This Quarterly Report on Form 10-Q contains forward-looking statements based on our current expectations. The forward-looking statements are contained principally in this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors." Words such as "expect," "anticipate," "target," "goal," "project," "intend," "plan," "could," "should," "might," "believe," "seek," "estimate," "continue," "may," variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated trends in our businesses and other characterizations of future events or circumstances are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those identified below under "Risk Factors." Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. In evaluating our business, you should carefully consider the risks described in the section entitled "Risk Factors" under Part II, Item 1A below, in addition to the other information in this Quarterly Report on Form 10-Q. Any of the risks contained herein could materially and adversely affect our business, results of operations and financial condition.

You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our audited Consolidated Financial Statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2007, and our unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2008 and other disclosures (including the disclosures under "Part II. Item 1A. Risk Factors") included in this Quarterly Report on Form 10-Q. Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

Management Overview

We are a biopharmaceutical company that discovers, develops and commercializes innovative therapeutics in areas of unmet medical need. Our mission is to advance the care of patients suffering from life-threatening diseases worldwide. Headquartered in Foster City, California, we have operations in North America, Europe, Australia and Asia. We market Truvada® (emtricitabine and tenofovir disoproxil fumarate), Atripla® (efavirenz 600 mg/emtricitabine 200 mg/tenofovir disoproxil fumarate 300 mg), Viread® (tenofovir disoproxil fumarate) and Emtriva® (emtricitabine) for the treatment of human immunodeficiency virus (HIV) infection; Hepsera® (adefovir dipivoxil) and Viread for the treatment of chronic hepatitis B; AmBisome® (amphotericin B) liposome for injection for the treatment of severe fungal infections; Letairis ® (ambrisentan) for the treatment of pulmonary arterial hypertension (PAH); Vistide® (cidofovir injection) for the treatment of cytomegalovirus infection; and Flolan® (epoprostenol sodium) for the treatment of pulmonary hypertension. F. Hoffmann-La Roche Ltd (together with Hoffmann-La Roche Inc., Roche) markets Tamiflu® (oseltamivir phosphate) worldwide for the treatment and prevention of influenza under a royalty-paying collaborative agreement with us. OSI Pharmaceuticals, Inc. markets Macugen® (pegaptanib sodium injection) in the United States and Europe for the treatment of neovascular age-related macular degeneration under a royalty-paying collaborative agreement with us. GlaxoSmithKline Inc. (GSK) markets Volibris® (ambrisentan) outside of the United States for the treatment of PAH under a royalty-paying collaborative agreement with us.

Business Highlights

In September 2008, Viread for the treatment of chronic hepatitis B was approved in Canada. We received similar approval from the U.S. Food and Drug Administration (FDA) in August, in Australia in July, and in the European Union, Turkey, and New Zealand in April 2008.

In September 2008, we received a complete response letter from the FDA informing us that the FDA cannot approve our New Drug Application (NDA) for aztreonam for inhalation for treatment of cystic fibrosis (CF) in its current form and requesting we conduct an additional Phase 3 clinical study. We are working with the FDA to determine whether further analyses of the existing data could lead to approval or whether we will need to conduct an additional study.

During the third quarter of 2008, we began dosing patients in our Phase 3 clinical study of elvitegravir (GS 9137), our novel integrase inhibitor for HIV, which we licensed from Japan Tobacco Inc. (Japan Tobacco) in 2005. In the hepatitis C area, we completed our Phase 1 study for GS 9190, a non-nucleoside polymerase inhibitor, and we are targeting initiation of the Phase 2 study in patients infected with the hepatitis C virus before the end of this year. We are continuing our Phase 2a study in patients with hepatitis C of GS 9450, the caspase inhibitor licensed from LG Life Sciences in 2007, and we expect data from this trial by the end of the year. Pending positive results from this study, we anticipate initiating a Phase 2b study in the first half of next year. We are also completing a Phase 1 study of GS 9450 to evaluate its safety and effect on liver enzymes in patients with non-alcoholic steatohepatitis (NASH). In the cardiovascular area, we completed enrollment in one of the two Phase 3 studies for darusentan for treatment of resistant hypertension and we anticipate having data from this study in the second quarter of 2009. We continued to enroll patients in our second Phase 3 study for darusentan, and we anticipate completing the enrollment and having data from this study before the end of 2009. We have completed a Phase 1 study to evaluate GS 9350 for safety and its ability to boost blood levels of midazolam, a common substrate used to investigate pharmacokinetic boosters. Based on the results obtained, we are now investigating the pharmacokinetics and bioequivalence of a GS 9350, elvitegravir and Truvada co-formulation into a single pill.

Financial Highlights

Our operating results for the third quarter of 2008 were led by product sales of $1.34 billion. Antiviral product sales (Truvada, Atripla, Viread, Hepsera and Emtriva) increased 39% to $1.23 billion in the third quarter of 2008 from the third quarter of 2007 and were the key drivers for total product sales growth of 39% in the third quarter of 2008 as compared to the third quarter of 2007. Atripla contributed $427.6 million, or 35%, to our third quarter antiviral product sales resulting from the continued uptake of Atripla in the United States and product launches in Europe. The growth of Atripla product sales and its increased proportion to overall product sales, caused total product gross margin to decrease as expected, due to the efavirenz component of Atripla sales at zero gross margin. Truvada product sales for the third quarter of 2008 were $549.1 million, or 45% of our third quarter antiviral product sales. Truvada product sales for the third quarter of 2008 increased 34% from the third quarter of 2007 due primarily to sales volume growth as well as a favorable foreign currency exchange impact. There was a favorable foreign currency impact of approximately $58.8 million on total revenues and $36.7 million on pre-tax income in the third quarter of 2008 when compared to the third quarter of 2007.

Under our collaborations with corporate partners, we recognized $25.2 million in royalty revenues in the third quarter of 2008, a decrease of 72% from royalty revenues of $91.0 million in the third quarter of 2007. The decrease in royalty revenues was primarily due to decreased Tamiflu sales by Roche related to pandemic planning initiatives worldwide.

The increased research and clinical activity related to the compounds in our pipeline, along with higher headcount required to support our expanding programs, contributed to higher research and development (R&D) expenses of $188.1 million for the third quarter of 2008 as compared to $140.4 million in the third quarter of 2007, an increase of 34%.

Selling, general and administrative (SG&A) expenses for the third quarter of 2008 increased by 9% from the third quarter of 2007 driven primarily by higher headcount and higher operating costs to support the continued growth of our business. Although the expansion of our business activities has required an increase in operating expenses, we continued our focus on cost control.

Our cash, cash equivalents and marketable securities increased by $533.8 million during the nine months ended September 30, 2008, driven primarily by our operating cash flows of $1.56 billion, partially offset by common stock repurchases of $1.22 billion under our stock repurchase program. In October 2008, we entered into an accelerated share repurchase transaction with Citibank, N.A. (Citibank) to repurchase $750.0 million of our common stock on an accelerated basis. Under the terms of the accelerated share repurchase agreement, we paid $750.0 million to Citibank to settle the initial purchase transaction and received 14,874,519 shares of our common stock at a price of $50.42 per share. On or before April 2009, subject to extension under certain circumstances as well as the maximum and minimum share delivery provisions of the agreement, we may receive additional shares from Citibank depending on the average of the daily volume weighted-average prices of our common stock during a specified period less a predetermined discount per share. As of October 31, 2008, the remaining authorized amount of stock repurchases that may be made under the $3.00 billion stock repurchase program which expires in December 2010 was $1.00 billion.

In light of the volatility and developments that we have seen in the financial markets, we continued to review our cash equivalents and marketable securities carefully as well as invest prudently. We believe that maintaining the primary goals of our investment policy, safety and preservation of principal and diversification of risk, as well as liquidity, has protected us from much of the risks in the credit markets while allowing us to continue to meet our operating cash flow requirements as well as execute on other opportunities such as our $750.0 million accelerated share repurchase.

Critical Accounting Policies, Estimates and Judgments

There have been no material changes in our critical accounting policies, estimates and judgments during the quarter ended September 30, 2008 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Total Revenues

Total revenues were $1.37 billion for the third quarter of 2008 and $1.06 billion for the third quarter of 2007. Total revenues were $3.91 billion for the nine months ended September 30, 2008 and $3.14 billion for the same period in 2007. Included in total revenues were product sales, royalty revenues and contract and other revenues.

Product Sales

The following table summarizes the period over period changes in our product
sales (in thousands, except percentages):



                                  Three Months Ended                       Nine Months Ended
                                    September 30,                            September 30,
                                  2008          2007       Change         2008           2007        Change
Antiviral products:
Truvada                        $   549,101    $ 409,084        34 %    $ 1,544,635    $ 1,140,382        35 %
Atripla                            427,623      241,101        77 %      1,106,941        643,668        72 %
Viread                             155,958      149,108         5 %        459,306        464,683        (1 )%
Hepsera                             91,217       79,273        15 %        264,604        225,790        17 %
Emtriva                              7,634        6,461        18 %         24,111         24,388        (1 )%

Total antiviral products         1,231,533      885,027        39 %      3,399,597      2,498,911        36 %
AmBisome                            72,884       68,508         6 %        213,680        194,764        10 %
Other                               34,085        8,396       306 %         83,747         13,539       519 %

Total product sales            $ 1,338,502    $ 961,931        39 %    $ 3,697,024    $ 2,707,214        37 %

Total product sales increased by 39% and 37% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to an overall increase in our antiviral product

sales including the strong growth of Atripla sales, as well as the continued growth of Truvada sales. Foreign currency denominated product sales experienced a net benefit from the depreciation of the U.S. dollar of approximately $58.8 million and $143.6 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007.

Antiviral Products

Antiviral product sales increased by 39% and 36% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, driven primarily by sales volume growth of Atripla and Truvada, as well as a favorable foreign currency exchange impact.

• Truvada

Truvada sales increased by 34% and 35% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, driven primarily by sales volume growth in the United States and Europe, and a favorable foreign currency exchange impact. Truvada sales accounted for 45% of our total antiviral product sales for the three and nine months ended September 30, 2008.

• Atripla

Atripla sales increased by 77% and 72% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, driven primarily by strong sales volume growth in the United States and Europe. We consolidate 100% of Atripla product sales because we are the primary beneficiary of our joint venture with Bristol-Myers Squibb Company (BMS) in the United States. The efavirenz portion of these Atripla sales which is purchased from BMS at BMS's estimated net selling price of efavirenz, was approximately $155.9 million and $406.0 million for the three and nine months ended September 30, 2008, respectively, and approximately $89.1 million and $237.9 million for the three and nine months ended September 30, 2007, respectively. Atripla was approved for sale in the United States and in the European Union in July 2006 and December 2007, respectively. Atripla sales accounted for 35% and 33% of our total antiviral product sales in the three and nine months ended September 30, 2008, respectively.

• Hepsera

Hepsera sales increased by 15% and 17% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, driven primarily by a favorable foreign currency exchange impact and sales volume growth in North America and certain European markets.

AmBisome

AmBisome sales increased by 6% and 10% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, driven primarily by a favorable foreign currency exchange impact.

For the full year of 2008, we expect total product sales to continue to grow as we continue to expand our sales and marketing efforts in North America and Europe, driven by the uptake of Atripla in North America and in the European Union, where the product is earlier in its launch, and driven by the launch of Viread for chronic hepatitis B.

Royalty Revenues

The following table summarizes the period over period changes in our royalty revenues (in thousands, except percentages):

Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 Change 2008 2007 Change Royalty revenues $ 25,161 $ 91,003 (72 )% $ 185,221 $ 407,212 (55 )%

Royalty revenues decreased by 72% and 55% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, driven primarily by the recognition of Tamiflu royalties from Roche of $8.6 million and $139.5 million in the three and nine months ended September 30, 2008, respectively, compared to Tamiflu royalties from Roche of $77.4 million and $368.4 million recognized in the three and nine months ended September 30, 2007, respectively. The decrease in Tamiflu royalties is primarily due to decreased sales related to pandemic planning initiatives worldwide. We recognize royalties on Tamiflu sales by Roche one quarter in arrears of the quarter in which the product is sold.

Roche reported in October 2008 that it expects a significant decrease in Tamiflu sales in 2008 compared to 2007 due to significantly lower pandemic sales; therefore, we expect our royalty revenues for 2008 to be significantly lower compared to 2007.

Cost of Goods Sold and Product Gross Margin

The following table summarizes the period over period changes in our total
product sales and cost of goods sold (in thousands, except percentages) and our
product gross margin:



                                 Three Months Ended                           Nine Months Ended
                                   September 30,                                September 30,
                                2008            2007         Change         2008             2007          Change
Total product sales          $ 1,338,502      $ 961,931          39 %    $ 3,697,024      $ 2,707,214          37 %
Cost of goods sold           $   300,183      $ 198,460          51 %    $   805,715      $   553,229          46 %
Product gross margin                77.6 %         79.4 %                       78.2 %           79.6 %

Product gross margin for the third quarter of 2008 was 77.6%, compared to 79.4% for the third quarter of 2007. Product gross margin for the nine months ended September 30, 2008 was 78.2%, compared to 79.6% for the same period in 2007. The lower product gross margins for the three and nine months ended September 30, 2008 compared to the same periods in 2007 were due primarily to the higher proportion of Atripla sales, which include the efavirenz portion at zero product gross margin and the impact of higher royalty expense attributable to changes in the product and geographic mix of product sales.

We expect product gross margin for the full year of 2008 to be slightly lower than that of 2007, due primarily to a higher mix of Atripla product sales.

Research and Development Expenses

The following table summarizes the period over period changes in the major
components of our R&D expenses (in thousands, except percentages):



                                        Three Months Ended                  Nine Months Ended
                                          September 30,                       September 30,
                                         2008        2007      Change       2008        2007      Change
Research                              $   44,344   $  36,762       21 %   $ 119,610   $  96,718       24 %
Clinical development                     116,377      85,719       36 %     321,132     250,000       28 %
Pharmaceutical development                27,341      17,876       53 %      79,163      59,660       33 %

Total research and development        $  188,062   $ 140,357       34 %   $ 519,905   $ 406,378       28 %

R&D expenses consist primarily of personnel costs, including salaries, benefits and stock-based compensation, clinical studies performed by contract research organizations, materials and supplies, licenses and fees and overhead allocations consisting of various support and facilities related costs. Our R&D activities are separated into three main categories: research, clinical development and pharmaceutical development. Research costs typically consist of preclinical and toxicology costs. Clinical development costs include costs for Phase 1, 2, 3 and 4 clinical trials. Pharmaceutical development expenses consist of costs for product formulation and chemical analysis.

R&D expenses for the third quarter of 2008 increased by $47.7 million compared to the same quarter of 2007, due primarily to increased clinical study expenses of $19.4 million primarily in the antiviral and cardiovascular areas, as well as increased compensation and benefit expenses of $14.5 million due primarily to higher headcount to support the growth of our business. Third quarter 2008 R&D expenses also included a $7.0 million milestone payment made to Japan Tobacco related to the dosing of patients with elvitegravir in Phase 3 studies.

R&D expenses for the nine months ended September 30, 2008 increased by $113.5 million compared to the same period in 2007, due primarily to increased clinical study expenses of $55.3 million primarily in the antiviral and cardiovascular areas, as well as increased compensation and benefit expenses of $36.4 million due primarily to higher headcount.

We expect R&D expenses for the full year of 2008 to be higher than that of 2007, reflecting increased spending on our internal and collaborative R&D efforts relating to the progress of our product candidates into more advanced clinical studies, as well as the continuation of our existing clinical trials.

Selling, General and Administrative Expenses

The following summarizes the period over period changes in our SG&A expenses (in thousands, except percentages):

Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 Change 2008 2007 Change Selling, general and administrative $ 189,189 $ 172,956 9 % $ 603,679 $ 525,693 15 %

SG&A expenses for the third quarter of 2008 increased by $16.2 million compared to the same quarter of 2007, due primarily to increased compensation and benefit expenses of $11.1 million, as well as increased infrastructure and technology-related expenses of $3.7 million to support the continued growth in our business. The increase in compensation and benefit expenses from headcount growth was partially offset by the decrease in stock-based compensation expense of $3.2 million due primarily to the accelerated stock-based compensation expense recorded during the three months ended September 30, 2007 related to certain employee terminations from our acquisition of Myogen, Inc. (Myogen) in 2006.

SG&A expenses for the nine months ended September 30, 2008 increased by $78.0 million compared to the same period in 2007, due primarily to increased marketing and promotional expenses of $19.2 million, other consulting and support services expenses of $12.8 million related to the growth in our business, as well as costs of $12.4 million associated with certain termination-related disputes in our international operations. Headcount growth also resulted in increased compensation and benefit expenses of $38.7 million for the nine months ended September 30, 2008 compared to the same period in 2007, net of a decrease in stock-based compensation expense of $29.2 million due primarily to the higher expense associated with unvested stock options that we had assumed from Myogen, including accelerated stock-based compensation expenses related to certain Myogen employee terminations during the nine months ended September 30, 2007.

We expect SG&A expenses for the full year of 2008 to be higher than that of 2007 due primarily to headcount related expenses to support the continued growth of our business, including the continued expansion of our international operations, and increased sales and marketing efforts to support the growth of our product franchises.

Purchased In-process Research and Development Expenses

In connection with our acquisitions of Myogen and Corus Pharma, Inc. (Corus) in 2006, we recorded purchased in-process research and development (IPR&D) expenses of $2.06 billion and $335.6 million, respectively, during the year ended December 31, 2006.

The purchased IPR&D expense for Myogen represented the estimated fair value of Myogen's incomplete R&D programs that had not yet reached technological feasibility and had no alternative future use as of the acquisition date and therefore, was expensed upon acquisition. A summary of these programs at the acquisition date, updated for subsequent changes in status of development, is as follows:

                                                                                Estimated
                                                                            Acquisition Date
                                                                               Fair Value
  Program              Description              Status of Development         (in millions)
Ambrisentan     An orally active,             Phase 3 clinical trials       $         1,413.7
                non-sulfonamide,              were completed prior to
                propanoic acid-class,         the acquisition date. We
                endothelin receptor           filed an NDA with the FDA
                antagonist (ERA) for the      in December 2006, and in
                treatment of PAH.             June 2007, the FDA
                                              approved Letairis for the
                                              treatment of PAH in the
                                              United States.
                                              Additionally, in March
                                              2007, the European
                                              Medicines Agency (EMEA)
                                              validated the marketing
                                              authorization application
                                              for ambrisentan for the
                                              treatment of PAH, filed
                                              by our collaboration
                                              partner, GSK. In February
                                              2008, ambrisentan
                                              received a positive
. . .