustments have been

28

made to the Loan Account to reflect such payments, shall be reallocated to the Commingled Funds in the same percentages as specified by the Member pursuant to the introductory paragraph of this Section 5.3, or if there is no such designation currently in force, as the Committee (in its discretion) shall determine.

            5.4     Limitations on Allocations.

                        5.4.1  Annual Addition Limitation. Notwithstanding any contrary Plan provision, in no event shall the Annual Addition to any Member's Accounts for any Plan Year exceed the lesser of (a) $40,000 (as adjusted periodically pursuant to section 415(d) of the Code), or (b) 100% of the Member's Total Compensation for the Plan Year; provided, however, that clause (b) shall not apply to Annual Additions described in clauses (5) and (6) of Section 5.4.2(c).

                        5.4.2  Definitions. For purposes of this Section 5.4, the following definitions shall apply:

            (a)     "Affiliate" shall mean 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" shall mean any defined contribution plan which is aggregated with this Plan pursuant to Section 5.4.3.

            (c)     "Annual Addition" shall mean with respect to each Member the sum for a Plan Year of (1) the Member's Salary Deferrals and excess Flex Credits to be credited to the Member's Salary Deferral Account and GenenFlex Account; (2) any Matching Contributions to be credited to the Member's Matching Account; (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 Member's account under any Aggregated Plan; (4) any after-tax employee contributions made by the Member for the Plan Year under any Aggregated Plan; (5) any amount allocated to the Member'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-retirem ent medical benefits that is allocated pursuant to section 419A of the Code to the Member's separate account under a welfare benefits fund (within the meaning of section 419(e) of the Code) maintained by an Employer or Affiliate.

29

            (d)     "Total Compensation" shall mean the amount of an Employee's:

            (1)     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-

            (A)     Including the aggregate of any Salary Deferrals, "catch-up contributions" and excess Flex Credits credited to his or her Salary Deferral Account and GenenFlex Account and any other amounts that are (i) contributed by any Employer or Affiliate on his or her behalf to an employee benefit plan by reason of the Employee's elective deferrals (within the meaning of section 402(g)(3) of the Code), or (ii) otherwise not includible in the gross income of the Employee by reason of section 132(f)(4) of the Code or pursuant to the Employee's compensation reduction agreement under section 125 of the Code; but

            (B)     Excluding amounts paid or reimbursed by the Employer or Affiliate for moving expenses incurred by the Member, to the extent that at the time of payment it is reasonable to believe that such amounts qualify as a "qualified moving expense reimbursement" (within the meaning of section 132(a)(6) of the Code); and

            (C)     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); or

            (2)     Compensation calculated by the Committee in a manner which satisfies applicable requirements of Treas. Reg. § 1.415-2(d).

                        5.4.3  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 aggregated shall be considered as one plan in applying the limitations of this Section 5.4, 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 Member who participates in any such plan.

                        5.4.4  Adjustments. If, as a result of (1) a reasonable error in estimating a Member's Total Compensation, allocating forfeitures under any Aggregated Plan or other circumstances which permit the application of the rules stated in this Section 5.4.4, or (2) a

30

reasonable error in determining the amount of Salary Deferrals and excess Flex Credits that may be made or contributed under the limits of this Section 5.4, any of the limitations of this Section 5.4 otherwise would be exceeded with respect to any Member for any Plan Year, then the following actions, but only to the extent necessary to avoid exceeding such limitations, shall be taken in the following order:

            (a)     Any after-tax employee contributions made by the Member under any Aggregated Plan for the Plan Year shall be returned to him or her;

            (b)     In the circumstances described in clause (2) above, Salary Deferrals and the value of excess Flex Credits contributed shall be distributed to the Member to the extent required to reduce the excess annual addition to the Member's Accounts attributable to that circumstance, provided that any such distribution shall be made last from any excess Flex Credits that the Member has elected under GenenFlex to have contributed to his or her GenenFlex Account;

            (c)     Any Matching Contributions allocated to the Member's Matching Account under this Plan and/or any employer matching contributions allocated to his or her account under any Aggregated Plan shall be reallocated to a suspense account, and the balance credited to that account shall be applied to reduce the Matching Contributions or other employer matching contributions (of the same class) otherwise to be made for and allocated to all eligible Members or participants in the Aggregated Plan for succeeding Plan Years in order of time;

            (d)     The Member's Salary Deferrals, excess Flex Credits contributed and any salary reduction contributions made at the Member's election pursuant to section 401(k) of the Code under any Aggregated Plan shall be reallocated to a suspense account and applied to reduce such Salary Deferrals, excess Flex Credits or other salary reduction contributions as otherwise are to be made thereafter at his or her election under this or any Aggregated Plan; and

            (e)     Any employer contributions otherwise to be allocated to the Member's account under any Aggregated Plan shall be reallocated to a suspense account, and the balance credited to that account shall be applied to reduce other employer contributions (of the same class) otherwise to be made for and allocated to all eligible participants in the Aggregated Plan for succeeding Plan Years in order of time.

                        5.4.4  Suspense Accounts. If a suspense account is created under Section 5.4.4(c), (d) and/or (e) and exists in a later Plan Year, the amount allocated to the suspense account shall be reallocated to the Member's Accounts before any amount may be contributed to

31

this or any Aggregated Plan on behalf of the Member for that Plan Year. If the Member for whom a suspense account is maintained terminates employment with all Employers and Affiliates before the suspense account balance has been reallocated pursuant to Section 5.4.4, that balance shall be reallocated among the Accounts of all Members who remain Employees on the first day of the next following Plan Year, in direct proportion to each such Member's share of the aggregate Total Compensation paid to all such Members for the Plan Year of termination (subject to the limitations of this Section 5.4), before any amount may be contributed to this or any Aggregated Plan for the Plan Year of reallocation. Suspense accounts shall not share in allocations of earnings and gains (or losses) of the Trust Fund. The balances credited to all suspense accounts shall be returned to the Employers upon termination of the Plan.

Limitation Year. For purposes of applying the limitations of section 415 of the Code, the limitation year shall be the Plan Year.

SECTION 6

ACCOUNTS AND COMMINGLED FUNDS

            6.1     Members' Accounts. At the direction of the Committee, there shall be established and maintained for each Member, as appropriate:

            (a)     A Salary Deferral Account, to which shall be credited all Salary Deferrals and "catch-up contributions" paid to the Trust Fund at his or her election under Section 3;

            (b)     A Matching Account, to which shall be credited all Matching Contributions paid to the Trust Fund on his or her behalf under Section 4;

            (c)     A Rollover Account, to which shall be credited all transfers made to the Trust Fund by or on behalf of the Member under Section 10.5;

            (d)     A Loan Account, to which shall be credited (pursuant to Section 5.3.3) any amounts loaned to the Member in accordance with Section 8.4; and

            (e)     A GenenFlex Account, to which shall be credited all excess Flex Credits paid to the Trust Fund at his or her election under GenenFlex in accordance with Section 3.

32

Each of a Member's Accounts shall also reflect the value of such Account's proportionate interest in each of the Commingled Funds as of each Valuation Date. The maintenance of one or more separate Accounts for each Member shall not be deemed to segregate for the Member, nor to give the Member any ownership interest in, any specific assets of the Trust Fund.

            6.2     Trust Fund Assets. The Trust Fund shall consist of the Members' Salary Deferrals, Matching Contributions, "catch-up contributions" made under Section 3.1.7, contributions of excess Flex Credits, rollovers 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 Commingled Funds, and each Member and his or her Accounts shall have only an undivided interest in any of the Commingled Funds.

            6.3     Commingled Funds. All assets of the Trust Fund shall be invested in the following Commingled Funds:

                        6.3.1  Common Stock Fund. The Trustee shall maintain a Common Stock Fund which shall be a commingled fund maintained for the purpose of investing such portions of Members' Accounts as are, pursuant to Members' investment instructions made in accordance with Section 5.3, properly allocable to the Common Stock Fund.

            (a)     The Common Stock Fund shall be invested in Common Stock.

            (b)     The Trustee may purchase shares of Common Stock for the Common Stock Fund in the open market.

            (c)     The Trustee may invest and hold up to 100% of the assets of the Common Stock Fund in Common Stock. The Trustee may also hold such assets in cash or cash equivalents as may be necessitated by the cash requirements of the Common Stock Fund, as determined by the Committee (in its discretion).

                        6.3.2  Short-Term Fund. The Trustee shall establish or maintain a Short-Term Fund which shall be a commingled fund maintained for the purpose of investing such portions of

33

Members' Accounts as are, pursuant to Members' investment instructions made in accordance with Section 5.3, properly allocable to the Short-Term Fund. The Short-Term Fund shall be invested by the Trustee in units, shares or other interests in one or more common, pooled or other collective short-term investment funds which are either (a) maintained by the Trustee or any other bank (within the meaning of section 581 of the Code), the trustee of or investment advisor to any such fund in which any other Commingled Fund is invested or an affiliate of such trustee or investment advisor, or (b) registered under the Investment Company Act of 1940.

                        6.3.3  Other Funds. In accordance with directions of the Committee, the Trustee shall establish or maintain one or more other Commingled Funds which shall be maintained for the purpose of investing such portions of Members' Accounts as are, pursuant to Members' investment instructions made in accordance with Section 5.3, properly allocable to each such Fund. Each such other Commingled Fund shall be invested in units, shares or other interests in one or more common, pooled or other collective investment funds which are either (a) maintained by the Trustee, any other person described in section 3(38)(B) of ERISA or an affiliate of such person, or (b) registered under the Investment Company Act of 1940. At least three of the Commingled Funds shall (a) be diversified, (b) have materially different risk and return charact eristics, and (c) be structured to satisfy the broad range of investment alternatives requirement, all in manner designed to permit the Plan to qualify as a 404(c) plan (within the meaning of section 404(c) of ERISA).

                        6.3.4  Designations, Redesignations and Reinvestments. Except to the extent that investment responsibility for one or more of the Commingled Funds (other than the Common Stock Fund) has been transferred to an Investment Manager in accordance with Section 9.6, the Committee (in its discretion) shall designate the common, pooled or other

34

collective investment funds in which the Commingled Funds (other than the Common Stock Fund) shall be invested. The Committee (in its discretion) may from time to time change the number, identity or composition of the Commingled Funds made available under this Section 6.3 and redesignate the collective investment funds in which any Commingled Fund shall be invested. All interest, dividends or other income realized from the investments of any of the Commingled Funds shall be reinvested in the Commingled Fund that realized such income. Temporary cash balances arising in any of the Commingled Funds shall be invested where feasible in any collective investment fund which would qualify as an investment medium for the Short-Term Fund.

            6.4     Valuation of Members' Accounts. The Trustee shall determine the fair market values of the assets of the Commingled Funds, and the Committee shall determine the fair market value of each Member's Accounts, as of each Valuation Date. In making such determinations and in crediting net earnings and gains (or losses) in the Commingled Funds to the Members' Accounts, the Committee (in its discretion) may employ, and may direct the Trustee to employ, such accounting methods as the Committee (in its discretion) may deem appropriate in order fairly to reflect the fair market values of the Commingled Funds and each Member's Accounts. 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 Member's Acc ounts in the Common Stock Fund may be measured in units (rather than shares of Common 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 Common Stock, which, as of any date, shall be (except as set forth

35

below) the closing price of the Common 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 share(s) of Common Stock, the fair market value of any share of Common Stock shall be the purchase or sale price of such share on the New York Stock Exchange.

            6.6     Statements of Members' Accounts. Each Member shall be furnished with periodic statements of his or her interest in the Plan, at least annually.

            6.7     Accounts Nonforfeitable. Each Member shall at all times have a fully (100%) vested and nonforfeitable interest in his or her Accounts.

SECTION 7

DISTRIBUTIONS

            7.1     Events Permitting Distribution. Subject to Section 7.3, the balance credited to a Member's Accounts shall become distributable only in the following circumstances:

            (a)     Upon termination of the Member's employment at or after Normal Retirement Age;

            (b)     Upon termination of the Member's active employment by reason of Disability or death;

            (c)     Upon the Member's separation from employment (within the meaning of section 401(k)(2)(B)(i)(I) of the Code) with all Employers and Affiliates (whether by reason of resignation or dismissal) for any reason other than those specified in paragraph (a) or (b) above;

            (d)     If the Member is a 5-percent owner (as described in Section 1.20(a)(2)), at any time during (and no later than) the April 1 that next follows the calendar year in which the Member attains age 70 1/2;

            (e)     If and to the extent permitted by section 401(k)(10) of the Code in connection with an Employer's or Affiliate's disposition of corporate assets or a subsidiary;

            (f)     Upon the Committee's approval of the Member's application for a withdrawal from his or her Account, to the limited extent provided in Section 8;

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            (g)     In accordance with and to the limited extent provided in Sections 3.1.1, 3.2.4, 4.1.8, or 5.4.4; or

            (h)     Upon the creation or recognition of an Alternate Payee's right to all or a portion of a Member's Account under a domestic relations order which the Committee determines is a QDRO (as defined in Section 8.5), but only as to the portion of the Member's Account that the QDRO states is payable to the Alternate Payee.

            7.2     Times for Distribution. Subject to all other provisions of this Section 7 and except as provided in Section 8.5 (relating to QDROs), distributions from a Member's Accounts shall occur as soon as practicable after the Valuation Date that coincides with or next follows the later of (a) the date 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.

                        7.2.1  Distribution Deadline. Subject to all other provisions of this Section 7, all distributions not made sooner pursuant to the first sentence of this Section 7.2 shall be made no later than 60 days after the end of the Plan Year in which a distribution event described in Sections 7.1(a) through (c) occurs with respect to the Member, or the Member attains Normal Retirement Age (whichever is later), subject also to the following:

            (a)     A Member'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 Accounts; provided, however, that the Member's Accounts shall be distributed or begin to be distributed no later than his or her Deadline Date (as defined in Section 7.2.2).

            (b)     If the amount of the distribution or the location of the Member or his or her Beneficiary (after a reasonable search) cannot be ascertained by the deadline described above, distribution shall be made no later than 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 Member's death shall be made within five years after his or her death.

                        7.2.2  For purposes of applying this Section 7.2, "Deadline Date" means:

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            (a)     With respect to a Member who is a 5-percent owner (as defined in Section 1.20(a)(2)), the April 1 that next follows the calendar year in which the Member attains age 70 1/2.

            (b)     With respect to a Member who is not a 5-percent owner (as defined in Section 1.20(a)(2)), the April 1 that next follows the later of (i) the calendar year in which the Member attains age 70 1/2, or (ii) the calendar year in which the Member's employment with all Employers and Affiliates terminates.

                        7.2.3  Age 70 1/2 Rule for 5-Percent Owners. If the Accounts of a Member who continues in employment after attaining Normal Retirement Age becomes distributable pursuant to Sections 7.1(d) and 7.2.2, the Accounts shall be distributed no later than the April 1 specified in Section 7.1(d), 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. If the balance credited to a Member's Accounts exceeds $5,000 (the "Threshold Amount") as of the Valuation Date that next precedes the date of the distribution, no portion of the Member's Accounts shall be distributed to the Member until he or she attains age 62, unless the Member (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. The Threshold Amount (as defined in this Section 7.3) shall be adjusted periodically pursuant to section 411(a)(11)(A) of the Code.

            7.4     Form of Distribution.

                        7.4.1  Cash. With respect to any portion of a Member's Accounts as is not invested in the Common Stock Fund, any distribution from such portion of the Accounts shall be made in the form of a single lump sum payment of cash (or its equivalent) equal to the balance credited to such portion of the Accounts as of the relevant Valuation Date, except to the extent that the distributee elects, in accordance with such procedures as the Committee (in its

38

discretion) shall specify, to have such portion of the Accounts distributed in the form of the unliquidated assets credited to such portion of the Accounts as of that Valuation Date.

                        7.4.2  Common Stock. Any distribution from such portion of a Member's Accounts as is invested in the Common 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 Common Stock as is equivalent to the full value of the units of the Common Stock Fund then credited to such portion of the Accounts;

            (b)     Cash (or its equivalent) equal to the full value of the units of the Common Stock Fund then credited to such portion of the Accounts; or

            (c)     A combination of both.

                        7.4.3  Fractional Shares. If shares of Common Stock are to be distributed, only full shares shall be distributed and cash (or its equivalent) shall be distributed in lieu of any fractional share.

                        7.4.4  No Annuities. In no event shall any distribution from a Member's Accounts be made in the form of a life annuity.

                        7.4.5  Direct Rollovers. Notwithstanding any contrary Plan provision:

            (a)     If a Distributee of any Eligible Rollover Distribution (1) elects to have at least $500 of such Distribution or, if less, the entire Distribution, paid directly to an individual retirement account ("IRA"), an annuity contract described in section 403(b) of the Code, 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 or an eligible defined contribution plan (within the meaning of section 401(a)(31)(D) of the Code), and (2) specifies such IRA, 403(b) plan, 457 plan or eligible defined contribution plan and the elected amount in such manner and within such advance notice period as the Committee (in its discretion) may specify, such Distribution (or elected portion thereof) shall be made in the form of a direct rollover to such IRA, 403(b) pla n, 457 plan or eligible defined contribution plan, in accordance with and subject to the conditions and limitations of section 401(a)(31) and related provisions of the Code; and

            (b)     Such Distribution may commence less than 30 days after the notice required under Treas. Reg. Section 1.411(a)-11(c) is given to the Distributee, provided that (1)

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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.

            (c)     "Distributee" shall mean a Member, a Beneficiary (if the surviving spouse of a Member), or an Alternate Payee (if the spouse or former spouse of a Member under a QDRO (as defined in Section 8.5)).

            (d)     "Eligible Rollover Distribution" shall mean a distribution of any portion of the balance credited to the Accounts of a Member which is not:

            (1)     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;

            (2)     Any distribution to the extent such distribution is required under Section 401(a)(9) of the Code;

            (3)     Any hardship distribution described in Section 410(k)(2)(B)(i)(IV) of the Code; and

            (4)     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 employer securities),

to the extent that it constitutes an eligible rollover distribution (within the meaning of section 401(a)(31)(C) of the Code).

            7.5     Common Stock Restrictions. Any Member or other prospective Distributee who is to receive a distribution of Common 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 Common Stock. Any shares of Common 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 Member may designate in writing one or more Beneficiaries on such form and in such manner as the Committee (in its discretion) shall specify.

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No such designation shall become effective until its receipt by the Company (as the Committee's delegate under Section 9.4(t)) in the manner specified.

                        7.6.1     Spousal Consent. If a Member designates any a person other than his or her spouse as a primary Beneficiary, the designation shall be ineffective unless the Member'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 Member'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 Member 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 Member may revoke his or her Beneficiary designation in writing 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 Member may designate different Beneficiaries (and thereby revoke all prior Beneficiary designations) on such form and 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(t)) in the manner specified, and the last effective designation received by the Company shall supersede all prior designations. If a Member dies without having effectively designated a Beneficiary, or if no Beneficiary survives the Member, the Member's Accounts shall be payable to his or her

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surviving spouse or, if the Member is not survived by his or her spouse, the Accounts shall be paid to one or more of the following persons in the following priority order:

            (a)     The Member's surviving Children (whether or not adopted) in equal shares or the trustees of any trust or trusts established for the benefit of the Member's surviving Children; for the purposes of applying this Section 7.6.2, "Children" shall mean the Member's natural or legally adopted children and the issue of the Member's deceased children, by right of representation;

            (b)     The Member's surviving parents or parent, in equal shares or the trustees of any trust or trusts established for the benefit of the Member's surviving parents or parent; or

            (c)     The executors and/or administrators of his or her estate.

            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 therefor, 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

            (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 Member 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

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unable to locate the Member or Beneficiary to whom a Member's Accounts are payable under this Section 7, (a) the Member's Accounts may be closed after 24 months have passed since the date the Account first became distributable to such Member or Beneficiary, and (b) the balance credited to any Accounts so closed shall be credited as an offset against the Employers' future Matching Contribution payment obligations. If the Member or Beneficiary whose Accounts were closed under the preceding sentence subsequently files a claim for distribution of his or her Accounts, and if the Committee (in its discretion) determines that such claim is valid, then the balance previously removed upon closure of the Accounts shall be restored to the Accounts 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 Member who is an Employee may make a withdrawal from his or her Accounts 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. No Member shall be permitted to make a withdrawal under this Section 8 more often than once in any one-year period. The active membership of a Member who makes a withdrawal under Section 8.2 shall be suspended, in the manner set forth in Section 2.5, for each payroll period that begins during the period starting on the withdrawal approval date and ending six months following that date. Following that suspension period, the Member may again become an Active Member and resume his or her Salary Deferrals or "catch-up contribution s" under Section 3, and/or contributions of excess Flex Credits (subject to the rules in effect under GenenFlex), effective with respect to Compensation paid for the payroll period beginning on any Entry Date, only by again electing to become an Active Member in accordance with Section 2.3.

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            8.2     Hardship Withdrawal. The Committee shall authorize a distribution under this Section 8.2 (subject to the provisions of Section 8.1) if the Member provides evidence which is sufficient to enable the Committee to determine that the withdrawal satisfies the conditions of this Section 8.2.

                        8.2.1     Permissible Financial Obligations. A Member may make a withdrawal under this Section 8.2 only to meet a financial obligation for:

            (a)     Unreimbursed expenses for medical care (as defined in section 213(d) of the Code) incurred by the Member, his or her spouse or any dependent (as defined in section 152 of the Code) of the Member, or necessary to enable any such person to obtain such care;

            (b)     Down payment and closing costs (excluding mortgage payments) directly related to the purchase of the Member's principal residence;

            (c)     Payment of tuition, room and board and related educational expenses for up to the next 12 months of post-secondary education for the Member, his or her spouse, children or any dependent (as defined in section 152 of the Code) of the Member;

            (d)     Prevention of the eviction of the Member from his or her principal residence or foreclosure on the mortgage or deed of trust on the Member's principal residence;

            (e)     Such other expenses as may be permitted under published documents of general applicability as provided under Treas. Reg. Section 1.401(k)-1(d)(2)(iv)(C).

                        8.2.2     Withdrawal Necessary to Meet Financial Obligation. No withdrawal shall be made under this Section 8.2 unless the Member has elected to receive all distributions, withdrawals and loans available under this Plan and all other qualified plans maintained by the Employers and Affiliates.

                        8.2.3     Contribution Limitations. To the extent required by regulations, no withdrawal shall be made under this Section 8.2 unless the Member irrevocably agrees, evidenced in such manner as the Committee (in its discretion) may specify, to the following limitations in his or her hardship withdrawal application:

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            (a)     During the period beginning on the withdrawal approval date and ending six months after that date, the Member shall neither (1) make contributions to, compensation deferrals under or payments in connection with the exercise of any rights granted under any other qualified plan or any nonqualified stock option, stock purchase, deferred compensation or similar plan (but not any health or welfare plan) maintained by any Employer or Affiliate; nor (2) elect under GenenFlex to have any excess Flex Credits contributed to his or her GenenFlex Account.

            (b)     Any election under GenenFlex to have excess Flex Credits contributed to his or her GenenFlex Account shall be suspended until the end of the withdrawal suspension period described in paragraph (a) above.

                        8.2.4     Limit on Withdrawal. No withdrawal under this Section 8.2 shall exceed the lesser of:

            (a)     The amount which the Committee (in its discretion) determines is necessary to satisfy the financial obligations meeting the conditions of Section 8.2.1 (net of income or penalty taxes reasonably anticipated to result from the withdrawal); or

            (b)     The excess of (1) the value of the Member's Accounts as of the Valuation Date that occurs on the withdrawal date reduced by amounts allocated pursuant to Section 8.5 to any subaccount of the Member's Account for any Alternate Payee under a QDRO (as defined in Section 8.5), over (2) the total amount due (including both principal and interest) under all outstanding loans made to the Member pursuant to Section 8.4.

            (c)     Notwithstanding the foregoing, the maximum amount that may be withdrawn from a Member's Salary Deferral Account and GenenFlex Account for this purpose shall be equal to the excess of (1) the sum of all Salary Deferrals, "catch-up contributions" and excess Flex Credits allocated to the Member's Salary Deferral Account and/or GenenFlex Account on the date of the withdrawal plus the amount of earnings credited to his or her Salary Deferral Account as of December 31, 1988, over (2) the sum of all amounts previously withdrawn or distributed from the Member's Salary Deferral Account and GenenFlex Account.

                        8.2.5     Order of Withdrawal From Accounts. Any amount withdrawn under this Section 8.2 shall be deducted from the Member's Accounts in the following order: the Salary Deferral Account, the GenenFlex Account, the Matching Account and the Rollover Account. Subject to the preceding sentence, amounts invested in the Commingled Funds shall be withdrawn prorata to fund the withdrawal.

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            8.3     Age 59 1/2 Withdrawal. At any time after a Member attains age 59 1/2, the Member (subject to the provisions of Section 8.1) may withdraw any amount up to the excess of (1) the value of his or her Accounts as of the Valuation Date that occurs on the withdrawal date, reduced by amounts allocated pursuant to Section 8.5 to any subaccount of the Member's Accounts for any Alternate Payee under a QDRO (as defined in Section 8.5), over (2) the total amount due (including both principal and interest) under all outstanding loans made to the Member pursuant to Section 8.4.

            8.4     Loans to Members.

                        8.4.1     General Loan Rules. A Member 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 Member's Accounts in accordance with the provisions of this Section 8.4. Loans shall be available to all Members who are Employees, and to parties in interest (within the meaning of section 3(14) of ERISA) with respect to the Plan who are non-Employee Members or Beneficiaries of deceased Members, 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 Member'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 Member under this Plan.

            (b)     "Available Balance" shall mean the vested total balance credited to the Member's Accounts as of the applicable date, reduced by amounts allocated pursuant to Section 8.5 to any subaccount of the Member's Accounts for any Alternate Payee under a QDRO (as defined in Section 8.5).

            (c)     Additional Limits. The amount borrowed under this Section 8.4 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 Member 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

46

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)     Number of Loans. No Member shall be permitted to borrow under this Section 8.4 if the borrowing would result in his or her having more than two (2) loans outstanding, and an additional loan may not be made to a Member until at least 12 months after the next earliest loan was made; provided, however, that the Committee (in its discretion) may nevertheless permit a Member to make a second or third loan if the Member provides evidence sufficient to show that the second or third loan is necessary in light of his or her immediate and heavy financial needs.

            (e)     Unpaid Leave of Absence. If a Member is granted an unpaid leave of absence and remains an Employee, his or her loan payments will be suspended for the lesser of the duration of the approved leave or one year. If the Member 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 8.4. If the Member fails to return to active employment with an Employer or Affiliate or separates from service with all Employers and Affiliates, the provisions of Sections 8.4.2(e)(2), 8.4.2(g), 8.4.2(h), 8.4.2(i), 8.4.3 and 8.4.4 shall apply.

                        8.4.2     Minimum Requirements of Each Loan. Any loan made under this Section 8.4 shall be evidenced by a loan agreement and promissory note, and the Member 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 Member's Loan Account and shall be accounted for as provided in Section 5.3.3.

            (b)     Term. The term of the loan shall not exceed five years. The Member may elect a term of either three or five years for each loan. However, the term of the loan may be up to 15 years, provided that the Member (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 Member'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

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over the agreed term of the loan in accordance with the provisions of this Section 8.4. A Member 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 Member 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 Member 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 Member who is not receiving periodic wage payments from an Employer or Affiliate.

            (f)     On Payroll. If during the term of the loan, a Member who has been making payments by the automatic payment method described in Section 8.4.2(e)(2) begins receiving periodic wage payments from an Employer or Affiliate, the Member shall authorize in writing payroll withholding for the remaining loan payments.

            (g)     Off Payroll. If during the term of the loan, a Member who has been making loan payments by payroll withholding ceases to receive periodic wage payments from an Employer or Affiliate (and distribution of the Member's Account has not begun), the Member shall authorize in writing an automatic payment method described in Section 8.4.2(e)(2) for the remaining loan payments.

            (h)     Failure to Authorize. If any Member fails to authorize any change in the method of payment required by Section 8.4.2(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 Member shall pledge 50% of his or her Available Balance (as defined in Section 8.4.1(b)), and shall provide such other collateral as the Committee (in its discretion) may require, to secure his or her loan payment obligations.

                        8.4.3     Default. If a Member defaults on his or her loan payment obligations and does not cure the default within 30 days of the date the Member 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

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            (b)     To reduce the balance credited to the Member's Accounts by the amount required to cure the default.

            (c)     In applying the method of cure provided in paragraph (a) above, if any losses are realized or expenses incurred, they shall be allocated only to the defaulting Accounts.

            (d)     In applying the method of cure provided in paragraph (b) above, the amount by which the Member's Accounts is to be reduced shall be credited to a separate suspense account for the Member and shall be increased with interest, at the interest rate actually applicable to the loan pursuant to Section 8.4.2(c), for the period from the date of the default until the earlier of the date the Member attains age 59 1/2 or the first date on which distributions from the Account can be made under Section 7.1; the balance credited to the Accounts as of that first date shall be reduced by the amount then credited to the suspense account; and only the remaining balance (if any) shall be available for distribution under Section 7.

                        8.4.4     Effect of Distributions. If any amount remains outstanding as a loan obligation of a Member when a distribution is made from his or her Account in connection with the Member's termination of 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 Member's Accounts shall be reduced to the extent necessary to discharge the obligation.

            8.5     Qualified Domestic Relations Orders. The Committee shall establish written procedures for determining whether a domestic relations order purporting to dispose of any portion of a Member's Account is a qualified domestic relations order (within the meaning of section 414(p) of the Code) (a "QDRO").

                        8.5.1     No Payment Unless a QDRO. No payment shall be made to any 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 any Alternate Payee only as specified in the QDRO.

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                        8.5.2     Immediate Payment Required. Payment shall be made to an Alternate Payee, in accordance with a QDRO, as soon as practicable after the QDRO determination is made, regardless of whether the distribution, if made to a Member at the time specified in the order, would be permitted under the terms of the Plan.

                        8.5.3     Deferred Payment. If the QDRO does not provide for immediate payment to an Alternate Payee, the Committee shall establish a subaccount to record the Alternate Payee's interest in the Member's Accounts. All investment decision with respect to amounts credited to the subaccount shall be made by the Alternate Payee in the manner provided in Section 5.3. Payment to the Alternate Payee shall not be deferred beyond the date of distribution to the Member or (in the event of death) his or her Beneficiary is made or commenced.

                        8.5.4     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 Member's Accounts 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 Member, his or her spouse, former spouse, child or other dependent and (b) the Member's Accounts are a source of payment under such order. For purposes of this Section 8.5.4, a "hold" shall mean that no withdrawals, loans or distributions may be made from a Member's Accounts. The Committee shall notify the Member if a hold is placed upon his or her Accounts pursuant to this Section 8.5.4.

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).

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            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 which 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 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 interpret the provisions of the Plan (and the documents governing GenenFlex, insofar as they relate to the relationships between GenenFlex and this Plan) and to determine any question arising under, or in connection with the administration or operation of, the Plan (or arising under, or in connection with the administration or operation of GenenFlex, insofar as they relate to the relationship between GenenFlex and this Plan);

            (b)     To determine all questions concerning the eligibility of any Employee to become or remain a Member and/or an Active Member of the Plan;

            (c)     To cause one or more separate Accounts to be maintained for each Member;

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            (d)     To establish and revise an accounting method or formula for the Plan, as provided in Section 6.4;

            (e)     To determine the manner and form, and to notify the Trustee, of any distribution to be made under the Plan;

            (f)     To grant or deny withdrawal and loan applications under Section 8;

            (g)     To determine the status and rights of Members and their spouses, Beneficiaries or estates under this Plan, including the ability of Members to have excess Flex Credits contributed to their GenenFlex Accounts under this Plan (subject to the rules in effect under GenenFlex);

            (h)     To instruct the Trustee with respect to matters within the jurisdiction of the Committee;

            (i)     To direct the Trustee, in accordance with Section 6.3, as to the establishment of Commingled Funds and the investment of the Plan assets held in the Commingled Funds (other than the Common Stock Fund);

            (j)     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;

            (k)     To prescribe the form and manner in which any member, or his or her spouse or other Beneficiary, shall make any election or designation required under the Plan;

            (l)     To establish rules for the performance of its powers and duties and for the administration of the Plan;

            (m)     To arrange for annual distribution to each Member of a statement of benefits accrued under the Plan;

            (n)     To establish rules and regulations by which requests for Plan information from Members are processed expeditiously and completely;

            (o)     To provide to each terminated Member notice of his or her vested interest under the Plan and to provide to each Member in advance of the Member's receipt of an Eligible Rollover Distribution (as defined in Section 7.4.5(d)) the written explanation described in section 402(f) of the Code;

            (p)     To publish a claims and appeal procedure satisfying the minimum standards of section 503 of ERISA pursuant to which Members or their spouses, Beneficiaries or estates may claim Plan benefits and appeal denials of such claims;

            (q)     To determine the liabilities of the Plan, to establish and communicate a funding policy to the Trustee and any Investment Manager appointed pursuant to

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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;

            (r)     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;

            (s)     To arrange for the purchase of any bond required of the Committee members or others under section 412 of ERISA;

            (t)     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 Members and Beneficiaries as provided in the Plan; and

            (u)     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 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 Commingled Funds (other than the Common Stock Fund) in one or more common, pooled or other collective investment funds. 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 the one or more of the Commingled Funds and other

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designated portions of the Trust Fund (other than the Common Stock 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 Commingled Fund (other than the Common Stock Fund) directly to any Investment Manager which has investment management responsibility for any collective investment fund in which the Commingled 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 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 Common Stock.

                        9.7.1     Pass-Through Issues. All Common Stock held in the Trust Fund shall be voted, tendered or exchanged, with respect to Pass-Through Issues, in accordance with Sections 9.7.3 through 9.7.6. For purposes of this Section 9.7, a "Pass-Through Issue" with respect to Common Stock is an issue which concerns:

            (a)     The voting of shares of Common Stock with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or any transaction which the Committee (in its discretion) determines to be similar to the foregoing;

            (b)     Any tender or exchange offer for Common Stock or any transaction that the Committee (in its discretion) determines to be similar to the foregoing;

            (c)     Any proposal by a shareholder pursuant to Rule 14a-8 under the 1934 Act;

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            (d)     Any election contest governed by Rule 14a-11 under the 1934 Act;

            (e)     Any proposal with respect to which there is any solicitation in opposition (within the meaning of Rule 14a-6 under the 1934 Act); or

            (f)     Any such other event that the Committee (in its discretion) designates as a Pass-Through Issue. It is anticipated that generally the Committee will designate all but nonsubstantive issues as Pass-Through Issues. The Committee shall have the authority (in its discretion) to determine which issues are nonsubstantive issues.

                        9.7.2     Voting On Issues Other Than Pass-Through Issues. Except with respect to Pass-Through Issues, Common Stock held in the Trust Fund shall be voted by the Trustee only in accordance with instructions received from the Committee. However, if with respect to some matter other than a Pass-Through Issue the Committee shall fail to give, or shall notify the Trustee in writing of its decision not to give, timely voting instructions to the Trustee, the Trustee (in its discretion) shall have the authority to vote such Common Stock in its sole discretion. The functions of the Committee and the Trustee with respect to other rights pertaining to such Common Stock on matters other than Pass-Through Issues shall be allocated between them in like manner.

                        9.7.3     Named Fiduciary Status. For purposes of this Section 9.7, each Member (or, if deceased, his or her Beneficiary) shall be a named fiduciary (within the meaning of, but not limited to, sections 402(a) and 403(a)(1) of ERISA) with respect to Pass-Through Issues for all shares of Common Stock as to which the Member has the right of direction with respect to voting, tender and any other rights appurtenant to such Stock. That named fiduciary status shall apply with respect to Pass-Through Issues for such whole number of shares of Common Stock (if any) actually held for the benefit of any Member (or Beneficiary) and allocable to his or her Account by reason of the Account's investment (if any) in the Company Stock Fund (for purposes of this Section 9.7, "Allocable Shares").

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                        9.7.4     Confidentiality. In implementing this Section 9.7, each appropriate fiduciary shall take all steps necessary or appropriate to ensure that each Member's (or Beneficiary's) instructions shall be kept in strictest confidence and shall not be divulged or released to any person, except as provided in the next sentence, including officers, directors or employees of the Company or any Affiliate. To the extent necessary for the operation of the Plan, however, the instructions may be provided to the Trustee and to a recordkeeper, auditor or other person providing services to the Plan if the person (a) is not the Company or an Affiliate, and (b) agrees not to divulge the instructions to any other person, including officers, directors or employees of the Company or any Affiliate.

                        9.7.5     Directed Voting and Consents.

            (a)     Notwithstanding any contrary Plan provision, whenever any proxies or consents are solicited from the holders of Common Stock with respect to Pass-Through Issues, the Trustee shall exercise voting or other rights solely as directed in written instructions timely received from Members (or if deceased, their Beneficiaries) and in accordance with this Section 9.7.

            (b)     Each Member (or if deceased, his or her Beneficiary) shall have the right, with respect to Pass-Through Issues for Allocable Shares, to instruct the Trustee, in accordance with procedures established by the Committee (in its discretion), as to the manner in which to vote such Allocable Shares at any stockholders' meeting of the Company, or the manner in which the Trustee shall give or withhold consent with respect to such Allocable Shares.

            (1)     The Trustee shall pool the results of instructions received from all Members (and Beneficiaries) as to their Allocable Shares and shall vote or otherwise act accordingly on Pass-Through Issues with respect to such Allocable Shares and the aggregate of all fractional shares of Common Stock allocable to the Members' Accounts;

            (2)     In the case of a deceased Member who has more than one Beneficiary, the Trustee shall vote or otherwise act on Pass-Through Issues in accordance with the instructions of the Member's Beneficiaries in respect of the deceased Member's Allocable Shares in proportion to the Beneficiaries' respective interests in the Member's Account in accordance with rules established by the Committee (in its discretion).

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            (3)     If and to the extent that no instructions are timely received from any Member (or Beneficiary) with a right to instruct with respect to his or her Allocable Shares, (A) such person shall be deemed to have timely instructed the Trustee not to vote the relevant Allocable Shares, and (B) the Trustee shall not vote such Allocable Shares nor take any other actions under this Section 9.7 with respect to such Allocable Shares on Pass-Through Issues.

            (c)     The Company shall use its best efforts to timely distribute or cause to be distributed to each Member (or Beneficiary) such information concerning Pass-Through Issues as will be distributed to stockholders of the Company in connection with any stockholders' meeting or any solicitation of voting or consents, together with a request for confidential instructions to the Trustee or its designee on how shares of Common Stock shall be voted on each such matter or how consents shall be given or withheld.

                        9.7.6     Tender or Exchange Offers.

            (a)     Notwithstanding any contrary Plan provision, whenever (i) any tender or exchange offer is made for shares of Common Stock, or (ii) there occurs any transaction that the Committee (in its discretion) determines to be similar to the foregoing (as described in Section 9.7.1(b)), the Trustee shall tender or exchange (or refrain from tendering or exchanging) shares of Common Stock solely as directed in instructions timely received from Members (or if deceased, their Beneficiaries) and in accordance with this Section 9.7.

            (b)    Each Member (or, if deceased, his or her Beneficiary) shall have the right, with respect to his or her Allocable Shares, to instruct the Trustee, in accordance with procedures established by the Committee (in its discretion), as to the manner in which to respond to such tender or exchange offer with respect to such Allocable Shares.

            (1)    The Trustee shall pool the results of instructions received from all Members (and Beneficiaries) as to their Allocable Shares and shall respond to such tender or exchange offer accordingly with respect to such Allocable Shares and the aggregate of all fractional shares of Common Stock allocable to the Members' Accounts.

            (2)    In the case of a deceased Member who has more than one Beneficiary, the Trustee shall respond to such tender or exchange offer in accordance with the instructions of the Member's Beneficiaries in respect of the deceased Member's Allocable Shares in proportion to the Beneficiaries' respective interests in the Member's Account in accordance with rules established by the Committee (in its discretion).

            (3)    If and to the extent that no instructions are timely received from any Member (or Beneficiary) with a right to instruct with respect to his or her Allocable Shares, (A) such person shall be deemed to have timely instructed the Trustee not to tender or exchange the relevant Allocable Shares, and (B) the Trustee shall not tender or exchange such Allocable Shares nor take any other

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actions under this Section 9.7 with respect to such Allocable Shares on the Pass-Through Issue qualifying as such under Section 9.7.1(b).

            (c)     The Company shall use its best efforts to timely distribute or cause to be distributed to each Member (or Beneficiary) such information as will be distributed to stockholders of the Company in connection with any Pass-Through Issue qualifying as such under Section 9.7.1(b), together with a request for confidential instructions to the Trustee or its designee on how to respond to such Issue.

            9.8     Decisions of Committee. All decisions of the Committee, and any action taken by it in respect of the Plan and within the powers granted to it under the Plan, and any interpretation of provision 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 actually incurred in connection with the administration of the Plan by the Employers, the Committee or otherwise, including legal, Trustee's and investment management fees and expenses ("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 greate r share, portion or amount of such Expenses which would otherwise be allocable to the Accounts of Members 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 membership in the

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Plan, 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 Accounts 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 AND ROLLOVER CONTRIBUTIONS

            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 Salary Deferrals, Matching Contributions, "catch-up contributions" made under Section 3.1.7, contributions of excess Flex Credits, and rollover contributions made under the Plan, the maintenance of Members' Accounts, and the payment of benefits as provided in the Plan. The Trustee shall receive and place in the Trust Fund all such contributions and shall hold, invest, reinvest and distribute the Trust Fund in accordance with 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 benefit s 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

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shareholders, directors or Employees. The Trust 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, Members, Beneficiaries and other persons receiving or entitled to receive benefits or payments under the Plan. Except to the limited extent permitted by Sections 5.4.5, 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 to contribute Salary Deferrals, "catch-up contributions" or excess Flex Credits and/or to make Matching Contributions under the Plan after initial qualification is hereby conditioned upon the continued qualification of the Plan under section 401(a) of the Code and the exempt status of the Trust Fund under section 501(a) of the Code and upon the deductibility of such Salary Deferrals, "catch-up contributions," excess Flex Credits and/or Matching Contributions under section 404(a) of the Code. That portion of any Salary Deferral, "catch-up contribution," excess Flex Credit or Matching Contribution which 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 ye ar 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)

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to avoid a reduction in the balance of any Member's Accounts below the balance that would have resulted if the mistake had not been made.

            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. Notwithstanding any contrary Plan provision, the Committee (in its discretion) may direct the Trustee to accept a transfer of assets to the Trust Fund by or on behalf of a Member of this Plan, but only if the transfer qualifies as an eligible rollover distribution as described in section 402(c) or 408(d)(3)(A)(ii) of the Code. Any assets transferred to the Trust Fund in accordance with the preceding sentence must be in the form of cash (or its equivalent).

                        10.5.1    Rollover Account. Assets transferred to the Trust Fund pursuant to this Section 10.5 shall be credited to the Member's Rollover Account. A Member's interest in his or her Rollover Account shall be fully (100%) vested and nonforfeitable at all times. The Member shall indicate, in such manner and within such advance notice period as the Committee (in its discretion) shall specify, the percentages of the amounts allocated to his or her Rollover Account

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that are to be invested in each of the Commingled Funds. In all other respects Rollover Account investments shall be subject to Section 5.3.

                        10.5.2    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 distribution as described in section 402(c) or 408(d)(3)(A)(ii) of the Code, then the balance credited to the Member's Rollover Account shall immediately be (a) segregated from all other Plan assets, (b) treated as a nonqualified trust established by and for the benefit of the Member, and (c) distributed to the Member. Such a nonqualifying rollover shall be deemed never to have been a part of the Trust Fund.

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 Salary Deferrals, "catch-up contributions," excess Flex Credits and/or Matching Contributions for any reason at any time. Complete discontinuance of all contributions of Salary Deferrals, "catch-up contributions," excess Flex Credits and Matching 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 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

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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 which prohibit any 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 contributions of Salary Deferrals, "catch-up contributions," excess Flex Credits and Matching Contributions, the interests of all Members affected by such termination or discontinuance in their Accounts shall remain fully (100%) vested and nonforfeitable. In the event the Plan is terminated, the balance credited to the Matching Accounts and Rollover Accounts and, to the extent permitted by section 401(k)(2)(B) of the Code, the Salary Deferral Accounts, and/or GenenFlex Accounts, of any Members who are affected by the termination may be distributed prior to the occurrence of a distribution event described in Section 7.1.

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

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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 Members. For purposes of determining the value of the Accounts, the provisions of section 416(g)(4)(E) of the Code and Treas. Reg. Section 1.416-1 (Q&A T-1) are incorporated herein by reference.

                        12.1.1   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" shall mean 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 paragraph (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 Section 5.4.2(d) and applied using the definition of "Affiliate" in Section 1.1 rather than in Section 5.4.2(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 Accounts of each Member 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 (as defined in Section 12.2.2) for the Plan Year; provided, however, that if the Key Employee Percentage (as defined in

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paragraph (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.

            (a)     "Key Employee Percentage" shall mean the largest percentage computed by dividing (a) the total amount of Salary Deferrals, excess Flex Credits and Matching Contributions allocated for that Plan Year to the Accounts of each Member who is a key employee (within the meaning of sections 416(i)(1) and (5) of the Code), by (b) his or her Top-Heavy Compensation.

            (b)     The additional contribution required under this Section 12.2.1 shall be made without regard to the level of the Member's Top-Heavy Compensation for the Plan Year.

            (c)     Notwithstanding the foregoing, if a Member 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 Member under this Plan.

                        12.2.2   "Top-Heavy Compensation" shall mean, with respect to any Member for a Plan Year, his or her Total Compensation (as defined in Section 5.4.2(d) and applied using the definition of "Affiliate" in Section 1.1 rather than in Section 5.4.2(a)) and except that, for this purpose, no amount in excess of the Compensation Limit (as defined in Section 1.10) shall be taken into account for any Plan Year.

SECTION 13

GENERAL PROVISIONS

            13.1     Plan Information. Each Member 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 8.4 and 8.5 or mandated by applicable law, or permitted pursuant to the special rules of section 401(a)(13)(C)

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of the Code, in no event may any Member, former Member 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 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 other than as provided in the Plan. Each Employer expressly reserves the right to discharge any Employee at any time.

            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

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shall be done and performed by any officer or Employee of the Employer who is thereunto duly authorized by the board of directors of 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 Member's accrued benefit, if such other plan were then to terminate, is at least equal to the accrued benefit to which the Member would have been entitled if this Plan had been terminated immediately before such merger, consolidation or transfer.

            13.7     Military Service. Notwithstanding any provision of this Plan to the contrary, Salary Deferrals, "catch-up contributions" and Matching Contributions with respect to qualified military service will be provided in accordance with section 414(u) of the Code. Member loan repayments under Section 8.4.2 shall be suspended as permitted under section 414(u) of the Code.

            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    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.

67

EXECUTION

            In Witness Whereof, Genentech, Inc., by its duly authorized officers, has executed this January 1, 2002 Restatement of the Plan on the date indicated below.

GENENTECH, INC.
By	/s/ LOUIS J. LAVIGNE
	Louis J. Lavigne
Title	Executive Vice President and     Chief Financial Officer
Dated	December 18, 2002
And by	/s/ THOMAS T. THOMAS
	Thomas T. Thomas
Title	Treasurer
Dated	December 18, 2002

68

APPENDIX A:  EFFECTIVE DATES

            This Appendix A lists those provisions of the January 1, 2002 Restatement of the Genentech, Inc. Tax Reduction Investment Plan (the "Plan") that have an effective date that is neither January 1, 2002 nor specified in the Plan text.

Effective Date	Plan Provision
January 1, 1985	Section 1.13 - Definition of eligible employee
January 1, 1985	Section 8.5.4 - Hold procedures relating to QDRO's
December 12, 1994(1)	Section 13.7 - Addition of provision to comply with USERRA
January 1, 1995	Section 5.4.1 - Change in determination of $30,000 Annual Addition Limitation
January 1, 1997	Section 1.10 - Change in definition of "Compensation" to eliminate family aggregation rule
	Section 1.20 - Change in definition of "Highly Compensated Employee" including elimination of the family aggregation rule
	Section 3.1.4 - Change in determination of deferral percentage limitation
	Section 3.1.5 - Elimination of application of family aggregation rule in determination of actual deferral percentage
	Section 3.2.4 - Change in the manner of allocation of excess contributions among HCE Members
	Section 4.1.5 - Change in determination of contribution percentage limitation
	Section 4.1.6 - Elimination of application of family aggregation rule in determination of actual contribution percentage
	Section 4.1.8 - Change in the manner of allocation of excess aggregate contributions among HCE Members

(1)      For Employers who return to service with an Employer or Affiliate on or after December 12, 1994.

A-1

Effective Date	Plan Provision
	Sections 7.1.(d) and 7.2.2 - Limit application of required distributions to Members while in-service on or after attainment of age 70 1/2 to only a Member who is a 5-percent owner
February 3, 1997	Section 3.3 - Change to the deadline for payment of Salary Deferrals and contributions of excess Flex Credits to the Trust Fund
August 5, 1997	Section 13.2 - Addition of section 401(a)(13)(C) exception to non-alienation rule
January 1, 1998	Section 5.4.2(d) - Change in definition of "Total Compensation"
January 1, 2001	Section 1.10 - Change in definition of "Compensation" to reflect section 132(f)(4) with regards to the amount of compensation reduction elected from qualified transportation fringes not includable in gross income
	Sections 2.3.1, 3.1(b) and 3.2(c) - Addition of language rendering provisions permitting contribution of excess Flex Credits inoperative pending future Committee action

A-2

EX-10.16

EXHIBIT 10.16

AMENDED AND RESTATED BACKUP FACILITY AGREEMENT
AND AMENDMENT TO OTHER OPERATIVE AGREEMENTS

            AMENDED AND RESTATED BACKUP FACILITY AGREEMENT dated as of November 7, 2002, among DNA FINANCE CORP. (the "Borrower"), the BANKS party hereto (the "Banks"), the INVESTORS party hereto (the "Investors"), JP MORGAN CHASE BANK (formerly known as The Chase Manhattan Bank), as CP Administrative Agent, as Collateral Agent, and as Agent Bank (the "Agent"), VACAVILLE REAL ESTATE TRUST 2001 ("Lessor"), and GENENTECH, INC. ("Lessee" and "Guarantor").

W I T N E S S E T H :

            WHEREAS, Borrower, Agent and the Banks hereto have heretofore entered into a Backup Facility Agreement dated as of October 26, 2001 (as amended prior to the Restatement Effective Date referred to below, the "Backup Facility Agreement"), and such parties, the Investors, Lessor, Lessee and certain other Persons have entered into the Participation Agreement referred to therein (as amended prior to the Restatement Effective Date referred to below, the "Participation Agreement"), and certain other Operative Agreements (as such term is defined in accordance with Section 1 below);

            WHEREAS, at the date hereof, there are no Facility Loans outstanding under the Backup Facility Agreement; and

            WHEREAS, the parties hereto desire to amend the Backup Facility Agreement, the Participation Agreement and certain other Operative Agreements as set forth herein and to restate the Backup Facility Agreement in its entirety to read as set forth in the Backup Facility Agreement with the amendments specified below;

            NOW, THEREFORE, the parties hereto agree as follows:

            SECTION 1.  Defined Terms; References.  Unless otherwise specifically defined herein, each term used herein which is defined in Annex A to the Participation Agreement shall have the meaning assigned to such term in such Annex A. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Backup Facility Agreement shall, after the Restatement Effective Date, refer to the Backup Facility Agreement as amended and restated hereby.

            SECTION 2.  Amendments

                        Upon the Restatement Effective Date:

            (a)  The Operative Agreements are amended by changing each reference to "The Chase Manhattan Bank" to "JPMorgan Chase Bank".

            (b)  Pursuant to Section 4.2 of the Backup Facility Agreement, the Banks agree that the current "Expiry Date" of November 7, 2002 shall be, and is hereby, extended to November 6, 2003, and each undersigned Bank shall remain a party to the Backup Facility Agreement as a Bank with an obligation to make (i) Revolving Facility Loans prior to its new Expiry Date in an aggregate principal amount not to exceed the amount of the Commitment set forth below, and (ii) a Term Loan in the amount of such Commitment on the terms set forth in the Backup Facility Agreement, in each case as such amounts may be adjusted from time to time as provided in the Backup Facility Agreement.

            (c)  The parties agree that notwithstanding anything to the contrary contained in Section 11.3 of the Participation Agreement, (i) the requirement that a Purchasing Bank be an Eligible Assignee may be waived by the Lessee in its sole and absolute discretion, without the requirement for any consent or waiver from any other party, and (ii) in the event that Lessee consents to a Purchasing Bank that is not an Eligible Assignee, the assigning Bank may assign Term Loans held by it to such Purchasing Bank, and in connection therewith, all the terms and provisions of Section 11.3 shall apply to such assignment (other than clause (a)(iv)).

            (d)  The Borrower and Banks agree that, notwithstanding anything to the contrary contained in Section 14.5 of the Participation Agreement, if the SPC (or Lessee pursuant to Section 10.1 of the Participation Agreement) exercises any of its rights in Section 4.4 of the Backup Facility Agreement to require a Termed Out Bank to assign its Term Loan to a Term Loan Purchaser, and if such Term Loan Purchaser is an Eligible Assignee, then, the Agent Bank shall have the power and authority (without obtaining any consent or approval from the Borrower or any other Bank), but without any obligation to do so, to enter into such amendments to the Backup Facility Agreement and other Operative Agreements, deliver such notices and agreements, and take such other actions, as may be requested by the SPC (or Lessee) (in each case at the Lessee's sole cost and expense), in order to authorize the Term Loan held by such Term Loan Purchaser to be r epaid from the proceeds of the issuance of Commercial Paper and replaced by a revolving Commitment of such Term Loan Purchaser (on all of the terms and conditions applicable to the Commitments of the Banks that are contained in the Backup Facility Agreement and other Operative Agreements), provided that the CP Administrative Agent and the Agent Bank shall have received written confirmation from S&P and Moody's that, immediately after giving effect to such Term Loan Purchaser's revolving Commitment, the then-current rating of the Commercial Paper shall not be qualified, reduced or withdrawn as a result thereof. No such amendment or replacement shall increase the aggregate Commitment of the Banks and the Term Loan Purchaser beyond the aggregate Commitment of the Banks in effect prior to the funding of the Term Loan purchased by such Term Loan Purchaser.

            (e)  Upon the Restatement Effective Date, the definition of "Indebtedness" contained in Annex A to the Participation Agreement is hereby amended by adding the following sentence at the end thereof:

For the avoidance of doubt, the parties hereto agree that, in the case of Lessee, "Indebtedness" shall not include any reimbursement, indemnification, payment or similar obligations of Lessee with respect to any appeal or surety bonds issued for the benefit of Lessee in order to stay (whether by statute or contract) the enforcement against Lessee of the judgment obtained by the City of Hope in June 2002 or any interest accruing thereon, to the extent, but only to the extent,

2

that Lessee's obligations in respect thereof are secured by a pledge of cash, cash equivalents, liquid assets or other financial instruments.

            (f)  Upon the Restatement Effective Date, Section 10.1(iv) of the Guarantee is hereby amended by adding the following sentence at the end thereof:

For the avoidance of doubt, the parties hereto confirm that the Liens permitted pursuant to this Section 10.1(iv) shall include liens on and deposits and pledges of cash, cash equivalents, liquid assets and other financial instruments to secure Lessee's reimbursement, indemnification, payment or similar obligations with respect to any appeal or surety bonds issued for the benefit of Lessee in order to stay (whether by statute or contract) the enforcement against Lessee of the judgment obtained by the City of Hope in June 2002 or any interest accruing thereon.

            (g)  The Banks agree that the Backup Facility Agreement and the Participation Agreement are each amended, as of the Restatement Effective Date, by replacing the Commitment amounts on the signature pages thereof with the Commitments shown on Schedule 1 attached hereto.

            SECTION 3.  Representations and Warranties.   Each of Lessee, Borrower, and Guarantor hereby represents and warrants that (i) its respective representations and warranties contained in the Participation Agreement and the Operative Agreements are, after giving effect to this Amendment and Restatement, true and correct in all material respects on and as of the Restatement Effective Date, and (ii) no Default will have occurred and be continuing as to it on such date.

            SECTION 4.  Governing Law.  This Amendment and Restatement shall be governed by and construed in accordance with the laws of the State of New York.

            SECTION 5.  Counterparts.  This Amendment and Restatement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

            SECTION 6.  Effectiveness.  This Amendment and Restatement shall become effective on the date when the following conditions are met (the "Restatement Effective Date"):

            (a)  the Agent shall have received from each of the Borrower, the Banks, the Required Participants, the Lessor, the Lessee, and the Guarantor a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Agent) that such party has signed a counterpart hereof;

            (b)  the Agent shall have received an opinion of in house counsel to Lessee, dated the Restatement Effective Date, in form and substance satisfactory to the Agent; and

            (c)  the Agent shall have received all documents the Administrative Agent may reasonably request relating to the existence of the Lessee, the authority for and the validity of this Amendment and Restatement, and any other matters relevant hereto, all in form and substance satisfactory to the Agent.

3

            SECTION 7.  Continuing Effect of the Participation Agreement and Operative Agreements.  Except as expressly provided herein, this Agreement shall not constitute an amendment or waiver of any other provision of the Backup Facility Agreement, the Participation Agreement or any Operative Agreement not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of Lessee, the Lessor, Borrower or Guarantor that would require a waiver or consent of the Agent Bank, the Investors and/or the Banks except as may be provided for herein. Except as expressly amended hereby, the provisions of the Participation Agreement and the Operative Agreements (together with any consent or waiver heretofore delivered pursuant thereto) are and shall remain in full force and effect.

            SECTION 8.  Expenses.  Lessee agrees to pay or reimburse the Agent and Borrower for all of their reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Agreement, including, without limitation, the fees and disbursements of their counsel.

            SECTION 9.  Construction.  The fact that all the parties hereto executed this Agreement should not be construed as requiring all such parties to execute or consent to any particular amendment of any Operative Agreement.

            SECTION 10.  Instruction.  The Agent, Borrower and the Lessor are hereby instructed to execute this Agreement.

4

            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

GENENTECH, INC., as Lessee and Guarantor

By:    /s/ LOUIS J. LAVIGNE                                   
            Name: Louis J. Lavigne
            Title: Executive Vice President and
                       Chief Financial Officer

DNA FINANCE CORP., as Borrower

By:    /s/ FRANK B. BILOTTA                                
            Name: Frank B. Bilotta
            Title: President

VACAVILLE REAL ESTATE TRUST 2001, as
Lessor

By:  Wilmington Trust Company, not in its
         individual capacity but solely as Trustee

            By:    /s/ MICHAEL G. OLLER, JR.           
                    Name: Michael G. Oller, Jr.
                    Title: Senior Financial Services Officer

JPMORGAN CHASE BANK (formerly known as
THE CHASE MANHATTAN BANK), as Agent
Bank

By:    /s/ DAWN LEE LUM                                      
            Name: Dawn Lee Lum
            Title: Vice President

JPMORGAN CHASE BANK (formerly known as
THE CHASE MANHATTAN BANK), as
Collateral Agent

By:    /s/ DAWN LEE LUM                                      
            Name: Dawn Lee Lum
            Title: Vice President

5

JPMORGAN CHASE BANK (formerly know as
THE CHASE MANHATTAN BANK), as
Administrative Agent

By:    /s/ ANDREW TAYLOR                                 
           Name: Andrew Taylor
           Title: Vice President

UBS AG, STAMFORD BRANCH, as a Bank

By:    /s/ WILFRED V. SAINT                                
            Name: Wilfred V. Saint
            Title: Associate Director
                      Banking Products Services, US

By:    /s/ LUKE GOLDSWORTHY                        
            Name: Luke Goldsworthy
             Title: Associate Director
                          Banking Product Services, US

BNP PARIBAS, as a Bank

By:    /s/ KATHERINE WOLFE                             
            Name: Katherine Wolfe
            Title: Director

By:    /s/ JOSEPH MACK                                         
            Name: Joseph Mack
            Title: Associate

ABN AMRO BANK, N.V., as a Bank

By:    /s/ JAMES S. KREITLER                              
            Name: James S. Kreitler
            Title: Senior Vice President

By:    /s/ HENRY SOSA                                            
            Name: Henry Sosa
            Title: Assistant Vice President

MELLON BANK, N.A., as a Bank

By:    /s/ LAWRENCE C. IVEY                              
            Name: Lawrence C. Ivey
            Title: First Vice President

6

WACHOVIA BANK, N.A., as a Bank

By:    /s/ DOUGLAS T. DAVIS                               
            Name: Douglas T. Davis
            Title: Director

CREDIT SUISSE FIRST BOSTON, as a Bank

By:    /s/ CHRISTOPHER LALLY                          
            Name: Christopher Lally
            Title: Vice President

By:    /s/ JENNIFER A. PIEZA                                
            Name: Jennifer A. Pieza
            Title: Associate

BANK OF NEW YORK, as a Bank

By:    /s/ REBECCA K. LEVINE                             
            Name: Rebecca K. Levine
            Title: Vice President

WACHOVIA CAPITAL INVESTMENTS, INC.,
as an Investor

By:    /s/ DOUGLAS T. DAVIS                               
            Name: Douglas T. Davis
            Title: Director

BANK HAPOALIM B.M., as an Investor

By:                                                                                 
            Name:
            Title:

BNP PARIBAS, as an Investor

By:    /s/ KATHERINE WOLFE                              
            Name: Katherine Wolfe
            Title: Director

BNP PARIBAS, as an Investor

By:    /s/ JOSEPH MACK                                          
            Name: Joseph Mack
            Title: Associate

7

SCHEDULE 1

COMMITMENT SCHEDULE

Bank	Commitment
JPMORGAN CHASE BANK	$	70,971,800
UBS AG, STAMFORD BRANCH	$	70,971,800
BNP PARIBAS	$	70,971,800
ABN AMRO BANK, N.V.	$	50,000,000
MELLON BANK, N.A.	$	50,000,000
WACHOVIA BANK, N.A.	$	70,971,800
CREDIT SUISSE FIRST BOSTON	$	70,971,800
BANK OF NEW YORK	$	25,000,000
TOTAL	$	479,859,000

EX-23.1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

            We consent to the incorporation by reference in the Registration Statements pertaining to the 1991 Employee Stock Plan, the 1999 Stock Plan, the 1996 Stock Option/Stock Incentive Plan, the 1994 Stock Option Plan, the 1990 Stock Option/Stock Incentive Plan, and the Genentech, Inc. Tax Reduction Investment Plan, and the Registration Statement (Form S-3 No. 333-37072) related to resales of common shares deliverable upon the exchange of Liquid Yield Option Notes, and in the related Prospectuses, of Genentech, Inc. of our report dated January 14, 2003, except for the note titled Subsequent Event, as to which the date is February 13, 2003, with respect to the consolidated financial statements of Genentech, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2002.

/s/ ERNST & YOUNG LLP

Palo Alto, California
February 13, 2003

EX-99.1

EXHIBIT 99.1

CERTIFICATIONS OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

            I, Arthur D. Levinson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Genentech, Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report of Genentech, Inc. on Form 10-K fairly presents in all material respects the financial condition and results of operations of Genentech, Inc.

By:	/s/ Arthur D. Levinson, Ph.D.
Name:	Arthur D. Levinson, Ph.D.
Title:	President and Chief Executive Officer
Date:	February 14, 2003

            I, Louis J. Lavigne, Jr., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Genentech, Inc. on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report of Genentech, Inc. on Form 10-K fairly presents in all material respects the financial condition and results of operations of Genentech, Inc.

By:	/s/ Louis J. Lavigne, Jr.
Name:	Louis J. Lavigne, Jr.
Title:	Executive Vice President and   Chief Financial Officer
Date:	February 14, 2003