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                       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, 2000
                                       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 NO. 0-19731

                           --------------------------

                             GILEAD SCIENCES, INC.

             (Exact name of registrant as specified in its charter)


                                            
               DELAWARE                                     94-3047598
    (State or other jurisdiction of            (I.R.S. Employer Identification No.)
    incorporation or organization)

   333 LAKESIDE DRIVE, FOSTER CITY,                           94404
              CALIFORNIA                                    (Zip Code)
    (Address of principal executive
               offices)


        Registrant's telephone number, including area code: 650-574-3000

                           --------------------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          COMMON STOCK $.001 PAR VALUE
                                (Title of Class)

                           --------------------------

    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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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. Yes / /  No /X/

    The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing price of the Common Stock on the Nasdaq Stock
Market on February 28, 2001 was $2,843,500,000*.

    The number of shares outstanding of the Registrant's Common Stock on
February 28, 2001 was 94,353,314. **

                      DOCUMENTS INCORPORATED BY REFERENCE

    Specified portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 2001 Annual Meeting
are incorporated by reference into Part III of this Report.

--------------------------

*   Based on a closing price of $37.375 per share. Excludes 18,273,770 shares of
    the Registrant's Common Stock held by executive officers, directors and
    stockholders whose ownership exceeds 5% of the Common Stock outstanding at
    February 28, 2001. Exclusion of such shares should not be construed to
    indicate that any such person possesses the power, direct or indirect, to
    direct or cause the direction of the management or policies of the
    Registrant or that such person is controlled by or under common control with
    the Registrant.

**  On February 22, 2001, the Registrant implemented a two-for-one stock split
    in the form of a stock dividend. All share and per share amounts for all
    periods presented have been restated to reflect the split.

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                                     PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

    This report includes forward-looking statements. In particular, statements
about our expectations, beliefs, plans, objectives, assumptions or future events
or performance are contained or incorporated by reference in this report. We
have based these forward-looking statements on our current expectations about
future events. While we believe these expectations are reasonable, such
forward-looking statements are inherently subject to risks and uncertainties,
many of which are beyond our control. Our actual results may differ materially
from those suggested by these forward-looking statements for various reasons,
including those discussed in this report under the heading "Risk Factors" at
page 28. Given these risks and uncertainties, you are cautioned not to place
undue reliance on such forward-looking statements. The forward-looking
statements included in this report are made only as of the date hereof. We do
not undertake and specifically decline any obligation to update any such
statements or to publicly announce the results of any revisions to any of such
statements to reflect future events or developments.

OVERVIEW

    Gilead is an independent bio-pharmaceutical company dedicated to
discovering, developing, manufacturing and commercializing proprietary
therapeutics for antiviral, anti-infective and oncology applications. We
currently derive revenue from four approved products and have five products in
development. We are adding to our existing portfolio of compounds through
internal discovery and an active product acquisition and in-licensing strategy.
Our internal discovery activities include identification of new molecular
targets, target screening and medicinal chemistry. We also have expertise in
liposomal drug delivery technology that we use to develop drugs that are safer,
easier for patients to tolerate and more effective. We have expanded our
business and intend to continue to expand through acquisition activities.

    We have four products that are currently marketed in the U.S. and various
other countries worldwide.

    - AmBisome-Registered Trademark- is approved for sale in 42 countries for
      the treatment and prevention of life-threatening fungal infections. We
      co-promote AmBisome in the U.S. with Fujisawa Healthcare, Inc.

    - Tamiflu-TM- is sold by our corporate partner Hoffmann-La Roche in 31
      countries for the treatment of influenza and recently received U.S. FDA
      approval for the prevention of influenza.

    - VISTIDE-Registered Trademark- is approved for sale in 21 countries for the
      treatment of CMV retinitis in AIDS patients.

    - DaunoXome-Registered Trademark- is approved for sale in 25 countries for
      the treatment of AIDS-related Kaposi's sarcoma.

    We have a sales force of 30 in the U.S. who promote AmBisome, VISTIDE and
DaunoXome, and a sales force of 85 in Europe and Australia who promote AmBisome
and DaunoXome. We also have corporate partners and distributors promoting these
products in over 30 countries.

    We believe that our most advanced clinical candidate, tenofovir DF, a
once-daily pill taken as part of combination therapy to treat HIV infection,
could address a significant unmet medical need. We recently announced
preliminary data from an ongoing Phase III clinical trial suggesting that 24
weeks of treatment with tenofovir DF reduced HIV levels in treatment-experienced
patients by an average of approximately 75%, reduced viral levels to
undetectable levels in approximately 45% of these patients,

                                       1

and improved patients' immune systems. We are gathering data from ongoing trials
and anticipate filing for approval of tenofovir DF in the U.S. and Europe in
mid-2001. We have retained all commercial rights to tenofovir DF and, if we
receive marketing approval, will promote it through our U.S. and European sales
forces.

    We are studying adefovir dipivoxil in two Phase III trials for the treatment
of hepatitis B virus infection, or HBV. We believe that adefovir dipivoxil has
the potential to address many of the limitations of current HBV therapies, most
notably drug resistance associated with long-term therapy. We are conducting a
Phase II program for NX 211 in relapsed ovarian cancer and small cell lung
cancer and are evaluating two oncology compounds in preclinical studies.

OUR MARKETED PRODUCTS

    The products that we have developed that are commercially available include:

    - AMBISOME: a drug for treating and preventing life-threatening fungal
      infections;

    - TAMIFLU: a drug for treating and preventing influenza;

    - VISTIDE: a drug for treating CMV retinitis in AIDS patients; and

    - DAUNOXOME: a drug for treating AIDS-related Kaposi's sarcoma.

    How these products are sold, and the indications that they are approved for,
vary with each product and in each country or region where they are sold.

    In 2000, we earned revenues of approximately $174 million from sales of
these products. Of this amount, sales of AmBisome generated aggregate product
sales and royalty revenues of approximately $155 million, or 79% of our total
revenues. We earned revenues from sales of, and royalties on, these products in
the U.S. of $30 million in 2000, $25 million in 1999 and $25 million in 1998.
Outside of the U.S., we earned revenues from sales of, and royalties on, these
products of $144 million in 2000, $125 million in 1999 and $120 million in 1998.
We did not begin recognizing revenues from sales of Tamiflu until 2000.

AMBISOME

    AmBisome is a liposomal formulation of amphotericin B. Amphotericin B is a
powerful antifungal agent that is known for its ability to attack and kill a
broad variety of life-threatening fungal infections, but it also has serious
side effects, including kidney toxicity. The patients most likely to suffer from
these fungal infections are patients with weakened immune systems, including
transplant patients, patients infected with the HIV virus, and cancer patients
undergoing chemotherapy. Studies show that by delivering amphotericin B in our
proprietary liposomal formulation, AmBisome reduces the rate and severity of
kidney toxicity and injection-related reactions, and allows these patients to
receive higher and more effective doses of amphotericin B.

    AmBisome is approved for sale in 42 countries, including the U.S., all of
the European Union, most of the rest of Europe, Australia, Canada and several
countries in Latin America and Asia. AmBisome is primarily used for treating
patients who are known to have life-threatening fungal infections. AmBisome is
also approved in the U.S. and 20 other countries to treat patients who, because
of certain symptoms, are presumed to have fungal infections, either as a first
choice therapy (first line) or after traditional amphotericin B has failed or
cannot be used. In the U.S., AmBisome also has been approved as a first line
treatment of acute cryptococcal meningitis in AIDS patients. In addition,
AmBisome is approved in five countries as a precautionary treatment for
preventing fungal infections in liver transplant patients and is approved for
treating a rare parasitic infection called visceral leishmaniasis in several
countries. In 16 of the countries where AmBisome is approved, including the
U.S., we are authorized to promote AmBisome as a first line treatment for
patients who

                                       2

are known to have a fungal infection. In the other 26 countries, AmBisome is
approved for use after traditional amphotericin B therapy fails or when
traditional amphotericin B cannot be used--a second line therapy.

    In the U.S., we co-promote AmBisome with Fujisawa Healthcare through our
domestic sales force. Our agreement with Fujisawa entitles us to a percentage of
revenues generated from these sales and provides that Fujisawa purchases
AmBisome from us at our manufacturing cost. See "Collaborative
Relationships--Fujisawa." In the major European countries and in Australia, we
sell AmBisome through our international sales force. We also sell AmBisome
through independent distributors in a number of countries in Europe, Latin
America and Asia. Our corporate partner, Sumitomo, is studying AmiBisome in
clinical trials in Japan. Sumitomo has the exclusive right to sell AmBisome in
Japan and we will receive a percentage of any revenues that they receive from
those sales. See "Collaborative Relationships--Sumitomo." Most of our revenues
from AmBisome are in Europe and we expect this to be the case for the
foreseeable future. In most major European countries, we sell AmBisome in the
currency of that country and our revenues in U.S. dollars could therefore
decrease if the value of those currencies were to decrease relative to the value
of the U.S. dollar.

    Traditional amphotericin B is the most significant competition for AmBisome.
In many countries, AmBisome cannot be prescribed until traditional amphotericin
B therapy has failed or cannot be used. In addition, there are other lipid-based
formulations of amphotericin B that compete with AmBisome. The most significant
lipid-based amphotericin B product that currently competes with AmBisome is
Abelcet, a drug sold by Elan Corporation plc, a company with significantly
greater resources than we have. Traditional amphotericin B is significantly less
expensive than AmBisome, and Abelcet is also less expensive than AmBisome. We
expect to face significant competition from new antifungal products, including
caspofungin a product developed by Merck that received marketing approval in
January 2001 and voriconazole, which is being developed by Pfizer, Inc. Pfizer
has filed an application for marketing approval of voriconazole. See
"Competition."

TAMIFLU

    Tamiflu is an oral pill for the treatment and prevention of influenza A and
B. Tamiflu is in a new class of prescription drugs called neuraminidase
inhibitors that act by disabling all common strains of the flu virus and
preventing the virus from spreading in a patient. Tamiflu originally was
approved by the FDA in October 1999 for the treatment of uncomplicated influenza
in adult patients, and in November 2000 was approved by the FDA for the
prevention of influenza in adults and adolescents 13 years and older. In
December 2000, Tamiflu was approved in Japan for the treatment of influenza in
adults and in the U.S. for the treatment of children as young as one-year old.

    When used as approved for the treatment of influenza, Tamiflu has been shown
to reduce the duration of the flu in adults by an average of 1.3 days, and to
reduce the severity of flu symptoms and the incidence of secondary infections.
When taken as approved for the prevention of influenza, studies have shown that
Tamiflu is up to 92% effective in preventing the development of the flu. The
most common side effects associated with Tamiflu are mild nausea and vomiting.

    Hoffmann-La Roche, our corporate partner who developed Tamiflu with us and
who has the exclusive right to sell Tamiflu, began selling Tamiflu in the U.S.
in November 1999. In May 1999, Hoffmann-La Roche submitted a Marketing
Authorisation Application to the European Commission seeking to have Tamiflu
approved under the centralized procedure in the European Union. This European
application was withdrawn by Hoffmann-La Roche to enable Hoffmann-La Roche to
submit additional data. This application was re-filed by Hoffmann-La Roche in
February 2001. We cannot be certain that this application will be approved. We
receive a percentage of the net revenues that Hoffmann-La Roche generates from
sales of Tamiflu. See "Collaborative Relationships--Hoffmann-La Roche."

                                       3

    There are several products that have been available to treat the flu for
some time, but they have not been shown to be as effective or as safe as
neuraminidase inhibitors. Relenza, an anti-flu drug sold by GlaxoSmithKline, is
the only other neuraminidase inhibitor that has been approved by the FDA. This
drug, which is delivered as an inhaled powder, is direct and significant
competition for Tamiflu. Tamiflu currently is the only FDA-approved
neuraminidase inhibitor that is available in a pill and we believe that this
method of delivery gives Tamiflu a competitive advantage over Relenza. We are
aware, however, that Johnson & Johnson is developing a neuraminidase inhibitor
that has the potential to be delivered as a once-daily pill (Tamiflu is taken
twice daily for treatment of flu). When and if Johnson & Johnson receives
approval for this product, it will also be direct and significant competition
for Tamiflu. See "Competition."

    Tamiflu is not being marketed as an alternative to influenza vaccinations.
Influenza vaccinations will remain the most effective method of preventing the
flu.

VISTIDE

    VISTIDE is an antiviral medication for the treatment of CMV retinitis in
patients with AIDS. CMV retinitis is a condition caused by a viral infection
that is characterized by lesions that form on a patient's retina. This condition
affects persons with weakened immune systems and is most common in patients with
AIDS. If left untreated, CMV retinitis can lead to blindness. VISTIDE was
approved by the FDA in June 1996 and by the European regulatory authorities in
May 1997 based on clinical trials demonstrating that the drug delays the
progression of CMV retinitis lesions in newly diagnosed patients and in
previously treated patients who had failed other therapies.

    We sell VISTIDE in the U.S. through our sales force of 30 therapeutic
specialists and five regional directors. These specialists promote VISTIDE
through direct contact with physicians, hospitals, clinics, and other healthcare
providers who are involved in the treatment of patients with CMV retinitis. We
sell VISTIDE to wholesalers and specialty distributors who sell the product in
the U.S. to healthcare providers. See "Marketing and Sales." Outside the U.S.,
Pharmacia Corporation has the exclusive right to sell VISTIDE. VISTIDE is
approved for sale in all 15 countries of the European Union as well as in
several other countries throughout the world. Pharmacia Corporation pays us a
percentage of revenues it generates from sales of VISTIDE. See "Collaborative
Relationships--Pharmacia Corporation."

    There are several other products that compete with VISTIDE. Ganciclovir,
which is sold by Roche Laboratories, is the most widely prescribed drug
treatment for CMV retinitis. Ganciclovir is available in injectable and oral
formulations, and the oral formulation is approved for both preventing and
treating CMV retinitis. There is a device that is marketed by Bausch & Lomb
Incorporated that is implanted in a patient's infected eye and releases
ganciclovir directly to the infected area. In addition, AstraZeneca sells an
injectable drug for the treatment of CMV retinitis called foscarnet, and
CibaVision sells a CMV retinitis drug called fomivirsen, that is injected
directly into the eye. We believe that sales of VISTIDE will be lower in future
periods because the CMV retinitis market continues to decline due to the success
of combination antiretroviral drug therapies in treating HIV-infected patients.

    The most significant side effect associated with the use of VISTIDE is
kidney toxicity. Due to this side effect, certain precautions must be taken when
VISTIDE is used, and in certain circumstances VISTIDE may not be used. Each time
VISTIDE is given to a patient, the patient must first be tested for warning
signs of kidney toxicity. If the patient does not have warning signs of kidney
toxicity, VISTIDE may be given to that patient but only in combination with
certain solutions that reduce the possibility of kidney toxicity. In addition,
VISTIDE may not be given to patients who are receiving other drugs that can
cause kidney toxicity. Patients who are receiving other drugs that are known to
cause kidney toxicity must discontinue taking those drugs and then wait
seven days before using VISTIDE. In certain animal studies, cidofovir, the
active ingredient in VISTIDE, has caused cancer. These side effects and dosing
limitations are a competitive disadvantage of VISTIDE.

                                       4

    We have an exclusive, worldwide license to patent rights and related
technology for cidofovir from IOCB/REGA, and are obligated to pay 5% of net
revenues from sales of VISTIDE or any other products containing cidofovir to
IOCB/REGA. See "Collaborative Relationships--IOCB/REGA."

DAUNOXOME

    DaunoXome is a liposomal formulation of the anticancer agent daunorubicin.
We have received approval to sell DaunoXome in the U.S. and 24 other countries
as a first line therapy for treating patients who suffer from HIV-associated
Kaposi's sarcoma. Kaposi's sarcoma is a disease characterized by widely
disseminated lesions in the skin, mucous membranes, lymph nodes and viscera that
can be life threatening for patients suffering from AIDS.

    DaunoXome uses our proprietary liposomal technology to deliver safer and
more effective doses of daunorubicin to the disease site. Studies have shown
that DaunoXome may actually locate and accumulate in the patient's tumor and
allow a patient to receive higher concentrations of daunorubicin at the disease
site than could be obtained with an equivalent dose of non-liposomal
daunorubicin.

    DaunoXome is marketed in the U.S. and abroad by our therapeutic specialists
and, in certain foreign countries, by distributors. We believe that sales of
DaunoXome will be lower in future periods because the number of HIV-infected
patients who develop Kaposi's sarcoma has declined significantly in recent years
due to the success of combination therapies in treating HIV patients.

OUR PRODUCTS IN LATE STAGE CLINICAL TRIALS

    We have two product candidates that we are developing in large, late-stage
human clinical trials: tenofovir DF for treating patients with HIV and adefovir
dipivoxil for treating patients with HBV. If these Phase III clinical trials are
successful, we will apply to the FDA and other foreign regulatory agencies for
approval to sell these drugs. Based on results to date, we expect to apply to
the FDA and the European Union for approval of tenofovir DF in mid-2001. In
addition, in January 2001 we acquired exclusive rights to market Cidecin-TM- in
16 European countries. Cidecin is an antibacterial that is being developed by
Cubist Pharmaceuticals, Inc. in Phase II and Phase III clinical trials. If
Cubist's Phase III clinical trials are successful, we will apply for regulatory
approval of Cidecin in Europe. We cannot, however, determine with any certainty
if any of these clinical trials will be successful and, if they are successful,
whether or not the FDA or other regulatory agencies will approve any of these
drugs for marketing.

TENOFOVIR DISOPROXIL FUMARATE

    Tenofovir DF is a nucleotide analogue reverse transcriptase inhibitor given
once daily as part of combination therapy to treat HIV infection.

    In February 2001, we announced preliminary 24-week data from study 907, a
48-week Phase III clinical trial evaluating a 300 mg dose of tenofovir DF as a
component of combination therapy in 552 treatment-experienced patients at 70
sites in the U.S., Europe and Australia. We designed study 907 to provide us
with conclusive data on the safety and efficacy of this dosage of tenofovir DF.
In this study, patients were randomly divided into two groups: one group of
patients who had tenofovir DF added to their existing combination therapy
(two-thirds of enrolled patients), and one group of patients who were given
placebo in addition to their existing therapy (one-third of enrolled patients).
These results suggest that, following 24 weeks of treatment:

    - Tenofovir DF reduced patients' HIV viral loads by an average of
      approximately 75% (-.61 log(10)), a primary endpoint of this trial.

    - Tenofovir DF suppressed HIV viral loads to undetectable levels in
      approximately 45% of patients, compared to 13% of patients who received
      placebo.

                                       5

    - Tenofovir DF increased patients' CD4 cell counts while patients who
      received placebo had their CD4 cell counts decrease. An increase in CD4
      cell count is an important indication that an HIV drug is improving a
      patient's immune system.

    - The rate that patients discontinued the use of tenofovir DF (6%) was
      equivalent to the discontinuation rate for placebo.

    - Tenofovir DF did not cause a significant increase of serious side effects
      relative to placebo.

    In September 2000, we presented the results from a 48-week Phase II dose
ranging clinical trial of tenofovir DF in 189 treatment-experienced patients. In
this study, patients received one of three doses of tenofovir DF (300 mg, 150 mg
or 75 mg) or placebo, in addition to their existing combination therapy. At week
24, patients receiving placebo were switched to the 300 mg dose. This trial
showed that, in this patient population, following 24 weeks of treatment, higher
doses of tenofovir DF were associated with lower levels of HIV compared to
placebo and that at week 48, higher doses of tenofovir DF were associated with
lower levels of HIV compared to baseline. At each measurement point, the
greatest reduction was observed in the 300 mg group. The study also showed that
48 weeks of dosing with tenofovir DF did not result in an increase of serious
adverse events.

    These preliminary Phase III results, combined with our completed Phase II
results, support our belief that tenofovir DF can be an important treatment
option for these difficult to treat patients. We expect that data from these
trials, together with data from other clinical trials, will form the basis of
marketing applications for treating this patient population that we expect to
file in the U.S. and Europe in mid-2001.

    In January 2001, we completed enrollment of 601 patients in study 903, a
Phase III clinical trial to evaluate tenofovir DF for treating patients who have
not had prior HIV therapy. This study will compare the safety and efficacy of
treatment with tenofovir DF in combination with lamivudine (3TC) and efavirenz
to the safety and efficacy of treatment with stavudine (d4T), lamivudine and
efavirenz. This study will help us determine the potential role of tenofovir DF
for treating this patient population and, if successful, form the basis of a
supplemental marketing application for this use.

    We cannot be certain that the data obtained from our clinical trials will
support regulatory approval of tenofovir DF as the FDA and other regulatory
authorities could reject our marketing application for a number of reasons
including if they require a higher level of safety or efficacy or more data than
we anticipated, or if they disagree with our design or interpretation of these
trials.

    One of the major challenges in treating HIV-infected patients is drug
resistance. Because many of the existing therapies for treating HIV and AIDS
rely on similar drug processes, patients who have developed resistance to one
drug often develop resistance to other drugs within its class. We believe that
tenofovir DF, if eventually approved by the FDA, could be a very important drug
for treatment-experienced patients because available data have shown that
patients do not develop rapid resistance to tenofovir DF and that tenofovir DF
is effective in treating patients who have developed resistance to other
therapies. We cannot be certain, however, that the resistance data we may obtain
upon completion of our Phase III clinical trials will show similar resistance
characteristics to the preliminary data from study 907 or the data we obtained
from the more limited Phase II clinical trials.

    Another major concern in HIV treatment is convenience of dosing. The
combination therapies that are having a very positive impact on the health of
HIV-infected patients require these patients to take numerous different drugs.
Some of these drugs require multiple doses every day and many have timing
restrictions. This results not only in inconvenience for patients but also
contributes to patients missing doses or not adhering to their therapy. We
believe that tenofovir DF can be administered as a once-daily oral pill on a
schedule that may be appealing to HIV patients and their physicians. The low
discontinuation rate observed for tenofovir DF in study 907 supports this
belief.

                                       6

    In December 1999, we discontinued developing adefovir dipivoxil for treating
HIV-infected patients. This decision followed a recommendation by an FDA
Advisory Panel not to approve a 60 mg dose of adefovir dipivoxil for treating
HIV due primarily to concerns of kidney toxicity that developed late in the
trials, as well as a desire for additional evidence of treatment benefits.
Tenofovir DF has a structure and activity similar to adefovir dipivoxil. While
tenofovir DF has not been associated with kidney toxicity and has shown superior
treatment benefits in our clinical trials, we cannot be certain that the kidney
toxicity issues that occurred in the later stages of the Phase III clinical
trials for adefovir dipivoxil will not arise in the clinical trials for
tenofovir DF or that we will achieve adequate treatment benefits.

    We have an exclusive, worldwide license to patent rights and related
technology for tenofovir DF from IOCB/REGA and would be obligated to pay 3% of
any net revenues from sales of tenofovir DF to IOCB/REGA in countries where the
product has patent protection. See "Collaborative Relationships--IOCB/REGA."

ADEFOVIR DIPIVOXIL FOR HEPATITIS B

    Hepatitis B is a highly contagious viral infection that can cause acute
liver failure. Some patients develop a chronic infection which over many years
can lead to complications (such as cirrhosis and cancer) that can lead to death.
The World Health Organization estimates that there are approximately
350 million people worldwide who are infected with chronic HBV, including
1.25 million people in the United States. Adefovir dipivoxil is a nucleotide
analogue reverse transcriptase inhibitor. Adefovir dipivoxil disables the HBV
virus by interfering with the activity of an enzyme known as HBV polymerase
which is necessary for the HBV virus to replicate. In randomized, double-blind,
placebo-controlled Phase II clinical trials, a 30 mg dose of adefovir dipivoxil
reduced the median HBV viral load by over 99% (approximately 4 log(10)) after
twelve weeks of treatment.

    We have two separate Phase III clinical trials to evaluate the safety and
effectiveness of adefovir dipivoxil pills for treating patients with chronic HBV
infection. Both of our Phase III trials were designed as randomized,
double-blind, placebo-controlled studies and are being conducted at clinical
sites in the U.S., Canada, Europe, Australia and Southeast Asia. One of these
trials, which is fully enrolled with 515 patients, is evaluating adefovir
dipivoxil once daily at 10 mg or 30 mg for treating patients who test positive
for the HBV "e" antigen, the most common type of hepatitis. The other trial,
which is fully enrolled with 185 patients, is evaluating adefovir dipivoxil once
daily at 10 mg for treating patients with a type of HBV known as "precore mutant
hepatitis B." Precore mutant HBV is most common in countries of Southeast Asia
and the Mediterranean.

    A vaccine is available that can prevent the transmission of HBV, but it does
not cure patients who become chronically infected with the virus. It is expected
that as this vaccine becomes more widely available, the incidence of HBV will
decrease. Existing therapies for treating patients who are infected with HBV
include the drugs Epivir-HBV (a form of lamivudine that is sold by
GlaxoSmithKline) and Intron-A (a form of interferon alpha 2b that is sold by
Schering Plough). Epivir-HBV is an orally-administered drug that prevents the
virus from replicating in patients. Intron-A is an injectable drug that can
provide a reduction in the amount of virus in the blood of some patients, but is
often associated with side effects. We believe that if the FDA approves adefovir
dipivoxil, Epivir-HBV would be its most significant competition. Of course we
cannot be certain that adefovir dipivoxil will be approved for the treatment of
HBV and we cannot determine if adefovir dipivoxil would be competitive with
Epivir-HBV. See "Competition."

    As is the case with HIV, drug resistance is a serious problem with drugs
that treat HBV. Available data to date has not demonstrated a
resistance-mutation associated with adefovir dipivoxil in HBV suggesting that
the development of resistance to adefovir dipivoxil in HBV patients may be slow
and infrequent. We believe that the resistance profile of adefovir dipivoxil
could make adefovir dipivoxil an

                                       7

important drug for treating chronic HBV infection. We cannot be certain,
however, that the resistance data we may obtain from the much broader and longer
term Phase III clinical trials on adefovir dipivoxil will also show these
resistance characteristics.

    As described above under tenofovir DF, we discontinued development of 60 mg
doses of adefovir dipivoxil for treatment of HIV due to safety and benefit
concerns from the FDA. Studies have shown that adefovir dipivoxil is
significantly more effective against the HBV virus than against the HIV virus,
allowing us to use lower doses that have not shown significant kidney toxicity
in our clinical trials to date. We have limited clinical data on the 10 mg dose
of adefovir dipivoxil that we obtained from open label safety studies of
adefovir dipivoxil in patients with lamivudine resistant HBV who are either pre
and post liver transplant patients or who are co-infected HIV/HBV. These studies
have demonstrated a decrease in HBV viral load that was similar to what has been
seen with the 30 mg dose in phase II studies. We cannot be certain that the
broad, long term studies of adefovir dipivoxil at 10 mg and 30 mg doses will
demonstrate, to the satisfaction of the FDA and other regulatory agencies, that
adefovir dipivoxil can be a safe and effective treatment for chronic HBV.

    Hepatitis B is most common in China and Southeast Asian countries. In
December 2000, we received approval and were granted a clinical trials permit to
initiate Phase I clinical trials in China. We expect to commence these clinical
trials in 2001. We have limited regulatory expertise and no manufacturing or
marketing capacity in China and Southeast Asia. Therefore, we will rely on the
assistance of third parties for these activities. It is also difficult to
protect patents in these countries and we could be adversely affected if we were
unable to obtain adequate patent protection for adefovir dipivoxil in China and
Southeast Asia. As part of our approval to commence Phase I clinical trials in
China, adefovir dipivoxil was granted Class I designation which would give us
12 years of market exclusivity for adefovir dipivoxil following any regulatory
approval in China.

    We have an exclusive, worldwide license to patent rights and related
technology for adefovir dipivoxil from IOCB/REGA, and would be obligated to pay
3% of any net revenues from sales of adefovir dipivoxil to IOCB/REGA in
countries where the product has patent protection. See "Collaborative
Relationships--IOCB/REGA."

CIDECIN

    Cidecin (daptomycin for injection) is an investigational antibacterial
compound being developed by Cubist Pharmaceuticals, Inc. In January 2001, we
entered into an agreement with Cubist granting us exclusive commercial rights to
Cidecin in 16 European countries. Under this arrangement, Cubist is responsible
for the ongoing clinical trials for the product and we are responsible for
European regulatory filings. We believe that this arrangement represents a
strategic opportunity for us because Cidecin falls within our therapeutic focus
of anti-infectives and is a product that, if approved, could be sold through our
existing European sales and marketing infrastructure.

    Laboratory tests have suggested that Cidecin may be effective in rapidly
killing most Gram-positive bacteria, including those that have become resistant
to current therapies. Gram-positive bacterial infections include complicated
skin and soft tissue infections, bacteremia, endocarditis or infection of the
valves of the heart, complicated urinary tract infections, pneumonia and
osteomyelitis or infection of bone or bone marrow. As is the case with HIV and
HBV, resistance to existing anti-bacterial therapy has become a significant
problem in treating these infections. If these laboratory tests are confirmed in
clinical trials, Cidecin could be a very useful drug for treating these serious
infections. There can be no assurance, however, that these results will be
confirmed in clinical trials.

    Cubist is currently evaluating Cidecin in multiple Phase III trials for the
treatment of complicated skin and soft tissue infection and community-acquired
pneumonia. If Cubist obtains data from these Phase III clinical trials that show
appropriate safety and efficacy of Cidecin for these uses, we would

                                       8

file for marketing authorization in the European Union and, if the application
is approved, would sell Cidecin through our European sales and marketing
infrastructure.

    On March 14, 2001, Cubist announced preliminary data from study 9901. Study
9901 is a pivotal phase III clinical trial evaluating Cidecin for complicated
skin and soft tissue infection. According to this announcement, a primary
endpoint of this trial, demonstrating equivalency to comparable agents, was
achieved.

    We cannot accurately predict the outcome of these clinical trials. If the
trials being conducted by Cubist are not successful, we may be prevented from
obtaining regulatory approval of Cidecin in Europe or may elect to conduct
additional trials ourselves or together with Cubist and pay for all or a portion
of the costs associated with those trials. Cubist does not have an obligation to
conduct or pay for additional clinical trials.

    Cubist is also evaluating Cidecin in a Phase III clinical trial for the
treatment of complicated urinary tract infection and an open-label Phase II
clinical trial for the treatment of bacteremia, and may evaluate Cidecin for the
treatment of endocarditis and other infections. Our agreement with Cubist does
not require Cubist to continue or complete these trials but, if Cubist
successfully completes Phase III clinical trials for these uses, we would seek
regulatory approval for these uses in our territory and would have exclusive
commercial rights to these indications in our territory. We cannot predict the
outcome of these clinical trials or if Cubist will evaluate Cidecin for
additional uses.

    Cubist is also developing an oral formulation of daptomycin. Our agreement
with Cubist would give us exclusive commercial rights in our territory to any
oral formulation of daptomycin that is developed by Cubist.

    We are required to pay milestone payments to Cubist based upon certain
development goals relating to the clinical development and regulatory approval
of Cidecin and any oral formulation of daptomycin. We are also required to pay
royalties to Cubist based upon our sales of Cidecin and any oral formulation of
daptomycin. See "Collaborative Relationships--Cubist."

OUR ONCOLOGY PORTFOLIO

    We are developing three investigational compounds in our oncology program.
One of these product candidates, NX 211, is in Phase II clinical trials, and the
other two product candidates, GS 7904L and GS 7836, are in preclinical
development.

NX 211

    NX 211 is a liposomal formulation of lurtotecan, an anti-cancer compound
developed by GlaxoSmithKline. GlaxoSmithKline granted to us the exclusive right
to develop and commercialize NX 211. See "Collaborative
Relationships--GlaxoSmithKline--NX 211."

    Prior to granting us these development and commercialization rights,
GlaxoSmithKline conducted Phase II clinical trials on non-liposomal lurtotecan
as a treatment for various forms of cancer. These Phase II clinical trials
showed that lurtotecan has anti-cancer activity but we believe that
GlaxoSmithKline did not continue pursuing development of non-liposomal
lurtotecan because they were not convinced that these Phase II clinical trials
showed sufficient treatment benefits at safe doses when compared to other
available anti-cancer agents. We entered into the development and
commercialization relationship with GlaxoSmithKline because we believe that by
delivering lurtotecan in a liposome, we may be able to increase the treatment
benefits of lurtotecan and give patients doses that are safe, effective and
convenient.

    Lurtotecan is in a class of compounds called camptothecins. These compounds
work by disrupting a cell's ability to use topoisomerase I, an enzyme that is
required for cells to replicate. Studies show

                                       9

that the ability of these compounds to kill and stop the spread of cancer cells
is directly related to the length of time that cancer cells are exposed to the
compound. We believe that by formulating lurtotecan in a liposome, we may be
able to increase its time of exposure and its treatment benefits.

    In 2000, we completed three Phase I single agent clinical trials that
evaluated different doses and treatment schedules of NX 211. These studies,
which involved 108 patients, established a maximum tolerated dose for NX 211
with hematological toxicity as the dose limiting factor. We also observed
anti-tumor or biological activity in seven of these difficult to treat patients.
We cannot be certain that the anti-tumor activity was related to NX 211 since
these trials were not designed to evaluate efficacy. One additional Phase I
single agent trial is ongoing. NX211 is also being evaluated in Phase I trials
in combination with another cancer therapy.

    Based on these Phase I results, we commenced a Phase II clinical program
evaluating NX 211 for treating patients with ovarian cancer. In November 2000,
two ovarian trials were initiated: one in patients who had failed first-line
chemotherapy and one in patients resistant to topotecan. In addition, we
initiated a separate Phase II clinical trial in December 2000 that will evaluate
NX 211 for the treatment of patients with small-cell lung cancer after failure
of initial therapy. We also expect to evaluate NX 211 in other cancer types. We
cannot accurately predict the outcome of these clinical trials.

    We are required to pay milestone payments to GlaxoSmithKline if we achieve
certain development goals related to the clinical development and regulatory
approval of NX 211. We are not required to pay any royalties or other payments
to GlaxoSmithKline based upon any sales of NX 211. See "Collaborative
Relationships--GlaxoSmithKline--NX 211."

GS 7904L

    GS 7904L is also a liposomal formulation of a compound that was developed by
GlaxoSmithKline for the treatment of cancer. We acquired exclusive worldwide
rights to develop and commercialize this compound from GlaxoSmithKline in
December 2000.

    Prior to our acquiring these rights, GlaxoSmithKline had discontinued
development of this compound during Phase I clinical trials. As is the case with
NX 211, we hope that by delivering the compound using our proprietary liposomal
technology, we will be able to improve the safety and efficacy profile of this
compound.

    This investigational compound is part of a class of compounds known as
thymidilate synthase inhibitors, or TS inhibitors. TS inhibitors act by
preventing the production of the thymidilate synthase enzyme, an enzyme that is
necessary for cell growth. This enzyme is expressed at significantly higher
levels in tumor cells than in healthy cells making it an appropriate target for
cancer therapy. Other TS inhibitors that have been approved by regulatory
agencies are used for treating colorectal and breast cancer. Our preclinical
studies to date indicate that the liposomal formulation of the compound is
associated with significant tumor growth inhibition and may improve the safety
profile of the compound.

    If our preclinical studies are successful, we plan to begin Phase I human
clinical trials of GS 7904L in 2001. We cannot be certain that our preclinical
studies will be successful. Even if these preclinical studies are successful, we
cannot be certain that we will be able to submit an application to begin
clinical testing in 2001, or that if commenced, these clinical trials would be
successful.

    We are required to pay milestone payments to GlaxoSmithKline if we achieve
certain development goals relating to the clinical development and regulatory
approval of GS 7904L. We are also required to pay royalties to GlaxoSmithKline
based upon any sales of GS 7904L. See "Collaborative
Relationships--GlaxoSmithKline--GS 7904L."

                                       10

GS 7836

    Also in December 2000, we acquired exclusive, worldwide rights to GS 7836
(4'-thio-araC) from the Southern Research Institute, or SRI. We are evaluating
GS 7836 in preclinical studies for the potential treatment of cancer.

    GS 7836 is in a class of compounds called nucleoside analogs. It is believed
that nucleoside analogues inhibit tumor cell growth by preventing the
replication of DNA. FDA-approved drugs in this class have been used to treat
acute and chronic leukemias, pancreatic and non-small cell lung cancer. GS 7836
has demonstrated anti-cancer activity against solid tumors in preclinical
studies conducted by SRI and Gilead. We cannot be certain that our preclinical
studies will be successful.

    We are required to pay milestone payments to SRI if we achieve certain
development goals relating to the clinical development and regulatory approval
of GS 7836. We are also required to pay royalties to SRI based upon our sales of
GS 7836. See "Collaborative Relationships--Southern Research Institute."

OUR SCIENCE

    We have research scientists in Foster City and San Dimas, California, and
Boulder, Colorado engaged in the discovery and development of new molecules and
technologies that we hope will lead to new medicines and novel formulations of
existing drugs. Our therapeutic focus is in the areas of infectious diseases and
cancer.

NUCLEOTIDE ANALOGUES

    Our scientists are working with our proprietary nucleotide analogues to
develop treatments for viral infections. These compounds treat viral infections
by interfering with the activity of certain enzymes that are necessary for the
virus to grow. For example, VISTIDE, a nucleotide analogue of cytosine, inhibits
the activity of an enzyme in the cytomegalovirus that is essential for that
virus to spread. Tenofovir DF and adefovir dipivoxil are nucleotide analogues
that work by inhibiting the activity of reverse transcriptase, an enzyme
necessary for replication of the HIV virus (tenofovir DF) and the HBV virus
(adefovir dipivoxil). Other viruses we are seeking to treat using nucleotide
analogues include the herpes and pox viruses. We are also evaluating several
nucleotide analogues in animals for activity against cancer.

    We believe that small molecule nucleotide analogues can offer advantages as
therapeutics. These advantages include:

    - These molecules have demonstrated ability to work in both infected and
      uninfected cells. This could enable us to develop drugs that not only
      treat a patient who is infected with a virus but that can also prevent a
      healthy person from becoming infected in the first place; and

    - Drugs developed with these molecules have been shown to have treatment
      activity in a patient for longer periods of time than other available
      drugs. This could enable us to develop drugs that require less frequent
      dosing and are thus more convenient for patients.

    Given the complexity of drug development, we cannot be certain that any drug
candidates we develop with this science will have any or all of these
advantages. Even if we do develop drug candidates with some or each of these
advantages, the FDA and other regulatory agencies could reject marketing
approval of these drug candidates for other reasons, including safety and
benefit concerns.

LIPOSOMES

    We also have scientists who are focused on applying our proprietary
liposomal drug delivery technology to develop safer, more effective and more
convenient drugs. Liposomes are sub-microscopic

                                       11

structures made of phospholipids, the basic components of human cell walls. They
are hollow spheres into which drugs can be packed. We believe that we can
influence the way compounds are released and distributed in the body by placing
them in liposomes. This can, in turn, improve the safety and treatment benefits
of such compounds. For example, we developed AmBisome by incorporating
amphotericin B in a liposome. Pre-clinical studies have shown that AmBisome
delivers amphotericin B in a manner that results in fewer side effects and
improved treatment benefits over conventional amphotericin B, including
concentrating the drug at the site of the infection, extending the time the drug
remains in the blood stream to prolong the therapeutic effect and reducing
kidney toxicity and injection related reactions.

    Our current strategy is to use our liposomal technology with compounds we
develop internally and to identify appropriate compounds developed by third
parties for use with this technology. Compounds developed by third parties that
are appropriate for our technology include those that, like amphotericin B, have
proven therapeutic benefits but suffer from significant side effects, or that
suffer from dosing and administration problems. We believe that we can use our
liposomal technology to improve the safety of these drugs while maintaining or
even improving their therapeutic benefits.

    We have identified certain generic compounds (compounds that are not
protected by patents) and proprietary compounds owned by third parties that may
benefit substantially from our liposomal technology, and we have begun
formulation studies for these compounds. In addition, we have discussed, and
will continue to discuss, collaborative relationships with other companies to
develop liposomal formulations of their compounds.

HIV PROTEASE INHIBITORS

    We are evaluating a number of small molecule compounds known as "protease
inhibitors" for the treatment of HIV. Protease inhibitors act by interfering
with the activity of protease, an enzyme that, like reverse transcriptase, is
necessary for replication of the HIV virus. We have conducted a number of
preclinical experiments on these compounds and have demonstrated that they have
potent antiviral activity. Our scientists are trying to increase the safety and
treatment benefits of and to reduce resistance concerns with these compounds
before conducting further preclinical development.

ADENOSINE RECEPTOR REGULATORS

    We are working with the National Institute of Diabetes, Digestive and Kidney
Diseases at the National Institutes of Health (NIH) to study compounds known as
adenosine receptor agonists and antagonists for the treatment and prevention of
neurodegenerative disorders (disorders of the brain and upper spine) associated
with stroke. We also intend to evaluate the use of these compounds in
inflammatory and allergic conditions. NIH researchers have developed a number of
these compounds, some of which have shown therapeutic benefits in stroke.

DRUG DISCOVERY TECHNOLOGIES

    We have a technology that we call the "SELEX process" that is used to
identify potential drug candidates. This process works by identifying drug
compounds, known as "aptamers", that tend to bind to the molecule that is
causing the disease. Because these aptamers tend to bind to the disease
molecules, we believe that they can be effective for treating disease at
relatively low doses. NX 1838 is an example of an aptamer identified with the
SELEX process. See "Collaborative Relationships--EyeTech."

                                       12

MARKETING AND SALES

    We established a U.S. sales force of therapeutic specialists when we began
selling VISTIDE in 1996. As a result of our merger with NeXstar in July 1999, we
also have marketing subsidiaries in the United Kingdom, Germany, Italy, Spain,
France, Portugal and Australia and a marketing operation in Greece. Our sales
professionals in the U.S., Europe and Australia promote and sell AmBisome and
DaunoXome. AmBisome is also sold by Fujisawa in the U.S. (where we co-promote
the product) and in Canada. Pharmacia Corporation promotes and sells VISTIDE in
countries outside of the U.S. and Hoffmann-La Roche promotes and sells Tamiflu
everywhere it is sold. In March 2000, we entered into a promotion agreement with
The Virco Group. We amended this agreement in February, 2001. Under this
arrangement, our U.S. therapeutic specialists will promote Virco's HIV
resistance monitoring services to HIV-treating physicians through June 2001.

    Our U.S. sales force currently consists of approximately 30 sales
representatives and five regional directors who promote VISTIDE to physicians,
hospitals, clinics, and other healthcare providers who treat AIDS patients,
AmBisome to infectious disease specialists, hospitals, home health care
providers and cancer specialists, and DaunoXome to cancer specialists and
hospitals. The U.S. sales force is supported by a managed care/national accounts
team and by a marketing and sales support staff of approximately 20 people based
at our headquarters in Foster City, California.

    Our international marketing subsidiaries are each headed by a general
manager who oversees the operations in the market(s) served by that subsidiary.
We currently have approximately 140 people located mainly in Europe, including
medical, financial and human resources personnel, who support our international
sales and marketing operations. These subsidiaries also assist in obtaining
regulatory approvals in the countries where they are located.

    In the U.S., we sell VISTIDE and DaunoXome to wholesalers and specialty
distributors who, in turn, sell the products to physicians, hospitals, clinics,
pharmacies and other healthcare providers. Outside of the U.S., we have
agreements with third-party distributors, including distributors in certain of
the countries where we have marketing operations, to promote, sell and
distribute AmBisome and DaunoXome. These international distribution agreements
generally provide that the distributor has the exclusive right to sell AmBisome
and DaunoXome in a particular country or several countries for a specified
period of time.

    If tenofovir DF is approved for treatment of HIV, a larger sales force and
additional marketing resources would be required in the U.S. and Europe to
expand our coverage of healthcare professionals treating HIV patients. It is our
current intention to retain the commercial rights to adefovir dipivoxil for HBV
in the U.S. and Europe and sell it through marketing partners or distributors in
Asia and the rest of the world. If we do retain significant commercial rights to
adefovir dipivoxil for HBV and the product is approved, we would need to
increase our sales force in the U.S. and Europe and use additional marketing
resources to sell this product. If Cidecin is approved for marketing in Europe,
we believe that given the profile of the product and its target market, our
existing sales force in Europe will be sufficient to market Cidecin.

    VISTIDE is returnable in its original, unopened container up to one year
beyond the expiration date or, if damaged when received by the customer. Our
customers may return AmBisome or DaunoXome if the shelf life has expired or if
the product is damaged or defective when it is received by the customer.
AmBisome has an approved shelf life of 36 months in the U.S. and 30 months in
most European countries. DaunoXome has a shelf life of 52 weeks in the U.S. and
most European countries. Additionally, certain governmental agency customers are
entitled to discounts, and we are required to provide rebates under state
Medicaid programs. To date, returns, rebates and discounts have not been
material. Fujisawa establishes the return policy for AmBisome in North America,
and Hoffmann-La Roche establishes the return policy for Tamiflu.

                                       13

COLLABORATIVE RELATIONSHIPS

    As part of our business strategy, we establish collaborations with other
companies to assist in the clinical development and/or commercialization of
certain of our products and product candidates and to provide support for our
research programs. We also evaluate opportunities for acquiring from other
companies products or rights to products and technologies that are complementary
to our business. Our existing collaborative relationships are as follows:

HOFFMANN-LA ROCHE

    In September 1996, we entered into a collaboration agreement with
Hoffmann-La Roche to develop and commercialize therapies to treat and prevent
the flu. Under this agreement, we granted Hoffmann-La Roche exclusive worldwide
rights to all of our proprietary influenza neuraminidase inhibitors, including
Tamiflu. In October 1999, the FDA approved Tamiflu for marketing and in
November 1999, Hoffmann-La Roche began selling Tamiflu.

    As of December 31, 2000, we have received license fees and milestone
payments from Hoffmann-La Roche totaling $39 million relating to the execution
of this agreement and to regulatory filings and approvals for Tamiflu.
Hoffmann-La Roche also funded all of the research and development costs for
Tamiflu, including reimbursement to us of $28 million for the period from
January 1, 1997 through December 31, 2000. In addition, under this agreement:

    - Hoffmann-La Roche is responsible for pricing, promoting and selling
      Tamiflu on a worldwide basis;

    - Hoffmann-La Roche pays us a percentage of its net revenues from sales of
      Tamiflu. In certain circumstances, the amount that Hoffmann-La Roche pays
      to us may be reduced, for example, if the cost of materials they use to
      manufacture Tamiflu increases. We receive payments and recognize revenue
      from Hoffmann-La Roche in the quarter following the quarter when the sales
      were made; and

    - Hoffmann-La Roche will make milestone payments to us if and when Tamiflu
      is approved in Europe.

    The agreement with Hoffman-La Roche terminates on a country-by-country basis
after the later of:

    - the expiration of patent coverage for Tamiflu; or

    - ten years from first commercial sale.

    Hoffmann-La Roche has the right to terminate the agreement in its entirety
or on a country-by-country basis prior to expiration at any time upon 12 months
notice.

FUJISAWA

    In 1991, we entered into an agreement with Fujisawa providing that:

    - We have the exclusive right to promote and sell AmBisome in all countries,
      except the U.S. and Canada;

    - Fujisawa has the exclusive right to promote and sell AmBisome in Canada;

    - We have the right to co-promote AmBisome with Fujisawa in the U.S., where
      Fujisawa has primary responsibility for promoting and selling AmBisome;

    - We receive approximately 17% of the net revenues from sales of AmBisome in
      the U.S. for our co-promotion efforts;

                                       14

    - We receive payments and recognize revenue from Fujisawa in the month
      following the month when Fujisawa's sales are made;

    - We would be required to pay Fujisawa 4% of our revenues in connection with
      sales of AmBisome in significant Asian markets, including Japan, Korea,
      Taiwan, China and India; and

    - We manufacture AmBisome for all sales and Fujisawa purchases AmBisome from
      us for sale in the U.S. at a price equal to our cost to manufacture the
      product and for sale in Canada at that cost plus a specified percentage.

    Our agreement with Fujisawa terminates when the last patent covering
AmBisome in the U.S. or Japan expires.

IOCB/REGA

    In 1991 and 1992, we entered into agreements with IOCB/REGA relating to
nucleotide compounds discovered at these institutions. In December 2000, we paid
IOCB/REGA $11 million to reduce the royalties payable upon any sales of
tenofovir DF and adefovir dipivoxil by 2% to a royalty rate of 3%. Under these
agreements and amendments to these agreements:

    - We received from IOCB/REGA the exclusive right to manufacture, use and
      sell the nucleotide compounds covered by these agreements;

    - In countries where there is patent protection, we are required to pay to
      IOCB/REGA 3% of the net revenues generated from any sales of tenofovir DF
      and adefovir dipivoxil, and 5% of any net revenues generated from sales of
      VISTIDE and any other products containing these compounds, subject to
      minimum royalty payments; and

    - In countries where there is no patent protection, we are not required to
      pay royalties to IOCB/ REGA for sales of tenofovir DF and adefovir
      dipivoxil and are required to pay 2.5% of any net revenues generated from
      sales of VISTIDE and any other products containing these compounds.

    We are currently making quarterly payments to IOCB/REGA based upon a
percentage of sales of VISTIDE and are obligated to pay additional amounts upon
any commercial sales of adefovir dipivoxil or tenofovir DF. We will amortize the
$11 million payment made in December 2000 over the estimated commercial lives of
tenofovir DF and adefovir dipivoxil, which will reduce any reported earnings on
these products.

    The agreements with IOCB/REGA terminate on a country-by-country basis after
the later of:

    - expiration of patent coverage for any product licensed under the
      agreements; or

    - ten years from first commercial sale.

    IOCB/REGA may terminate the licenses under these agreements for a particular
product in key markets if we do not make any sales of that product within
12 months after regulatory approval in those countries.

CUBIST

    In January 2001, we entered into an agreement with Cubist giving us
exclusive commercial rights in 16 European countries to all oral and injectable
formulations of Cubist's investigational antibacterial compound daptomycin.
These formulations include Cidecin, an intravenous formulation of daptomycin
currently in Phase III clinical trials for treatment of bacterial infections.
Under this agreement:

    - Cubist is required to complete ongoing clinical trials for Cidecin;

    - We are responsible for all regulatory filings for products in our
      territory;

                                       15

    - If Cidecin is approved for marketing in our territory, we are responsible
      for marketing Cidecin in our territory;

    - We paid an upfront fee to Cubist of $13 million at the time we signed this
      agreement and may be required to make additional payments to Cubist of up
      to $31 million if certain goals related to the clinical development and
      regulatory approval of Cidecin and an oral formulation of daptomycin are
      achieved;

    - We are required to pay to Cubist a percentage of our revenues from sales
      of products in our territory;

    - If Cubist desires to grant commercial rights to an oral or injectable
      daptomycin-related product in certain other countries including any
      country that joins the EU, Cubist must offer us such commercial rights on
      a priority basis; and

    - Cubist is obligated to continue the preclinical development of an oral
      formulation of daptomycin and would have an obligation to pursue clinical
      development of that formulation if appropriate.

    This agreement expires on a country by country basis with respect to each
product developed upon the later of:

    - Ten years after first commercial sale of such product in such country; or

    - The date that there is no patent coverage for such product.

GLAXOSMITHKLINE--NX 211

    In May 1998, we entered into agreements with GlaxoSmithKline giving us
rights to GlaxoSmithKline's proprietary compound lurtotecan and granting
GlaxoSmithKline rights to use our SELEX process to identify aptamers for
therapeutic uses. In December 2000, GlaxoSmithKline waived its right to
participate in the commercialization of NX 211 and its rights to royalties based
on any sales of NX 211 in exchange for our agreement to increase milestone
payments upon marketing approvals of NX 211.

    Under the agreement relating to lurtotecan, we are developing NX 211, a
liposomal formulation of lurtotecan. This agreement provides that:

    - We have the exclusive right to develop and commercialize NX 211; and

    - We may be required to make one time milestone payments to GlaxoSmithKline
      if we achieve certain goals related to the clinical development and
      regulatory approval of NX 211.

PHARMACIA CORPORATION

    In August 1996, we entered into an agreement with Pharmacia Corporation
relating to VISTIDE. Under this agreement we received $10 million on signing and
$10 million upon approval of VISTIDE for marketing in Europe. In addition, under
this agreement:

    - Pharmacia Corporation has the exclusive right to market and sell VISTIDE
      in all countries outside of the U.S. and a right of first negotiation for
      any competitive products we own;

    - We are responsible for maintaining the patents for cidofovir;

    - We are required to sell bulk cidofovir to Pharmacia Corporation;

    - Pharmacia Corporation will pay to us a percentage of its net sales of
      VISTIDE and any other products developed under the collaboration
      agreement. We receive payments and recognize revenue from Pharmacia
      Corporation in the quarter following the quarter when the sales were made;
      and

                                       16

    - Pharmacia Corporation holds 2,267,572 shares of our common stock that it
      purchased in connection with this agreement. Pharmacia Corporation may not
      sell their shares or acquire additional shares of our stock without our
      approval until June 2002.

    Our agreement with Pharmacia Corporation expires on a country-by-country
basis as patent coverage for VISTIDE expires or ten years from first commercial
sale of VISTIDE in countries where the product is not covered by a patent.

    In addition, Pharmacia Corporation may terminate the agreement:

    - upon six months notice; or

    - upon notice on a country-by-country basis, three months before applying
      for marketing approval of a competitive product.

GLAXOSMITHKLINE--GS 7904L

    In December 2000, we entered into an agreement with GlaxoSmithKline giving
us rights to GS 7904L, a novel anti-tumor compound. Under this agreement:

    - We have the exclusive worldwide right to develop and commercialize GS
      7904L for all indications, other than malaria;

    - We are developing GS 7904L in a liposome and are evaluating it in
      preclinical studies for oncology;

    - We paid an upfront fee to GlaxoSmithKline at the time we signed this
      agreement and may be required to make payments to GlaxoSmithKline if we
      achieve certain goals related to the clinical development and regulatory
      approval of GS 7904L; and

    - If we successfully commercialize the product, we would be required to pay
      to GlaxoSmithKline a percentage of our net sales.

    This agreement expires, on a country by country basis with respect to each
product developed upon the later of:

    - Ten years after first commercial sale of such product in such country; or

    - The date that there is no patent coverage for such product.

SOUTHERN RESEARCH INSTITUTE

    In December 2000, we entered into an agreement with SRI giving us rights to
GS 7836, a novel anti-tumor compound. Under this agreement:

    - We have the exclusive worldwide right to develop and commercialize GS 7836
      for all indications;

    - We are evaluating this compound in preclinical studies for oncology;

    - We paid an upfront fee to SRI at the time we signed this agreement and may
      be required to make payments to SRI if we achieve certain goals related to
      the clinical development and regulatory approval of GS 7836; and

    - If we successfully commercialize the product, we would be required to pay
      to SRI a percentage of our net sales.

    This agreement expires on a country by country basis with respect to each
product developed upon the later of:

    - Ten years after first commercial sale of such product in such country; or

    - The date that there is no patent coverage for such product.

                                       17

SUMITOMO PHARMACEUTICALS CO., LTD.

    In 1996, we entered into an agreement with Sumitomo Pharmaceuticals
Co., Ltd. that gave Sumitomo the exclusive right to develop and market AmBisome
in Japan. Sumitomo paid to us $7 million at the time we entered into this
agreement and $3 million in March 1998 when Sumitomo made a regulatory filing in
Japan. Under the terms of this agreement:

    - Sumitomo is required to make a payment of $4 million to us if AmBisome is
      approved for sale in Japan;

    - Sumitimo is required to pay to us a percentage of any revenue they
      generate from sales of AmBisome; and

    - If AmBisome is approved in Japan, we would manufacture AmBisome for sale
      by Sumitomo in Japan. The price that we would charge Sumitomo for the
      supply of AmBisome and the percentage of revenues that they would be
      required to pay to us would be determined by the price of AmBisome in
      Japan.

    This agreement terminates on the later of:

    - Ten years after Sumitomo begins selling AmBisome in Japan; or

    - The date the last patent for AmBisome in Japan expires.

EYETECH PHARMACEUTICALS

    In March 2000, we entered into an agreement with EyeTech
Pharmaceuticals, Inc. relating to NX 1838. We received a $7 million up-front
licensing fee from EyeTech upon execution of the agreement. Under the terms of
the agreement:

    - EyeTech received the exclusive right to develop and commercialize
      NX 1838;

    - We are entitled to additional cash payments from EyeTech of up to
      $25 million if and when EyeTech reaches certain NX 1838 development
      milestones; and

    - If the product is successfully commercialized, EyeTech will pay us
      royalties on worldwide sales of the product.

    As part of this transaction, we received a five-year warrant to purchase
833,333 shares of EyeTech series B convertible preferred stock, exercisable at a
price of $6.00 per share, the price at which the stock was issued to other
investors. As required by our license agreement with the University Technology
Corporation, we transferred 5% of this warrant to the University Technology
Corporation (the right to acquire 41,666 shares) and therefore currently hold a
warrant to purchase 791,667 shares. In addition, we agreed to provide clinical
supplies of the product to EyeTech for an initial one-year period.

    This agreement expires upon the later of:

    - Ten years after first commercial sale of any product developed; or

    - The date the last patent expires under the agreement.

VIRCO GROUP

    In March 2000, we entered into an agreement with the Virco Group relating to
Virco's HIV resistance monitoring services. Under this agreement:

    - We help to promote Virco's HIV resistance monitoring services; and

    - Virco pays to us a fixed fee for this promotion.

    This agreement will terminate in June 2001.

                                       18

PROLIGO L.L.C.

    We own a 49% interest in Proligo L.L.C., a company that manufactures
oligonucleotides. We also have agreements with Proligo and SKW Americas, Inc.
(the owner of the remaining 51% of Proligo) relating to the ownership,
operations and funding of Proligo. Under these agreements:

    - We contributed a total of $4.9 million to Proligo to fund its operations
      in late 1999 and early 2000 and we have no further funding obligations to
      Proligo;

    - SKW Americas will have the right to purchase our ownership interest in
      Proligo for a 90-day period beginning on July 29, 2001 for the amount they
      would have been required to pay for that interest had they purchased it in
      1999;

    - Over the next three years, SKW Americas is obligated to pay to us
      approximately $300,000; and

    - Proligo agreed to manufacture oligonucleotides for us and we would pay
      them an amount equal to their manufacturing cost plus a pre-determined
      percentage.

    Proligo will dissolve and any remaining assets will be distributed to its
owners in August 2028, unless the owners of Proligo at that time decide to
extend the term. The agreement relating to the manufacture and supply of
oligonucleotides expires in August 2008.

GLAXOSMITHKLINE--SELEX

    At the time we entered into the agreement with GlaxoSmithKline relating to
NX 211, we also entered into an agreement giving GlaxoSmithKline the
non-exclusive right to use our SELEX technology for five years to identify
aptamers.

    - GlaxoSmithKline would be required to pay to us a fee at the time we enter
      into an additional agreement;

    - GlaxoSmithKline would be required to make payments to us based on
      achieving certain goals relating to the regulatory approval of any product
      they develop based on the aptamer; and

    - GlaxoSmithKline would be required to pay to us a percentage of any
      revenues they may generate from sales of any product they develop based on
      the aptamer.

    This agreement terminates on May 27, 2003 except:

    - GlaxoSmithKline can extend this agreement for additional one year periods
      in which case GlaxoSmithKline would be required to pay to us an
      appropriate fee; and

    - GlaxoSmithKline can terminate this agreement earlier at any time on
      90 days notice to us.

SOMALOGIC, INC.

    In November 1999, we entered into an agreement with Somalogic, Inc., a
company formed by Larry Gold, the founder of NeXstar, relating to our SELEX
technology. Under this agreement:

    - We gave Somalogic the exclusive right to use our SELEX technology to make
      and sell in vitro diagnostic products (diagnostic products that are not
      used in a person or animal);

    - We assigned and sold to Somalogic certain patents and materials relating
      to in vitro diagnostics, including robotic SELEX machines;

    - We have the right to use the other drug discovery technology that is the
      subject of this agreement internally to study diseases and in our drug
      development and clinical trial programs; and

                                       19

    - Somalogic paid to us the first installment of a fee at the time we entered
      into the agreement and a second and final installment in November 2000.

    This agreement terminates on the later of:

    - On a country by country basis as patent coverage for this drug discovery
      technology expires; or

    - November 2024.

INTERNATIONAL DISTRIBUTION AGREEMENTS

    We have various agreements with distributors in Europe, Asia, South America,
the Middle East and Africa that grant these distributors the exclusive right to
sell AmBisome, and in some cases DaunoXome, in a particular country or countries
for a specified period of time. Most of these agreements also provide for
collaborative efforts between us and the distributor for obtaining regulatory
approval for the product in the particular country and for marketing the product
in the country. Most of these agreements establish a price that the distributor
must pay for our product and require us to deliver quantities of the product
ordered by the distributor.

ACADEMIC AND CONSULTING RELATIONSHIPS

    To supplement our research and development efforts, as part of our regular
business we enter into arrangements with universities and medical research
institutions. These arrangements often provide us with rights to patents, patent
applications and technology owned by these institutions in return for payments
and fees relating to our use of these rights.

UNIVERSITY TECHNOLOGY CORPORATION

    We have an ongoing collaborative arrangement relating to our SELEX
technology with the University Technology Corporation, a technology holding
company for the University of Colorado at Boulder. Under this arrangement:

    - The University of Colorado at Boulder has given us all of its present and
      future rights to:

       - inventions covered by patents and patent applications for SELEX
         technology;

       - improvements to SELEX technology it makes or discovers;

       - oligonucleotides or other molecules it makes using SELEX technology;

       - results of certain research; and

       - computer software related to SELEX technology.

    - We are required to pay to the University of Colorado at Boulder:

       - 2% of the revenues we generate from our sales of SELEX-derived
         products;

       - 15% of any amounts we receive from a third party that are based upon
         sales by those third parties of SELEX-derived products; and

       - 5% of other payments we receive from third parties as a result of
         certain arrangements we have with those third parties to develop and
         sell SELEX-derived products.

MANUFACTURING

AMBISOME AND DAUNOXOME

    We manufacture AmBisome and DaunoXome in commercial quantities in two
separate but adjacent facilities in San Dimas, California. The Medicines Control
Agency of the United Kingdom has

                                       20

approved both of these facilities to manufacture AmBisome and DaunoXome for
commercial use. The FDA has approved both these facilities to manufacture
AmBisome but only one of these facilities to manufacture DaunoXome for
distribution in the U.S. To import AmBisome and DaunoXome into the European
Union, we own a manufacturing facility in Dublin, Ireland where we perform
quality control testing, final labeling and packaging for the European Union and
elsewhere.

    We use commercially available materials and equipment to manufacture these
products. Currently, we obtain the amphotericin B, daunorubicin HCl and
cholesterol that we use to manufacture AmBisome and DaunoXome from single
approved suppliers.

    AmBisome is currently freeze dried at our San Dimas manufacturing facility
and is sold as a freeze-dried product. Given our demands and projections for
growth in AmBisome use, we are currently using two different third parties to
freeze dry some of the product and are evaluating the feasibility of installing
additional freeze drying capacity in San Dimas. If we are unable to locate
appropriate third parties or install and validate additional freeze drying
capacity in San Dimas, our ability to increase AmBisome sales would be
diminished. Manufacturing liposomal products is a particularly complex process
and any new liposomal product we develop will require unique and complex
variations in our manufacturing process.

ANTIVIRAL PRODUCTS

    We hire third parties to manufacture our antiviral drugs for clinical and
commercial purposes, including VISTIDE, adefovir dipivoxil tablets and tenofovir
DF tablets. Hoffmann-La Roche manufactures Tamiflu. We have no commercial-scale
manufacturing facilities for our antiviral products that are qualified under the
FDA's current Good Manufacturing Practices, and we have no current plans to
establish these facilities. In using third parties, we cannot be certain that
they will perform their obligations effectively and on a timely basis. If these
third parties do not perform effectively and timely, our clinical trials or
regulatory filings could be delayed or we could be unable to deliver our
products to customers on a timely basis, and this would adversely affect our
operating results.

    We have one supplier that has been approved by the FDA and EMEA to
manufacture the cidofovir used in VISTIDE and a single FDA approved supplier for
the final drug product, and we have submitted information on a second cidofovir
supplier to assure our supplies. We manufacture the active ingredient in
tenofovir DF in small quantities at our own facilities and in larger quantities
through two contract manufacturers. The final tenofovir DF and adefovir tablets
used in our clinical trials are manufactured at two contract manufacturing
sites. If manufacturing at any of these sites we use were interrupted for any
reason, our ability to complete our clinical trials or ship our products would
be impaired, and this would adversely affect us.

    For our antiviral products in particular, we will need to develop additional
manufacturing capabilities and establish additional third party suppliers in
order to manufacture sufficient quantities of our product candidates to complete
clinical trials and to manufacture sufficient quantities of any candidates that
are approved for commercial sale. If we are unable to develop manufacturing
capabilities internally or contract for large scale manufacturing with third
parties on acceptable terms for our antiviral products, our ability to conduct
large-scale clinical trials and meet customer demand for commercial products
would be adversely affected.

    We believe that the technology we use to manufacture our products and
compounds is proprietary. For our antiviral products, we have disclosed all
necessary aspects of this technology to contract manufacturers to enable them to
manufacture the products and compounds for us. We have agreements with these
manufacturers that are intended to restrict them from using or revealing this
technology, but we cannot be certain that these manufacturers will comply with
these restrictions. In addition, these manufacturers could develop their own
technology related to the work they perform for us that we may need to
manufacture our products or compounds. We could be required to enter into

                                       21

an agreement with that manufacturer if we wanted to use that technology
ourselves or allow another manufacturer to use that technology. The manufacturer
could refuse to allow us to use their technology or could demand terms to use
their technology that are not acceptable.

    We believe that we are in compliance with all material environmental
regulations related to the manufacture of our products.

PATENTS AND PROPRIETARY RIGHTS

    Patents and other proprietary rights are very important to our business. If
we have a properly designed and enforceable patent it can be more difficult for
our competitors to use our technology to create competitive products and more
difficult for our competitors to obtain a patent that prevents us from using
technology we create. As part of our business strategy, we actively seek patent
protection both in the U.S. and internationally and file additional patent
applications, when appropriate, to cover improvements in our compounds, products
and technology. We also rely on trade secrets, internal know-how, technological
innovations and agreements with third parties to develop, maintain and protect
our competitive position. Our ability to be competitive will depend on the
success of this strategy.

    We have a number of patents, patent applications and rights to patents
related to our compounds, products and technology, but we cannot be certain that
issued patents will be enforceable or provide adequate protection or that
pending patent applications will result in issued patents. The following table
shows the actual or estimated expiration dates in the U.S. and Europe for the
primary patents and for patents that may issue under pending applications that
cover the compounds in our marketed products and our product candidates:



                                     U.S. PATENT EXPIRATION   EUROPEAN PATENT EXPIRATION
                                     ----------------------   --------------------------
                                                        
PRODUCTS
AmBisome...........................           2016                       2008
Tamiflu............................           2016                       2016
VISTIDE............................           2010                       2012
DaunoXome..........................           2009                       2008

PRODUCT CANDIDATES
tenofovir DF.......................           2017                       2017*
adefovir dipivoxil.................           2014                       2011
NX 211.............................           2013*                      2012*
NX 1838............................           2012*                      2016*
GS 7904L...........................           2015                       2011
GS 7836............................           2019**                     2019**
Cidecin............................            N/A***                    2019**


------------------------

*   Applications for these patents are pending. If patents from these
    applications do not issue, we would not have patent protection through the
    dates indicated and would instead rely on other patents that expire earlier.
    For example, if this patent on tenofovir DF does not issue, we have patents
    that expire in 2006 and 2013 that provide protection.

**  These are method of use patents. In general, method of use patents do not
    provide the same level of protection as composition of matter patents.

*** We do not have commercial rights to Cidecin in the United States.

    Patents covering VISTIDE, tenofovir DF and adefovir dipivoxil, lurtotecan
(the active ingredient in NX 211), Cidecin, GS 7904L and GS 7836 are held by
third parties. We acquired exclusive rights to these patents in the agreements
we have with these parties. See "Collaborative Relationships." Patents do not
cover the active ingredients in AmBisome and DaunoXome. Instead, we hold patents
to the

                                       22

liposomal formulations of these compounds and also protect these formulations
through trade secrets. We do not have patent filings covering adefovir dipivoxil
in China or in certain other Asian countries, although we do have applications
pending in various Asian countries, including China, that relate to specific
forms and formulations of adefovir dipivoxil. Asia is a major market for HBV
therapies.

    We may obtain patents for our compounds many years before we obtain
marketing approval for them. This limits the time that we can prevent other
companies from developing these compounds and therefore reduces the value of the
product. However, we can apply for patent term extensions. For example,
extensions for the patents on VISTIDE have been applied for or granted in the
U.S. and a number of European countries, compensating in part for delays in
obtaining marketing approval. Similar patent term extensions may be available
for other products that we are developing, but we cannot be certain we will
obtain them.

    It is also very important that we do not infringe patents or proprietary
rights of others and that we do not violate the agreements that grant
proprietary rights to us. If we do infringe patents or violate these agreements,
we could be prevented from developing or selling products or from using the
processes covered by those patents or agreements, or we could be required to
obtain a license from the third party allowing us to use their technology. We
cannot be certain that, if required, we could obtain a license to any
third-party technology or that we could obtain one at a reasonable cost. If we
were not able to obtain a required license, we could be adversely affected.

    Patents relating to pharmaceutical, biopharmaceutical and biotechnology
products, compounds and processes such as those that cover our existing
compounds, products and processes and those that we will likely file in the
future, do not always provide complete or adequate protection. Future litigation
or reexamination proceedings regarding the enforcement or validity of our
existing patents or any future patents could invalidate our patents or
substantially reduce their protection. In addition, our pending patent
applications and patent applications filed by our collaborative partners may not
result in the issuance of any patents or may result in patents that do not
provide adequate protection. As a result, we may not be able to prevent third
parties from developing the same compounds and products that we are developing.
Also, in the U.S., patent applications are generally maintained in secrecy until
patents are issued so we cannot be certain that we are the inventor of
technologies covered by our pending patent applications or that we were the
first to file patent applications for those inventions.

    We also rely on unpatented trade secrets and improvements, unpatented
internal know-how and technological innovation. In particular, a great deal of
our liposomal manufacturing expertise, which is a key component of our liposomal
technology, is not covered by patents but is instead protected as a trade
secret. We protect these rights mainly through confidentiality agreements with
our corporate partners, employees, consultants and vendors. These agreements
provide that all confidential information developed or made known to an
individual during the course of their relationship with us will be kept
confidential and will not be used or disclosed to third parties except in
specified circumstances. In the case of employees, the agreements provide that
all inventions made by the individual while employed by us will be our exclusive
property. We cannot be certain that these parties will comply with these
confidentiality agreements, that we would have adequate remedies for any breach,
or that our trade secrets will not otherwise become known or be independently
discovered by our competitors. Under some of our research and development
agreements, inventions discovered in certain cases become jointly owned by us
and our corporate partner and in other cases become the exclusive property of
one of us. It can be difficult to determine who owns a particular invention, and
disputes could arise regarding those inventions.

                                       23

COMPETITION

    Our products and development programs target a number of diseases and
conditions, including fungal infections, viral infections and cancer. There are
many commercially available products for these diseases, and a large number of
companies and institutions are spending considerable amounts of money and
resources to develop additional products to treat these diseases. Our current
products compete with other available products based primarily on:

    - product performance;

    - safety;

    - tolerability;

    - acceptance by doctors;

    - patient compliance;

    - patent protection;

    - ease of use;

    - price;

    - insurance and other reimbursement coverage;

    - distribution;

    - marketing; and

    - adaptability to various modes of dosing.

    Any other products we market in the future will also compete with products
offered by our competitors. If our competitors introduce data that shows
improved characteristics of their products, improve or increase their marketing
efforts or simply lower the price of their products, sales of our products could
decrease. We also cannot be certain that any products we develop in the future
will compare favorably to products offered by our competitors or that our
existing or future products will compare favorably to any new products that are
developed by our competitors. Our ability to be competitive also depends upon
our ability to attract and retain qualified personnel, to obtain patent
protection or otherwise develop proprietary products or processes and to secure
sufficient capital resources for the substantial period that it takes to develop
a product.

    In markets where AmBisome has been approved as a first line therapy, it
competes against traditional amphotericin B, which is made by Bristol-Myers
Squibb Company and numerous generic manufacturers. We expect to face significant
competition from new antifungal products, including caspofungin, a product
developed by Merck that received marketing approval in January 2001 and
voriconazole, which is being developed by Pfizer, Inc. Phizer has filed an
application for marketing approval for voriconazole. There is also a number of
other lipid-based amphotericin B products that have been approved in the U.S.
and throughout Europe, including Abelcet, which is sold by Elan Corporation, and
Amphotec, which is sold by InterMune Pharmaceuticals, Inc. These products
compete against AmBisome as both primary and secondary therapy and have been
offered at prices that are less than AmBisome's price.

    Tamiflu competes with Relenza, an anti-flu drug that is sold by
GlaxoSmithKline. Relenza is a neuraminidase inhibitor that is delivered as an
orally-inhaled dry powder. In addition, Johnson & Johnson and Biocryst are
developing a neuraminidase inhibitor anti-flu drug that will represent
significant competition when and if the FDA approves it. This drug may be
administered as a once-daily pill, as opposed to Tamiflu, which must be taken
twice daily. We cannot be certain that Tamiflu will compare favorably to this
drug based on performance, price, length of dosing, side effects or any other
criteria. Johnson & Johnson is in advanced clinical trials with this compound,
but it is unclear if or when this product may be on the market.

                                       24

    VISTIDE competes with a number of drugs that also treat CMV retinitis. These
drugs include:

    - Ganciclovir, a drug that is sold in intravenous and oral formulations by
      Hoffman La-Roche and as an ocular implant by Bausch & Lomb Incorporated;

    - Foscarnet, an intravenous drug sold by AstraZeneca; and

    - Formivirsen, a drug that is injected directly into the eye that is sold by
      CibaVision.

    If approved, tenofovir DF will face substantial competition. A number of
drugs to treat HIV infection and AIDS are currently sold or are in advanced
stages of clinical development, including 16 products currently sold in the U.S.
Among the companies that are significant competitors in the HIV/ AIDS market are
GlaxoSmithKline, Bristol-Myers Squibb, Hoffmann-La Roche, Pfizer, Merck and
DuPont Pharma.

    Lamivudine is a drug that was developed by GlaxoSmithKline in collaboration
with Biochem Pharma. Lamivudine is sold in the U.S., China and several other
countries and has been shown to be effective in treating patients with HBV. If
adefovir dipivoxil is approved to treat HBV, lamivudine will be significant
competition.

    There are drugs that have been approved, or are awaiting approval, for the
treatment of Kaposi's sarcoma in the U.S. and Europe, including one that is sold
in a liposomal formulation. These drugs compete or are expected to compete with
DaunoXome.

    A number of companies are pursuing the development of technologies
competitive with our research programs. These competing companies include
specialized pharmaceutical firms and large pharmaceutical companies acting
either independently or together with biopharmaceutical companies. Furthermore,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection and may establish
collaborative arrangements for competitive products and programs.

    We anticipate that we will face increased competition in the future as our
competitors introduce new products to the market and new technologies become
available. We cannot determine if existing products or new products that our
competitors develop will be more effective or more effectively marketed and sold
than any that we develop. Competitive products could render our technology and
products obsolete or noncompetitive before we recover the money and resources we
used to develop these products.

GOVERNMENT REGULATION

    Our operations and activities are subject to extensive regulation by
numerous government authorities in the U.S. and other countries. In the U.S.,
drugs are subject to rigorous FDA regulation. The Federal Food, Drug and
Cosmetic Act and other federal and state statutes and regulations govern the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of our products. As a result of these
regulations, product development and the product approval process is very
expensive and time consuming.

    The FDA must approve a drug before it can be sold in the U.S. The general
process for this approval is as follows:

PRECLINICAL TESTING

    Before we can test a drug candidate in humans, we must study the drug in
laboratory experiments and in animals to generate data to support the drug's
potential safety and benefits. We submit this data to the FDA in an
investigational new drug application, or IND, seeking their approval to test the
compound in humans.

                                       25

CLINICAL TRIALS

    If the FDA accepts the investigational new drug application, we study the
drug in human clinical trials to determine if the drug is safe and effective.
These clinical trials involve three separate phases which often overlap, can
take many years and are very expensive. These three phases, which are themselves
subject to considerable regulation, are as follows:

    - Phase I. The drug is given to a small number of healthy human subjects or
      patients to test for safety, dose tolerance, pharmacokinetics, metabolism,
      distribution, and excretion.

    - Phase II. The drug is given to a limited patient population to determine
      the effect of the drug in treating the disease, the best dose of the drug,
      and the possible side effects and safety risks of the drug.

    - Phase III. If a compound appears to be effective and safe in Phase II
      clinical trials, Phase III clinical trials are commenced to confirm those
      results. Phase III clinical trials are long-term, involve a significantly
      larger population, are conducted at numerous sites in different geographic
      regions and are carefully designed to provide reliable and conclusive data
      regarding the safety and benefits of a drug. It is not uncommon for a drug
      that appears promising in Phase II clinical trials to fail in the more
      rigorous and reliable Phase III clinical trials.

FDA APPROVAL PROCESS

    If we believe that the data from the Phase III clinical trials show an
adequate level of safety and effectiveness, we will file a new drug application,
or NDA, with the FDA seeking approval to sell the drug for a particular use. The
FDA will review the new drug application and often will hold a public hearing
where an independent advisory committee of expert advisors asks additional
questions regarding the drug. This committee makes a recommendation to the FDA
that is not binding on the FDA but is generally followed by the FDA. If the FDA
agrees that the compound has a required level of safety and effectiveness for a
particular use, it will allow us to sell the drug in the U.S. for that use. It
is not unusual, however, for the FDA to reject an application because it
believes that the drug is not safe enough or effective enough or because it does
not believe that the data submitted is reliable or conclusive.

    At any point in this process, the development of a drug could be stopped for
a number of reasons including safety concerns and lack of treatment benefit. We
cannot be certain that any Phase I, Phase II or Phase III clinical trials that
we are conducting, including those for tenofovir DF for HIV and adefovir
dipivoxil for chronic HBV, or any that we conduct in the future, will be
completed successfully or within any specified time period. We may choose, or
the FDA may require, us to delay or suspend our clinical trials at any time if
it appears that the patients are being exposed to an unacceptable health risk or
if the drug candidate does not appear to have sufficient treatment benefit.

    The FDA may also require us to complete additional testing, provide
additional data or information, improve our manufacturing processes, procedures
or facilities or require extensive post-marketing testing and surveillance to
monitor the safety or benefits of our product candidates if they determine that
our new drug application does not contain adequate evidence of the safety and
benefits of the drug. In addition, even if the FDA approves a drug, it could
limit the uses of the drug. Approvals can also be withdrawn if the FDA does not
believe that we are complying with regulatory standards or if problems are
uncovered or occur after approval.

    In addition to obtaining FDA approval for each drug, the manufacturing
facilities for any drug we sell, including those of companies who manufacture
our drugs for us as well as our own, must be approved by the FDA and are subject
to periodic inspections by the FDA. Foreign establishments that manufacture
products to be sold in the U.S. must also be approved by the FDA and are subject
to periodic regulatory inspection. Manufacturing facilities located in
California, including our San Dimas facility and Foster City facility, also must
be licensed by the State of California in compliance with local regulatory
requirements.

                                       26

    Drugs that treat serious or life-threatening diseases and conditions that
are not adequately addressed by existing drugs may be designated as fast track
products by the FDA and may be eligible for priority six month review and
accelerated approval. Drugs receiving accelerated approval must be monitored in
post-marketing clinical trials in order to confirm the safety and benefits of
the drug. Tenofovir DF for HIV has qualified as a fast track product and may be
eligible for accelerated approval. We have not determined if we would seek "fast
track" status of any other products if they qualified or the impact of this
status on the timing or likelihood of approval of any of these potential
products or those of our competitors.

    We are also subject to other federal, state and local regulations regarding
workplace safety and protection of the environment. We use hazardous materials,
chemicals, viruses and various radioactive compounds in our research and
development activities and cannot eliminate the risk of accidental contamination
or injury from these materials. Any misuse or accidents involving these
materials could lead to significant litigation, fines and penalties.

    Drugs are also subject to extensive regulation outside of the U.S. In the
European Union, there is a centralized approval procedure that authorizes
marketing of a product in all countries in the European Union (which includes
most major countries in Europe). If this procedure is not used, under a
decentralized system an approval in one country of the European Union can be
used to obtain approval in another country of the European Union under a
simplified application process. After approval under the centralized procedure,
pricing and reimbursement approvals are also required in most countries. VISTIDE
was approved by the European Union under the centralized procedure. Tamiflu and
tenofovir DF will be reviewed under the centralized procedure, but neither drug
has been approved in Europe.

PRICING AND REIMBURSEMENT

    Insurance companies, health maintenance organizations (HMOs), other
third-party payors and some governments seek to limit the amount we can charge
for our drugs. For example, in certain foreign markets, pricing negotiations are
often required to obtain approval of a product, and in the U.S. there have been,
and we expect that there will continue to be, a number of federal and state
proposals to implement drug price control. In addition, managed care
organizations are becoming more common in the U.S. and will continue to seek
lower drug prices. The announcement of these proposals or efforts can cause our
stock price to lower, and if these proposals are adopted, our revenues would
decrease.

    Our ability to sell our drugs also depends on the availability of
reimbursement from governments and private insurance companies. These
governments and insurance companies often demand rebates or predetermined
discounts from list prices. We expect that products we are developing,
particularly for AIDS indications, will be subject to reimbursement issues. We
cannot be certain that any of our other products that obtain regulatory approval
will be reimbursed by these government and insurance companies.

    Regulatory approval of prices is generally required in most foreign
countries. In particular, certain countries will condition their approval of a
product on the agreement of the seller not to sell that product for more than a
certain price in that country and in the past have required price reductions
after or in connection with product approval. We cannot be certain that
regulatory authorities in the future will not establish lower prices or that any
regulatory action reducing the price of our products in any one country will not
have the practical effect of requiring us to reduce our prices in other
countries.

EMPLOYEES

    As of February 28, 2001, we had more than 850 full-time employees. We
believe that we have good relations with our employees.

                                       27

                                  RISK FACTORS

    In evaluating our business, you should carefully consider the following
risks in addition to the other information in this report. Any of the following
risks could materially and adversely affect our business, operating results and
financial condition.

ANY SIGNIFICANT REDUCTION IN AMBISOME SALES WOULD SIGNIFICANTLY REDUCE OUR
  OPERATING INCOME AND COULD REQUIRE US TO SCALE BACK OUR MANUFACTURING
  OPERATIONS AND REDUCE OUR SALES FORCE.

    AmBisome sales for the years ended December 31, 1999 and 2000 were
approximately $129 million, or 76%, and $141 million, or 72%, of our total
revenues. We expect that revenues from sales of AmBisome will continue to
constitute a substantial majority of our total product revenues at least through
2001.

    Accordingly, for the foreseeable future, we expect that we will continue to
rely on sales of AmBisome to support our existing manufacturing and sales
infrastructure and to provide operating income to offset a significant portion
of our administrative, research and development expenditures. Any significant
reduction in sales of AmBisome, whether as a result of the introduction of
competitive products or otherwise, would hurt our business, and we would have to
scale back our manufacturing operations and reduce our sales force. There are
several products on the market that compete with AmBisome and are generally
priced lower than AmBisome. We expect to face significant competition from new
antifungal products, including caspofungin, a product developed by Merck that
received marketing approval in January 2001, and voriconazole, which is being
developed by Pfizer, Inc. Pfizer has filed an application for marketing approval
of voriconazole.

TAMIFLU IS A NEW DRUG, AND IT MAY NOT GAIN SIGNIFICANT MARKET ACCEPTANCE.

    Most people who become infected with the flu use over-the-counter drugs to
treat the flu symptoms and rely on their immune system to fight the infection.
Tamiflu is in a new class of prescription drugs designed to prevent and treat
the flu. Patients may be reluctant to visit a physician or seek a prescription
drug for the flu, physicians may be reluctant to prescribe a flu drug, and
government reimbursers and private insurance companies may refuse to pay for an
anti-flu drug. In order for Tamiflu to be successful, our marketing partner
Hoffmann-La Roche will need to increase awareness and acceptance of this new
approach to preventing and treating the flu. The 1999-2000 flu season was the
first flu season that Tamiflu was commercially available. To date the incidence
of flu for the 2000-2001 flu season has been very low. It is too early to
determine if Tamiflu will achieve significant market acceptance.

WE HAVE A HISTORY OF LOSSES, EXPECT TO OPERATE AT A LOSS FOR THE FORESEEABLE
  FUTURE AND MAY NEVER BE PROFITABLE.

    We have never been profitable on a full-year basis. We may never become
profitable. At December 31, 2000, our accumulated deficit was approximately
$506 million. Our losses have resulted principally from expenses associated with
our research and development programs and, to a lesser extent, from sales,
general and administrative expenses. Our product sales and royalty revenues are
derived from sales of AmBisome, VISTIDE and DaunoXome and royalty arrangements
related to Tamiflu, AmBisome and VISTIDE.

WE DEVELOP DRUGS TO TREAT HIV AND AIDS AND RELATED CONDITIONS, AND THEREFORE
  CHANGES IN THE REGULATORY AND COMMERCIAL ENVIRONMENT FOR HIV AND AIDS
  THERAPIES COULD HARM OUR BUSINESS.

    Several of our products and products in development address HIV and AIDS or
related conditions. These products include VISTIDE for CMV retinitis, tenofovir
DF for HIV and AIDS, and DaunoXome for HIV-associated Kaposi's sarcoma. We
develop those products based upon current

                                       28

policy and the current marketplace for HIV and AIDS therapies, as well as our
prediction of future policy and the future marketplace for these therapies. Our
business is subject to substantial risk because these policies and markets
change quickly and unpredictably and in ways that could impair our ability to
obtain regulatory approval and commercial acceptance of these products.

OUR OPERATIONS DEPEND ON COMPLIANCE WITH COMPLEX FDA AND COMPARABLE
  INTERNATIONAL REGULATIONS. FAILURE TO OBTAIN BROAD APPROVALS ON A TIMELY BASIS
  OR TO ACHIEVE CONTINUED COMPLIANCE COULD DELAY COMMERCIALIZATION OF OUR
  PRODUCTS.

    The products that we will develop and sell must be approved and will be
subject to extensive regulation by the FDA and comparable agencies in other
countries. We are continuing clinical trials for AmBisome for currently approved
and additional uses. We are also conducting clinical trials for three other
products: tenofovir DF, adefovir dipivoxil and NX 211. We anticipate that we
will conduct a variety of clinical trials and file for marketing approval of
additional products over the next several years. These products may fail to
receive marketing approval on a timely basis, or at all. We also cannot be
certain that we will file an NDA for tenofovir DF in mid-year 2001, or at all,
as unexpected results of ongoing clinical trials or unexpected requests from the
FDA for additional data could delay or prevent that filing. In addition,
tenofovir DF may not be granted priority review by the FDA, which means that any
NDA would not be reviewed within 6 months of submission. In addition, these
products may receive marketing approvals that place limitations on their uses.
These failures, delays or limitations, as well as other regulatory changes,
actions and recalls, could delay commercialization of any products and adversely
affect our results of operations.

    In addition, even after our products are marketed, the products and their
manufacturers are subject to continual review. Later discovery of previously
unknown problems with our products, our own manufacturing or the production by
third-party manufacturers may result in restrictions on our products or the
manufacture of our products, including withdrawal of the products from the
market. If we fail to comply with applicable regulatory requirements, we could
be subject to penalties including fines, suspensions of regulatory approvals,
product recalls, seizure of products and criminal prosecution.

RESULTS OF CLINICAL TRIALS AND APPROVAL OF PRODUCTS ARE UNCERTAIN, AND WE MAY BE
  DELAYED IN OR PROHIBITED FROM SELLING OUR PRODUCTS.

    We have a number of potential products that have reached the development
stage. These potential products include tenofovir DF, adefovir dipivoxil, NX
211, GS 7904L and GS 7836. We will be required to demonstrate the safety and
effectiveness of these and any other products we develop in each intended use
through extensive preclinical studies and clinical trials in order to obtain
regulatory approval of these products. The results from preclinical and early
clinical studies do not always accurately predict results in later, large-scale
clinical trials for several reasons, including:

    - preliminary results may not be indicative of effectiveness;

    - further clinical trials may not achieve the desired result; and

    - further clinical trials may reveal unduly harmful side effects or may show
      the drugs to be less effective than other drugs or delivery systems for
      the desired indications.

    Even successfully completed large-scale clinical trials may not result in
marketable products for several reasons, including:

    - the potential products are not shown to be safe and effective;

    - regulatory authorities disagree with the results or design of our studies
      and trials; or

    - the potential products are too difficult to develop into commercially
      viable products.

                                       29

    In November 1999, an FDA Advisory Committee recommended against approval of
our application to approve a 60 mg dose of adefovir dipivoxil to treat HIV.
Kidney toxicity associated with this 60 mg dose, as well as a desire for
additional data, were the major concerns of this committee. Following this
recommendation, we were informed by the FDA that they would not approve our
application unless we obtained additional data that satisfied the concerns
raised by this committee. Based on these discussions, we terminated our
development of adefovir dipivoxil for the treatment of AIDS. We are using 10 and
30 mg doses of adefovir dipivoxil in our Phase III clinical trials of adefovir
dipivoxil for HBV. We believe that these lower doses will not result in the
kidney toxicity experienced with 60 mg and that adefovir dipivoxil can be
effective in treating HBV at these lower doses. We cannot be certain, however,
that these lower doses will be both safe enough and have sufficient treatment
benefits to receive FDA approval. Tenofovir DF is in the same class of drugs as
adefovir dipivoxil. While we have not yet observed kidney toxicity in our
clinical trials of tenofovir DF, the kidney toxicity in our clinical trials of
adefovir dipivoxil for HIV did not arise until the later stages of our clinical
trials. We cannot be certain that similar toxicity issues will not arise later
in our clinical trials of tenofovir DF. A number of companies in our industry
have suffered similar setbacks in advanced clinical trials despite promising
results in earlier trials. In the end, we may be unable to develop additional
marketable products.

DELAYS IN PATIENT ENROLLMENT FOR CLINICAL TRIALS COULD INCREASE COSTS AND DELAY
  REGULATORY APPROVALS.

    The rate of completion of our clinical trials will depend on the rate of
patient enrollment. There will be substantial competition to enroll patients in
clinical trials for our drugs in development. This competition has delayed our
clinical trials in the past. In addition, recent improvements in existing drug
therapy, particularly for HIV, HBV and certain cancers, may make it more
difficult for us to enroll patients in our clinical trials as the patient
population may choose to enroll in clinical trials sponsored by other companies
or choose alternative therapies. Delays in planned patient enrollment can result
in increased development costs and delays in regulatory approvals.

OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO RESULTS
  OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET
  ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.

    Our success depends on our ability to successfully develop and obtain
regulatory approval to market new pharmaceutical products. A significant portion
of the research that we will conduct will involve new and unproven technologies.
Development of a product requires substantial technical, financial and human
resources even if the product is not successfully completed.

    Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including:

    - lack of sufficient treatment benefit or unacceptable toxicity during
      preclinical studies or clinical trials;

    - failure to receive necessary regulatory approvals;

    - existence of proprietary rights of third parties; and

    - inability to develop manufacturing methods that are efficient,
      cost-effective and capable of meeting stringent regulatory standards.

MOST OF OUR PRODUCT SALES OCCUR OUTSIDE THE U.S., AND CURRENCY FLUCTUATIONS MAY
  IMPAIR OUR FINANCIAL RESULTS.

    A significant majority of our sales is denominated in foreign currencies.
Increases in the value of the U.S. dollar against these foreign currencies in
the past have reduced, and in the future may reduce,

                                       30

our U.S. dollar return on these sales and negatively impact our financial
condition. We hedge with respect to foreign accounts receivable, but we do not
hedge our exposure to the impact of fluctuating foreign exchange rates on
forecasted sales. Foreign currency fluctuations will continue to affect our
future results.

PRODUCT DEVELOPMENT EXPENSES CAN CAUSE OUR OPERATING EXPENSES TO FLUCTUATE FROM
  QUARTER TO QUARTER.

    The clinical trials required for regulatory approval of our products are
extremely expensive. It is difficult to accurately predict or control the amount
or timing of these expenses from quarter to quarter. Uneven and unexpected
spending on these programs causes our operating results to fluctuate from
quarter to quarter.

WE DEPEND ON RELATIONSHIPS WITH OTHER COMPANIES FOR RESEARCH FUNDING, CLINICAL
  DEVELOPMENT, SALES AND MARKETING PERFORMANCE AND REVENUES. FAILURE TO MAINTAIN
  THESE RELATIONSHIPS WOULD NEGATIVELY IMPACT OUR BUSINESS.

    We rely on a number of significant collaborative relationships with major
pharmaceutical companies for our research funding, clinical development and/or
sales and marketing performance. These include collaborations with Fujisawa
Healthcare, GlaxoSmithKline, Hoffmann-La Roche, Pharmacia Corporation, EyeTech
Pharmaceuticals, Inc., and Sumitomo Pharmaceuticals Co. Inc. We also only rely
on international distributors for sales of AmBisome in certain countries. In
addition, we recently entered into a collaboration agreement with Cubist
Pharmaceuticals, Inc. to commercialize Cubist's antibacterial drug Cidecin in
several European countries following regulatory approval. Under this agreement,
Cubist is responsible for the ongoing clinical development of Cidecin.
Accordingly, we will have no control over but will rely on Cubist's clinical
trials for our regulatory filings for Cidecin. If these ongoing clinical trials
do not support regulatory approval, Cubist is not required to conduct additional
clinical trials and we may choose to conduct these trials ourselves at our
expense. Reliance on collaborative relationships poses a number of risks,
including:

    - we will not be able to control whether our corporate partners will devote
      sufficient resources to our programs or products;

    - disputes may arise in the future with respect to the ownership of rights
      to technology developed with corporate partners;

    - disagreements with corporate partners could lead to delays in or
      termination of the research, development or commercialization of product
      candidates, or result in litigation or arbitration;

    - contracts with our corporate partners may fail to provide significant
      protection or may fail to be effectively enforced if one of these partners
      fails to perform;

    - corporate partners have considerable discretion in electing whether to
      pursue the development of any additional products and may pursue
      alternative technologies or products either on their own or in
      collaboration with our competitors;

    - corporate partners with marketing rights may choose to devote fewer
      resources to the marketing of our products than they do to products of
      their own development; and

    - there are risks related to the ability of our distributors and corporate
      partners to pay us.

    Given these risks, there is a great deal of uncertainty regarding the
success of our current and future collaborative efforts. If these efforts fail,
our product development or commercialization of new products could be delayed or
revenue from existing products, including Tamiflu and AmBisome, could decline.

                                       31

OUR RIGHTS TO MARKET AMBISOME IN THE U.S. AND CANADA ARE LIMITED BY AN AGREEMENT
  WITH FUJISAWA. FAILURE OF FUJISAWA TO EFFECTIVELY MARKET AMBISOME MAY REDUCE
  OUR REVENUES.

    Our rights to market AmBisome in the U.S. and Canada are subject to an
agreement with Fujisawa. Under the terms of this agreement, we have sole
marketing rights to AmBisome in all countries except the U.S. and Canada but
must pay royalties in connection with sales in most significant Asian markets,
including Japan. We co-promote AmBisome with Fujisawa in the U.S. We manufacture
AmBisome for sale in the U.S. and Canada and sell AmBisome to Fujisawa at cost
in the U.S. and at cost plus a specified percentage in Canada. Fujisawa collects
all revenues from AmBisome sales in the U.S. and pays us approximately 17% of
net sales. The success of AmBisome in the U.S. will be dependent primarily on
the efforts of Fujisawa, and in Canada the success of AmBisome will depend
entirely on Fujisawa. If Fujisawa fails in its efforts, potential revenues from
the sales of AmBisome may be substantially reduced.

FAILURE OF HOFFMANN-LA ROCHE TO EFFECTIVELY MARKET TAMIFLU WOULD REDUCE OUR
  POTENTIAL REVENUES.

    Hoffmann-La Roche has sole responsibility for promoting and selling Tamiflu
on a worldwide basis and we have no control over their activities. Therefore, we
are relying on the efforts of Hoffmann-La Roche for any revenues we receive from
the sale of Tamiflu. If Hoffmann-La Roche does not dedicate sufficient resources
to the promotion of Tamiflu, or if Hoffmann-La Roche fails in its marketing
efforts, the royalties we receive from the sale of Tamiflu would decrease and we
would be adversely affected.

INABILITY TO ESTABLISH FUTURE SUCCESSFUL COLLABORATIVE RELATIONSHIPS MAY IMPAIR
  OUR FINANCIAL RESULTS.

    We may seek future collaborative relationships with corporate partners to
fund some of our research and development expenses and to develop and
commercialize some of our, or their, potential products. Further, we anticipate
that our revenues from collaborative agreements will continue to be affected by
existing agreements, as well as by the timing of drug development programs of
our corporate partners. We may not be able to negotiate acceptable collaborative
arrangements in the future, and any arrangements we do negotiate may not be
successful. If we fail to establish additional collaborative relationships, we
will be required to undertake research, development, marketing and manufacturing
of our proposed products at our own expense or discontinue or reduce these
activities.

OUR EXISTING PRODUCTS AND PRODUCTS UNDER DEVELOPMENT MAY NOT BE ACCEPTED BY
  PHYSICIANS, INSURERS AND PATIENTS.

    Many of our products in development, if approved for marketing, would have
no established market. The ability of these products to achieve and sustain
market acceptance will depend on the receipt and scope of regulatory approvals
and whether or not government authorities and managed care organizations will
adequately reimburse patients who use these products.

    In addition, we need to convince the medical and patient advocacy community
of:

    - the effectiveness of these products in treating disease;

    - the safety of these products when administered to patients; and

    - the advantages of these products over competitive products.

    Physicians, patients, patient advocates, payors and the medical community in
general may not accept or use any products that we may develop. If our products
are not accepted, our results of operations will suffer.

                                       32

MANY OTHER COMPANIES ARE TARGETING THE SAME DISEASES AND CONDITIONS AS WE ARE.
  COMPETITIVE PRODUCTS FROM OTHER COMPANIES COULD SIGNIFICANTLY REDUCE THE
  MARKET ACCEPTANCE OF OUR PRODUCTS.

    Our products and development programs target a number of diseases and
conditions, including viral infections, fungal infections, bacterial infections
and cancer. There are many commercially available products for these diseases.
Certain of these products are well-established therapies and have generated
substantial sales. In addition, a large number of companies and institutions are
conducting well-funded research and development activities directed at
developing treatments for these diseases. Products currently on the market and
those under development by our competitors could make our technology and
products obsolete or noncompetitive. We expect that competition for the
treatment of these diseases will increase in the future as new products enter
the market and advanced technologies become available. We will also be competing
to license or acquire technology from other companies.

    Most of our competitors and potential competitors have substantially greater
resources than we do. Those resources include superior product development
capabilities and financial, scientific, manufacturing, marketing, managerial and
human resources. These competitors may achieve superior patent protection,
obtain key technology, receive regulatory approval or achieve product
commercialization earlier than us.

THE SIGNIFICANTLY GREATER RESOURCES OF THE MARKETING ORGANIZATIONS OF LARGE
  PHARMACEUTICAL COMPANIES COULD HINDER OUR ABILITY TO COMPETE SUCCESSFULLY.

    Our products compete, and the products we may develop are likely to compete,
with products of other companies that currently have extensive and well-funded
marketing and sales operations. Because these companies are capable of devoting
significantly greater resources to their marketing efforts, our marketing or
sales efforts may not compete successfully against the efforts of these other
companies.

OUR EXISTING PRODUCTS ARE SUBJECT TO REIMBURSEMENT FROM GOVERNMENT AGENCIES AND
  OTHER THIRD PARTIES. PHARMACEUTICAL PRICING AND REIMBURSEMENT PRESSURES MAY
  REDUCE PROFITABILITY.

    Successful commercialization of our products depends, in part, on the
availability of governmental and third party payor reimbursement for the cost of
such products and related treatments. Government health administration
authorities, private health insurers and other organizations generally provide
reimbursement. Government authorities and third-party payors increasingly are
challenging the price of medical products and services, particularly for
innovative new products and therapies. This has resulted in lower average sales
prices. For example, a majority of our sales of AmBisome, VISTIDE and DaunoXome
are subject to reimbursement by government agencies, resulting in significant
discounts from list price and rebate obligations. If Tamiflu is approved for
sale in Europe, its success will also depend largely on obtaining government
reimbursement in Europe because in many European countries, including the United
Kingdom and France, patients are reluctant to pay for prescription drugs out of
their own pocket. We also expect that the success of our products in
development, particularly in Europe, will depend on the ability to obtain
reimbursement. Even if reimbursement is available, reimbursement policies may
adversely affect our ability to sell our products on a profitable basis.

    In addition, in many international markets, governments control the prices
of prescription pharmaceuticals. In these markets, once marketing approval is
received, pricing negotiation can take another six to twelve months or longer.
Product sales, attempts to gain market share or introductory pricing programs of
our competitors could require us to lower our prices in these countries, which
could adversely affect our results of operations.

                                       33

WE MAY NOT BE ABLE TO OBTAIN EFFECTIVE PATENTS TO PROTECT OUR TECHNOLOGIES FROM
  USE BY COMPETITORS, AND PATENTS OF OTHER COMPANIES COULD REQUIRE US TO STOP
  USING OR PAY FOR THE USE OF REQUIRED TECHNOLOGY.

    Our success will depend to a significant degree on our ability to:

    - obtain patents and licenses to patent rights;

    - preserve trade secrets; and

    - operate without infringing on the proprietary rights of others.

    We have rights to U.S. and foreign issued patents and have filed and will
continue to file patent applications in the U.S. and abroad relating to our
technologies. There is a risk, however, that patents may not issue from any of
these applications or that the patents will not be sufficient to protect our
technology. Patent applications in the U.S. are generally confidential until a
patent is granted. As a result, we may not know if our competitors filed patent
applications for technology covered by our pending applications. We also cannot
be certain that we were the first to invent the technology that is the subject
of our patent applications. GS 7836 and Cidecin are protected by method of use
patents that generally do not provide the same level of protection as
composition of matter patents. Competitors may have filed patent applications or
received patents and may obtain additional patents and proprietary rights that
block or compete with our patents.

    We do not have patent filings covering adefovir dipivoxil in China or in
certain other Asian countries, although we do have applications pending in
various Asian countries, including China, that relate to various forms and
formulations of adefovir dipivoxil. Asia is a major market for HBV therapies,
one of the potential indications for adefovir dipivoxil. We may obtain patents
for certain products many years before marketing approval is obtained for those
products. Because patents have a limited life, which may begin to run prior to
commercial sale, the commercial value of the product may be limited. In
addition, patents may not provide adequate protection in certain countries in
Africa and Asia, including China.

    Our competitors may file patent applications covering our technology. If so,
we may have to participate in interference proceedings or litigation to
determine the right to a patent. Litigation and interference proceedings are
expensive even if successful.

    Our success depends in large part on our ability to operate without
infringing upon the patents or other proprietary rights of third parties. If we
infringe patents of others, we may be prevented from commercializing products or
may be required to obtain licenses from these third parties. We cannot be
certain that we would be able to obtain alternative technologies or any required
license. Even if we were to obtain such technologies or licenses, we cannot be
certain that the terms would be reasonable. If we fail to obtain such licenses
or alternative technologies, we may be unable to develop some or all of our
products.

    For example, we may decide to use an assay method in our drug screening
programs. ICT Pharmaceuticals has patents that may cover parts of this program.
ICT Pharmaceuticals has offered us a non-exclusive license under these patents
as part of an industry-wide licensing program. If it is determined that we need
these patents for this program, we would need to obtain this license or develop
or acquire alternative technologies for this program. We cannot be certain that
we would be able to obtain this license on reasonable terms or that alternative
technologies could serve our needs for future drug development. In addition,
Ohio State University holds a patent that we may need to develop and
commercialize NX 211. Ohio State University has offered us a non-exclusive
license under this patent, and we have entered into an option with Ohio State
University to enter into this license. Should we elect to enter into an
agreement with Ohio State University under this option, we will be required to
pay fees and a product royalty on NX 211.

                                       34

    In addition, we use significant proprietary technology and rely on
unpatented trade secrets and proprietary know-how to protect certain aspects of
our production and other technologies. Our trade secrets may become known or
independently discovered by our competitors.

MANUFACTURING PROBLEMS COULD DELAY PRODUCT SHIPMENTS AND REGULATORY APPROVALS.

    For VISTIDE, adefovir dipivoxil and tenofovir DF, we rely on third parties
for the manufacture of bulk drug substance and final drug product for clinical
and commercial purposes. Hoffmann-La Roche is responsible for manufacturing
Tamiflu, and if they encounter problems in this process, our revenues from the
sales of Tamiflu could decrease. We depend on these third parties to perform
their obligations effectively and on a timely basis. If these third parties fail
to perform as required, our clinical trials or submission of products for
regulatory approval may be delayed. These delays could impair our ability to
deliver commercial products on a timely basis and could impair our competitive
position.

    We manufacture AmBisome and DaunoXome at our facilities in San Dimas,
California. Our only formulation and manufacturing facilities are in San Dimas,
California; although we own a manufacturing facility in Ireland that performs
certain quality control testing, labeling and packaging, and we use third
parties as alternate contract suppliers to fill and freeze dry certain batches
of product. In the event of a natural disaster, including an earthquake,
equipment failure, strike or other difficulty, we may be unable to replace this
manufacturing capacity in a timely manner and would be unable to manufacture
AmBisome and DaunoXome to meet market needs.

WE MAY NOT BE ABLE TO OBTAIN MATERIALS NECESSARY TO MANUFACTURE OUR PRODUCTS.

    Many of the materials that we utilize in our operations are made at only one
facility. For example, we depend on single suppliers for high quality
amphotericin B, daunorubicin HCl and high quality cholesterol, each of which is
used in the manufacture of one or more of our liposome products. Because the
suppliers of key components and materials must be named in the new drug
application filed with the FDA for a product, significant delays can occur if
the qualification of a new supplier is required. If supplies from our suppliers
were interrupted for any reason, we could be unable to ship AmBisome, VISTIDE or
DaunoXome, or supply any of our products in development for clinical trials.

WE HAVE LIMITED EXPERIENCE IN MANUFACTURING PRODUCTS AND MAY NOT BE ABLE TO
  DEVELOP ADEQUATE MANUFACTURING CAPACITY.

    For some of our potential products, we will need to develop further our
production technologies for use on a larger scale in order to conduct clinical
trials and produce such products for commercial sale at an acceptable cost. We
cannot be certain that we will be able to implement any of these developments
successfully.

    The manufacturing process for pharmaceutical products is highly regulated,
and regulators may shut down manufacturing facilities that they believe do not
comply with regulations. The FDA's current Good Manufacturing Practices are
extensive regulations governing manufacturing processes, stability testing,
record-keeping and quality standards. In addition, our manufacturing operations
are subject to routine inspections by regulatory agencies and similar
regulations are in effect in other countries.

OUR BUSINESS MAY GIVE RISE TO PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE
  OR INDEMNITY AGREEMENTS.

    The testing, manufacturing, marketing and use of AmBisome, VISTIDE and
DaunoXome, as well as products in development, involve substantial risk of
product liability claims. These claims may be made directly by consumers,
healthcare providers, pharmaceutical companies or others. A successful product
liability claim against us could require us to pay substantial amounts, which
could impair our financial condition and our ability to clinically test and to
market our products.

                                       35

    Additionally, we are required by governmental regulations to test our
products even after they have been sold and used by patients. As a result of
such tests, we may be required to, or may determine that, we should recall
products already in the market. Subsequent testing and product recalls may
increase our potential exposure to product liability claims.

OUR USE OF HAZARDOUS MATERIALS, CHEMICALS, VIRUSES AND RADIOACTIVE COMPOUNDS
  EXPOSES US TO POTENTIAL LIABILITIES.

    Our research and development involves the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, we could be held liable for
significant damages or fines.

ITEM 2. PROPERTIES

    Our corporate headquarters, including our principal executive offices and
certain of our research facilities, are located in Foster City, California. At
this location, we lease approximately 260,300 square feet of space in eight
proximately located buildings. One of the subleases covering 59,039 square feet
of space in this group of buildings expires in December 2003 and there are no
renewal options. The remaining leases expire in March and September 2006 and we
have an option to renew all of these leases for two additional five-year
periods.

    In Boulder, Colorado, we lease a facility of approximately 11,000 square
feet of office space, which we use as administrative offices. This lease expires
in February 2005 and has an option to renew for two additional five-year
periods. We also lease approximately 60,000 square feet of space, which we use
both as research laboratories and as administrative offices. This lease expires
in October 2001, but we have an option to renew the lease for two successive
five-year periods.

    We also occupy facilities in San Dimas, California under leases that expire
in May and November 2003, with two five-year renewal options. These facilities
cover 102,500 square feet of space and house research and development
activities, manufacturing and certain administrative functions. In 2000, we also
leased a warehouse facility adjacent to these facilities that we use for product
distribution and administrative functions. This facility has 53,000 square feet
of space and the lease expires in April 2006, with two additional five-year
extensions.

    In addition, we lease approximately 48,000 square feet of space for our
sales and marketing, regulatory finance, information technology and human
resource operations in Europe and Australia, including a prepaid, 999-year lease
for our 13,000 square foot manufacturing and distribution facility in Ireland.
The other leases have various expiration dates.

ITEM 3. LEGAL PROCEEDINGS

    On August 11, 1997, we entered into a settlement with Elan Corporation (the
successor to The Liposome Company, Inc.) in which we each agreed to dismiss all
legal proceedings involving patents related to our liposomal formulation of
amphotericin B. In the settlement agreement, Elan agreed not to sue us in
connection with the worldwide production and sales of AmBisome and gave us
rights to use some of their patents. Under the terms of the settlement
Agreement, we are required to make payments based on AmBisome sales over the
next several years.

    We are also a party to various other legal actions that arose in the
ordinary course of our business. We do not believe that any of these other legal
actions will have any significant impact on our business.

                                       36

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

    A Special Meeting of Stockholders was held on February 2, 2001 in Redwood
City, California. Of the 94,171,488 shares of Gilead Common Stock entitled to
vote at the meeting, 75,644,638 shares were represented at the meeting in person
or by proxy, constituting a quorum. The stockholders approved an amendment to
Gilead's Certificate of Incorporation to increase the authorized number of
shares of Common Stock from 100,000,000 shares to 500,000,000 shares. There were
59,152,774 votes cast for the proposal, 16,451,600 votes cast against, 60,264
abstentions, and no broker non-votes.

                                       37

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

    Our common stock is traded on The Nasdaq Stock Market under the symbol
"GILD." The following table sets forth for the periods indicated the high and
low intra-day sale prices per share of our common stock on The Nasdaq Stock
Market. These prices represent quotations among dealers without adjustments for
retail mark-ups, mark-downs or commissions, and may not represent prices of
actual transactions.



                                                                HIGH       LOW
                                                              --------   --------
                                                                   
2000
First Quarter...............................................   $42.50     $22.38
Second Quarter..............................................   $38.25     $21.63
Third Quarter...............................................   $59.06     $33.00
Fourth Quarter..............................................   $55.38     $30.47

1999
First Quarter...............................................   $28.75     $17.63
Second Quarter..............................................   $27.06     $17.94
Third Quarter...............................................   $46.69     $25.31
Fourth Quarter..............................................   $37.88     $18.50


    On February 22, 2001, the Company implemented a two-for-one stock split in
the form of a stock dividend. All share and per share amounts for all periods
presented in this Form 10-K have been restated to reflect the split.

    As of February 28, 2001, we had 94,353,314 shares of common stock
outstanding held by approximately 519 stockholders of record. We have not paid
cash dividends on our common stock since our inception and we do not anticipate
paying any in the foreseeable future.

    On December 13, 2000, Gilead issued $250 million of 5% convertible
subordinated notes due December 15, 2007 in a private offering to J.P. Morgan &
Co., Lehman Brothers and Morgan Stanley Dean Whitter, which resold the notes to
private institutional investors.

                                       38

ITEM 6. SELECTED FINANCIAL DATA

                             GILEAD SCIENCES, INC.
                    SELECTED CONSOLIDATED FINANCIAL DATA(1)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                          YEARS ENDED DECEMBER 31,
                                            ----------------------------------------------------
                                              2000       1999       1998       1997       1996
                                            --------   --------   --------   --------   --------
                                                                         
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................  $195,555   $168,979   $151,119   $132,258   $122,121
Total costs and expenses..................   247,873    239,838    230,631    220,480    181,403
Loss from operations......................   (52,318)   (70,859)   (79,512)   (88,222)   (59,282)
Loss before cumulative effect of change in
  accounting principle....................   (43,106)   (66,486)   (44,758)   (72,893)   (45,614)
Cumulative effect of change in accounting
  principle(2)............................   (13,670)        --         --         --         --
Net loss..................................   (56,776)   (66,486)   (44,758)   (72,893)   (45,614)
Basic and diluted loss per common
  share:(3)
  Loss before cumulative effect of change
    in accounting principle...............  $  (0.47)  $  (0.78)  $  (0.55)  $  (0.92)  $  (0.61)
  Cumulative effect of change in
    accounting principle..................     (0.15)        --         --         --         --
                                            --------   --------   --------   --------   --------
  Net loss................................  $  (0.62)  $  (0.78)  $  (0.55)  $  (0.92)  $  (0.61)
                                            ========   ========   ========   ========   ========
Common shares used to calculate basic and
  diluted net loss per common share(3)....    91,050     85,652     82,030     78,864     75,282




                                                              DECEMBER 31,
                                        ---------------------------------------------------------
                                          2000        1999        1998        1997        1996
                                        ---------   ---------   ---------   ---------   ---------
                                                                         
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
  securities..........................  $ 512,878   $ 294,394   $ 348,743   $ 387,361   $ 338,354
Working capital.......................    535,560     324,104     359,555     396,810     332,352
Total assets..........................    678,099     436,808     487,764     516,989     450,540
Long-term obligations.................      2,238       5,253       8,883       9,658      18,120
Convertible subordinated debt.........    250,000      79,533      80,000      80,000          --
Accumulated deficit...................   (506,008)   (449,232)   (382,746)   (337,988)   (265,095)
Total stockholders' equity(4).........    351,124     297,292     333,699     357,726     374,649


------------------------

(1) Periods prior to the year ended December 31, 1999 have been restated to
    reflect the merger with NeXstar Pharmaceuticals, Inc. on July 29, 1999,
    which was accounted for as a pooling of interests.

(2) Gilead adopted Staff Accounting Bulletin No. 101, "REVENUE RECOGNITION IN
    FINANCIAL STATEMENTS", in the fourth quarter of 2000. The effect of the
    change was recorded as the cumulative effect of a change in accounting
    principle effective as of the first quarter 2000.

(3) On February 22, 2001, the Company implemented a two-for-one stock split in
    the form of a stock dividend. All share and per share amounts for all
    periods presented have been restated to reflect the split.

(4) No cash dividends have been declared or paid on the Company's common stock.

                                       39

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

OVERVIEW

    Gilead Sciences, Inc. ("Gilead" or "we") was incorporated in Delaware on
June 22, 1987, and is an independent biopharmaceutical company that seeks to
provide accelerated solutions for patients and the people who care for them. We
discover, develop, manufacture and commercialize proprietary therapeutics for
challenging infectious diseases (viral, fungal and bacterial diseases) and
cancer. Gilead also has expertise in liposomal drug delivery technology.
Currently, we market AmBisome-Registered Trademark- ((amphotericin B) liposome
for injection), an antifungal agent, DaunoXome-Registered Trademark-
(daunorubicin citrate liposome injection), a drug approved for the treatment of
Kaposi's Sarcoma, and VISTIDE-Registered Trademark- (cidofovir injection) for
the treatment of cytomegalovirus ("CMV") retinitis. Hoffmann-La Roche Inc.
markets Tamiflu-TM- (oseltamivir phosphate) for the treatment of influenza,
under a collaborative agreement with Gilead. In addition, we are developing
products to treat diseases caused by human immunodeficiency virus ("HIV"),
hepatitis B virus ("HBV"), bacterial infections and cancer.

    On February 22, 2001, Gilead completed a two-for-one stock split, effected
in the form of a stock dividend, to stockholders of record as of February 2,
2001. Accordingly, all share and per share amounts for all periods presented
have been restated to retroactively reflect the split.

    In the year ended December 31, 2000, Gilead adopted the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, resulting in a cumulative effect of a change in accounting
principle.

    On July 29, 1999, Gilead entered into a business combination with NeXstar
Pharmaceuticals, Inc. ("NeXstar"). The business combination has been accounted
for as a pooling of interests and the historical consolidated financial
statements of Gilead for all periods prior to the business combination have been
restated to include the financial position, results of operations and cash flows
of NeXstar.

    Certain prior period amounts have been reclassified to conform to the
current presentation.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

    The following discussion contains forward-looking statements that involve
risks and uncertainties. Gilead's actual results could differ materially from
those discussed in any forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, as well as under the caption "Business," including "Risk
Factors" in Part I. All forward-looking statements included in this document are
based on information currently available to Gilead, and we assume no obligation
to update any such forward-looking statements. The following discussion should
be read in conjunction with the consolidated financial statements and notes
included elsewhere in this report.

    AMBISOME SALES.  We rely on sales of AmBisome for a significant portion of
our operating income. There are lower priced products that compete with
AmBisome; a product that was recently approved that will compete with AmBisome;
and products being developed that could compete with AmBisome in the future. If
these other products achieve further market acceptance, or if the products in
development become commercially available, revenues from sales of AmBisome would
likely decrease, resulting in a reduction of operating income.

    REGULATORY PROCESS.  The U.S. Food and Drug Administration ("FDA") and
foreign agencies could reject or limit the commercialization of our products for
a number of reasons including: if they disagree with the results or designs of
our clinical trials; if they believe our products have unacceptable efficacy,
toxicity or tolerability; or if they believe our products can not be safely and
efficiently manufactured on a commercial basis. If these agencies reject or
limit the commercialization of our products, our

                                       40

financial results would be adversely affected. The clinical trials required for
regulatory approval of our products are extremely expensive, and it is difficult
for us to accurately predict or control the amount or timing of these expenses
from quarter to quarter. In addition, regulatory agencies could require us to
conduct additional unanticipated clinical trials on our products, the cost of
which could be substantial.

    MARKET ACCEPTANCE OF PRODUCTS.  The ability of our products to achieve and
sustain market acceptance will depend on a number of factors, including: the
receipt and scope of regulatory approvals; the availability of public and
private insurance and reimbursement for our products; safety, efficacy,
tolerability and cost of our products; and how our products compare to
competitive products. If our products do not achieve and sustain market
acceptance, our results of operations will suffer. Tamiflu is in a new class of
drugs that represent a new approach to treating the flu. In order for Tamiflu to
achieve market acceptance, our marketing partner, Hoffmann-La Roche, Inc., must
change attitudes toward the treatment of influenza.

    COLLABORATIONS.  We depend on collaborations for the development and
commercialization of certain products and for revenue, including the
collaboration with Hoffmann-La Roche, Inc. for sales of Tamiflu worldwide and
the collaboration with Fujisawa Healthcare, Inc. ("Fujisawa") for sales of
AmBisome in the United States and Canada. These collaborations could fail for a
number of reasons, including if our partners do not devote sufficient resources
to the development, commercialization or marketing of our products, or if
disputes arise with our partners. We will also seek additional collaborations.
If our collaborations fail or if we are unable to establish additional
collaborations, our financial results would be adversely affected.

    FOREIGN CURRENCY FLUCTUATIONS. A significant majority of our product sales
is denominated in foreign currencies. Increases in the value of the U.S. Dollar
against these foreign currencies in the past have reduced, and in the future may
reduce, our U.S. Dollar return on these sales and negatively impact our
financial condition. We do not hedge our exposure to the impact of fluctuating
foreign exchange rates on forecasted sales. We do hedge accounts receivable
balances denominated in foreign currencies, which minimizes our exposure to
currency fluctuations between the date a sale is recorded and the date that cash
is collected.

    UNCERTAIN FINANCIAL RESULTS.  We expect that our financial results will
continue to fluctuate from quarter to quarter and that such fluctuations may be
substantial. The fluctuations can be caused by many factors that are beyond our
control, including the risk factors listed above. We have never been profitable
on a full-year basis and we may never achieve or sustain profitability. As of
December 31, 2000, our accumulated deficit was $506.0 million.

RESULTS OF OPERATIONS

REVENUES

    We had total revenue of $195.6 million for the year 2000, $169.0 million for
the year 1999 and $151.1 million for the year 1998. Included in total revenue
are net product sales, royalty income and contract revenue, including research
and development ("R&D") collaborations.

    Net product sales revenue was $149.7 million for 2000, compared with
$139.9 million for 1999 and $114.2 million for 1998. Our revenues are primarily
derived from sales of AmBisome, which represented 94% of total product sales in
2000, 92% of total product sales in 1999 and 91% of total product sales in 1998.
Reported sales of AmBisome were $141.1 million in 2000, an increase of 9% over
AmBisome sales of $129.2 million in 1999. Excluding the impact of the decline in
foreign currencies relative to the U.S. dollar in 2000, sales of AmBisome in
2000 would have increased 21%. A significant majority of Gilead's product sales
is denominated in foreign currencies. We do not hedge our exposure to the impact
of fluctuating foreign exchange rates on forecasted sales. We do hedge

                                       41

accounts receivable balances denominated in foreign currencies, which minimizes
our exposure to currency fluctuations between the date a sale is recorded and
the date that cash is collected. Sales of AmBisome were $103.4 million in 1998.
The increase in AmBisome sales in 1999 compared with 1998 was not materially
affected by changes in foreign currency rates.

    In 2000, Gilead also recognized product sales revenue of $4.4 million from
sales of DaunoXome and $4.2 million from sales of VISTIDE. In 1999, DaunoXome
sales were $4.8 million and VISTIDE sales were $5.9 million. In 1998, we
reported DaunoXome sales of $4.7 million and VISTIDE sales of $6.1 million. We
expect combined sales of DaunoXome and VISTIDE in the future to decrease
slightly compared to 2000 levels.

    We reported royalty revenue of $24.6 million in 2000, compared with
$10.4 million in 1999 and $7.3 million in 1998. During this three-year period,
the most significant source of royalty revenue was from sales of AmBisome in the
United States by Fujisawa under a co-promotion arrangement with Gilead. During
the fourth quarter of 1999, we began recognizing royalty revenues from
Fujisawa's sales of AmBisome in the month following that in which the related
product sales occur. Prior to the fourth quarter of 1999, we recognized this
royalty revenue in the month the sales occurred. Royalty revenue from Fujisawa
was $13.5 million in 2000, compared with $8.3 million in 1999 and $4.8 million
in 1998. The 1999 amount represents royalties from 11 months of Fujisawa sales
of AmBisome.

    We also reported royalty revenue of $9.6 million in 2000 related to sales of
Tamiflu. Tamiflu is an orally administered compound developed to treat and
prevent viral influenza in humans. Gilead co-developed Tamiflu with F.
Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (collectively, "Roche"). Roche
owns the worldwide commercial rights to Tamiflu, and is required to pay Gilead a
royalty on net sales of the product. In October 1999, the FDA approved Tamiflu
for the treatment of influenza in adults, and Roche began selling the product
commercially. We record royalty revenue from Roche in the quarter following the
quarter in which the related Tamiflu sales occur. Accordingly, Gilead began
recognizing royalties from Tamiflu in the first quarter of 2000. We expect
Tamiflu royalties to increase in 2001 as a result of broader market penetration
and additional regulatory approvals received during the second half of 2000.
During that time period Tamiflu was approved in the U.S. as a prophylaxis
(preventive) in adults and as a treatment for influenza in children, and
approved in Japan as a treatment for influenza in adults.

    Substantially all of the remaining net royalty revenue recognized in 2000,
1999 and 1998 represents royalties from sales of VISTIDE by Pharmacia S.A.
("Pharmacia") outside the United States. In future periods, royalties from sales
of VISTIDE are expected to be relatively flat or decline slightly.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. Among other things, SAB 101 describes the SEC Staff's position on
the recognition of certain nonrefundable up-front fees received in connection
with collaboration agreements. We previously recognized nonrefundable technology
access fees received in connection with collaboration agreements as revenue when
received or when collectibility was probable, and when the technology had been
transferred. Effective January 1, 2000, we changed our method of accounting for
these fees to recognize them as the related manufacturing obligation is
fulfilled or on a straight-line basis over the term of the related research and
development collaboration, manufacturing or supply arrangement, as appropriate,
as this method best matches the effort provided. We believe the change in
accounting principle is preferable based on guidance provided in SAB 101. The
cumulative effect of the change in accounting principle was recorded in the
fourth quarter of 2000, retroactively effective as of January 1, 2000, as
deferred revenue that will be recognized as contract revenue over the remaining
term of the research and development, manufacturing or supply arrangements, as
appropriate. For the year ended December 31, 2000, the impact of the cumulative
change in accounting principle was to increase the net loss by $13.7 million. We
recognized additional contract revenue of $2.9 million in 2000, in accordance
with SAB 101, related

                                       42

to up front fees which had been received in prior years. The $2.9 million was
related to three collaborative arrangements: $1.6 million related to an initial
licensing fee from Sumitomo; $0.7 million related to an initial licensing fee
from Roche; and $0.6 million related to an initial license fee from Pharmacia.
The remaining $10.7 million of related deferred revenue at December 31, 2000
results from the Sumitomo and Pharmacia collaborations, and is expected to be
recognized as contract revenue over the next twelve years. There is no remaining
deferred revenue related to the Roche initial license fee as of December 31,
2000. The pro forma results included in the Consolidated Statements of
Operations in Part IV reflect amounts that would have been reported if the
change in accounting principle had been applied retroactively.

    Total contract revenue was $21.3 million in 2000, compared with
$18.7 million in 1999 and $29.6 million in 1998. The single most significant
source of contract revenue in each of these three years was payments from Roche
relating to the development of Tamiflu under an R&D collaboration agreement
between Gilead and Roche. We recorded contract revenue from Roche of
$11.2 million in 2000, $14.9 million in 1999 and $16.4 million in 1998. The
$11.2 million of contract revenue from Roche in 2000 included $9.6 million in
milestone payments related to Roche completing regulatory filings and approvals
for Tamiflu in the U.S. and Japan, $0.9 million of R&D expense reimbursements,
and $0.7 million resulting from the adoption of SAB 101 as discussed above. The
1999 amount included $12.8 million of milestone payments and $2.1 million of R&D
reimbursements. The $16.4 million recorded during 1998 represented
reimbursements of R&D expenses, and included $5.2 million attributable to R&D
expenses incurred in the fourth quarter of 1997, which were subject to Roche's
approval as of December 31, 1997. Such expenses were approved for reimbursement
and recognized as revenue in 1998. R&D reimbursements from Roche in 2000
decreased compared to 1999, and reimbursements in 1999 similarly decreased
relative to 1998, as Tamiflu development efforts ramp down while Roche's
commercialization activities increased. As of December 31, 2000, Gilead is
entitled to additional milestone payments of up to $11.6 million upon Roche
achieving certain developmental and regulatory milestones. While we may earn
milestones payments under the Roche agreement in 2001, we expect expense
reimbursements under the Roche agreement to continue to decline in 2001. Such
reimbursements will approximate our actual related costs incurred.

    In March 2000, we entered into an agreement with EyeTech
Pharmaceuticals, Inc. relating to Gilead's proprietary aptamer NX 1838.
Currently in early clinical trials, NX 1838 is an inhibitor of vascular
endothelial growth factor, or VEGF, which is known to play a role in the
development of certain ophthalmic diseases. Under the terms of the agreement,
EyeTech received worldwide rights to all therapeutic uses of NX 1838, and, if
the product is successfully commercialized, EyeTech will pay us royalties on
worldwide sales of the product. EyeTech also will be responsible for all
research and development costs. We will provide clinical supplies of the product
to EyeTech through March 2001. We received a $7.0 million up-front licensing fee
from EyeTech in April 2000, which is being recognized as revenue ratably over
the one-year supply agreement period. Accordingly, $5.2 million of the license
fee was recorded as contract revenue under the agreement in 2000, and the
remainder of the license fee will be recognized as revenue in the first quarter
of 2001. We are also entitled to additional cash payments from EyeTech of up to
$25.0 million if and when EyeTech reaches certain NX 1838 development
milestones. Additionally, Gilead received a warrant to purchase 833,333 shares
of EyeTech series B convertible preferred stock, exercisable at a price of $6.00
per share, the price at which the stock was issued to other investors. We are
obligated to transfer 5% of the total shares subject to the warrant to the
University of Colorado at Boulder under a collaborative agreement with the
university, and we expect to retain the remaining 791,667 shares. We did not
recognize revenue related to the warrant as there was no readily determinable
fair value at the time of the transaction.

    In November 1999, Gilead and Somalogic, Inc. entered into an agreement under
which Gilead assigned to Somalogic a sole and exclusive license to certain
intellectual property, including patents and patent applications. Under the
terms of the agreement, Somalogic was required to pay Gilead a total of

                                       43

$2.5 million in two nonrefundable installments. The second installment totaled
$1.0 million and was received in November 2000 and recorded as contract revenue
upon receipt. The first installment of $1.5 million was received and recognized
as contract revenue in November 1999. Contract revenue recognized in 1999 also
included a $1.0 million performance-based milestone payment received from SKW
Americas, Inc. ("SKW"). SKW is the 51% owner of Proligo L.L.C. ("Proligo"), an
entity in which we hold the remaining 49% ownership interest.

    In 1998, we recorded as contract revenue a $3.0 million milestone payment
from Sumitomo Pharmaceuticals Co., Ltd. related to a license of AmBisome rights
in Japan. Also in 1998, we entered into an agreement with Isis
Pharmaceuticals, Inc. ("Isis") under which we sold to Isis the holdings of our
antisense patent estate, including patents and patent applications. Under the
terms of the agreement, Isis is required to pay Gilead a total of $6.0 million
in four installments. The total sale price of $6.0 million was included in
contract revenue in 1998.

    Contract revenue for 1998 also includes reimbursement of research expenses
under our collaborative agreements with GlaxoSmithKline, formerly Glaxo
Wellcome Inc. ("Glaxo") and Schering A.G. ("Schering"). Under the agreement with
Schering related to the discovery and development of aptamers as IN VIVO
diagnostic agents ("Schering Research Agreement"), we recognized $2.4 million of
contract revenue in 1998. The Schering Research Agreement expired in 1999, but a
related license agreement remains in effect. Our collaborative agreement with
Glaxo was related to its code blocker program. Contract revenue recognized in
connection with the Glaxo agreement was $1.8 million in 1998.

COST OF GOODS SOLD

    Cost of goods sold was $33.5 million in 2000, compared with $29.5 million in
1999 and $23.4 million in 1998. As a percentage of product sales revenue, cost
of goods sold was 22% in 2000, 21% in 1999 and 20% in 1998.

    In connection with most of our European product sales, we price our products
in the currency of the country into which the products are sold ("Payment
Currencies"). A significant majority of our manufacturing cost is in U.S.
Dollars. A decline in the value of the Payment Currencies relative to the U.S.
Dollar will negatively impact gross margins since our manufacturing costs will
remain approximately the same while our revenues, which are reported in U.S.
Dollars, will decline. In 2000, the gross margin was negatively impacted by
these factors, as discussed in the product sales section under the caption
"Revenues" above. Excluding the impact of foreign exchange rates on reported
sales revenue, cost of sales as a percentage of sales would have been
approximately 20%, down slightly from 1999 primarily due to larger production
quantities in 2000 absorbing our fixed costs. Our cost of sales percentage on an
annual basis has been in the 20% to 22% range in recent years. Except for the
potential impact of unpredictable and uncontrollable changes in Payment
Currencies relative to the U.S. Dollar, we expect the cost of sales as a
percentage of sales revenue in 2001 to remain materially consistent with the
2000 rate. In future years, changes in the nature or mix of our product sales
could impact this relationship.

OPERATING EXPENSES

    Research and development ("R&D") expenses for 2000 were $131.6 million,
compared with $110.2 million for 1999 and $124.8 million for 1998. Major
development projects in 2000 include tenofovir DF for HIV and adefovir dipivoxil
for hepatitis B virus ("HBV"). We incurred increased costs for both of these
programs which are in Phase III clinical trials. Additionally, we made up-front
payments in the fourth quarter of 2000 to in-license two oncology products from
Glaxo and Southern Research Institute. These increases more than offset
significantly lower expenses in 2000 for the development of adefovir dipivoxil
for HIV, a program we discontinued in the fourth quarter of 1999. We expect R&D
expenses in 2001 to be approximately 20% to 30% higher than 2000 due to
increased spending on the continued late-stage development of tenofovir DF for
HIV and adefovir dipivoxil for HBV.

                                       44

    The decrease in R&D expenses in 1999 compared to 1998 was primarily
attributable to reduced research activities at our Boulder, Colorado facility.
In August 1998, we transferred our Boulder-based NeXstar Technology Products
division to Proligo, our equity investee. In addition, in October 1998, we
reduced our R&D workforce in Boulder by 47 employees and recorded an expense of
$1.6 million related to severance packages for the discharged employees. In
1999, we reduced the R&D workforce in Boulder by 30 employees upon completing
the merger with NeXstar. Finally, Gilead had a reduced level of involvement in
the development of Tamiflu in 1999 compared to 1998. These decreases were offset
in part by greater levels of expense in 1999 for the development programs for
adefovir dipivoxil for HBV and tenofovir DF for HIV, as well as an adjustment of
$2.9 million to fully reserve our supply of adefovir dipivoxil for HIV. This
adjustment was made as a result of our decision to discontinue the development
of this product candidate in the United States after a negative recommendation
from an FDA advisory panel.

    Selling, general and administrative ("SG&A") expenses were $82.8 million in
2000, compared with $100.1 million in 1999 and $82.4 million in 1998. The major
factor contributing to the decrease in 2000 from 1999 levels was the inclusion
in SG&A of $18.3 million of merger-related expenses in 1999. Excluding merger
expenses, SG&A expenses in 2000 were essentially flat compared with 1999. Higher
general and administrative ("G&A") expenses in 2000 were offset by savings in
sales and marketing expenses. The increased G&A spending included costs to
implement new and upgraded information technology systems; legal costs incurred
in connection with new collaboration agreements and various corporate projects;
and expenses to meet general corporate reporting requirements. Sales and
marketing expenses in 1999 included costs to expand our sales and marketing
capacity in anticipation of the then-planned commercial launch of adefovir
dipivoxil for HIV, which was discontinued in the fourth quarter of 1999.
Additionally, 2000 sales and marketing expenses reflect cost savings in the U.S.
from the elimination in the second half of 1999 of duplicate positions and
functions within the combined Gilead and NeXstar organization. In 2001, we
expect SG&A expenses to be 25% to 40% higher than 2000 levels, primarily due to
the activities necessary to prepare for the anticipated U.S. and European
commercial launch of tenofovir DF.

    The increase in SG&A expenses in 1999 compared with 1998 was due to merger
expenses of $18.3 million. Excluding the merger expenses, SG&A spending was flat
from 1998 to 1999. During 1999, we recorded $2.3 million of compensation expense
related to a NeXstar stock option plan that requires the use of variable plan
accounting. This charge was substantially offset by cost savings related to the
elimination of duplicate selling, general and administrative positions and
functions within the combined Gilead and NeXstar organization in the second half
of 1999.

    Merger expenses of $18.3 million are included in total SG&A expenses for
1999. These expenses primarily consisted of transaction costs, including
professional fees, filing fees and printing costs; employee severance costs; and
the write-down of certain NeXstar property and equipment that was not expected
to be used in future operations. Total employee severance costs of $5.3 million
relate to the termination of 70 employees, the majority of which were from our
Boulder, Colorado facility. As of December 31, 1999, all employees for whom
severance costs were accrued had been terminated. The balance of the accrued
liability was $2.5 million at December 31, 1999 and substantially all remaining
accrued severance costs were paid to former employees by December 31, 2000. We
do not expect to realize any further cost savings resulting from staff
reductions that occurred after the merger.

LITIGATION SETTLEMENT AND RELATED EXPENSES

    We incurred litigation settlement and related expenses of $1.4 million in
2000, $1.5 million in 1999 and $1.3 million 1998. In 1997 we reached a
settlement with Elan Corporation, plc ("Elan", the successor company to The
Liposome Company) in which both companies agreed to dismiss all legal
proceedings involving AmBisome, Gilead's liposomal formulation of amphotericin
B. Under the terms of the settlement agreement, we made an initial payment to
Elan of $1.8 million and are required to

                                       45

make additional payments through 2006, based on AmBisome sales. The payments are
subject to certain minimum and maximum amounts. A $10.0 million accounting
charge was recorded in 1997 representing the net present value of all future
minimum payments we are required to make. We record an expense each quarter
based on the difference between all future minimum payments and the amount
previously accrued. These amounts have not been significant. We do not expect
the difference between the future minimum and maximum payments to Elan to be
material.

GAIN ON SALE OF SUBSIDIARY

    In 1998, we recognized a $22.1 million gain on the sale of our 51% interest
in our newly established subsidiary, Proligo, a Delaware limited liability
company, to SKW. Proligo was formed in July 1998 and initially consisted of the
assets of our NeXstar Technology Products division, a manufacturer of
oligonucleotides and specialty chemicals for the pharmaceuticals industry. As
payment for the sale of our interest in Proligo, we received $15.0 million and a
49% interest in PerSeptive Biosystems GmbH, a company in Hamburg, Germany, which
specializes in the manufacture of nucleoside phosphoramidite monomers. In
addition, SKW agreed to pay us $3.0 million in guaranteed payments and up to
$20.5 million in performance-based milestones through 2003. As part of the
transaction, we contributed $4.9 million and our 49% interest in PerSeptive
Biosystems GmbH to Proligo. The 49% interest in PerSeptive Biosystems GmbH had a
fair value of approximately $5.5 million. SKW contributed $5.1 million and the
remaining 51% of PerSeptive Biosystems to Proligo.

INTEREST INCOME AND INTEREST EXPENSE

    We reported interest income of $17.6 million in 2000, compared with
$16.4 million in 1999 and $21.8 million in 1998. The increase in 2000 over 1999
was due to higher interest rates on our investment portfolio, as well as
slightly higher average balances of invested funds. The decrease in interest
income in 1999 compared to 1998 was due to both a declining balance of invested
cash as well as slightly lower investment returns in 1999. We expect interest
income in 2001 to increase from 2000 levels due to higher cash balances as a
result of our $250.0 million 5% convertible subordinated notes financing
completed in December 2000.

    We incurred interest expense of $4.4 million in 2000 compared with
$6.5 million in 1999 and $7.2 million in 1998. The decrease in 2000 from 1999
occurred primarily because we incurred interest expense on our 6.25% convertible
debentures only through August 1, 2000, when they were converted to common
stock. Interest expense on other debt, including capital leases, decreased also,
due to continually declining outstanding balances as we repay the debt. This
decrease, however, was offset by interest on our new $250.0 million 5%
convertible subordinated notes issued in December 2000. Interest expense
decreased in 1999 compared to 1998 primarily due to the repayment of debt
obligations including capital leases. We expect interest expense in 2001 to
increase to approximately three times the 2000 expense level as we incur a full
year of expense on the $250 million 5% convertible subordinated notes.

EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE

    In 2000, Gilead recorded $2.9 million as our equity in the loss of our
unconsolidated affiliate, Proligo. This represented our 49% share of Proligo's
loss for the thirteen-month period ended December 31, 2000. During the fourth
quarter of 2000, Proligo changed its fiscal year-end to December 31 from
November 30. For 1999, we recorded $4.7 million equity in the loss of Proligo
for Proligo's fiscal year ended November 30, 1999. In 1998, we recorded
$1.1 million as our equity in the loss of Proligo for the period from
August 15, 1998 (Proligo's inception date) through November 30, 1998. We expect
to continue to recognize losses on our equity investment in Proligo during 2001.

                                       46

    Our investment in Proligo is reported in other noncurrent assets on our
consolidated balance sheet. The carrying amount of this investment was
$6.9 million at December 31, 2000 and $7.6 million at December 31, 1999. In the
three-year period ended December 31, 2000, we funded Proligo with a total of
$9.8 million to maintain our percentage ownership interest in Proligo. We have
no further commitments to provide additional funding to Proligo, and we do not
expect to provide any.

LIQUIDITY AND CAPITAL RESOURCES

    Cash, cash equivalents and marketable securities totaled $512.9 million at
December 31, 2000, up from $294.4 million at December 31, 1999. The increase of
$218.5 million was due to the net proceeds of $241.8 million from our
$250.0 million 5% convertible subordinated notes financing in December 2000.
Other major sources and uses of cash included proceeds from issuances of stock
under employee stock plans, offset by cash used to fund operating activities and
capital expenditures.

    Significant changes in working capital during 2000 included an increase in
accrued clinical and preclinical expenses of $4.5 million, primarily due to the
advanced and accelerated Phase III clinical trials for tenofovir DF for HIV and
adefovir dipivoxil for HBV. Other accrued liabilities increased $4.3 million in
2000, the largest component of which was an unrealized loss on foreign exchange
contracts of $1.7 million at December 31, 2000. This unrealized loss was
partially offset by unrealized foreign exchange gains on accounts receivable
balances at that date, however the gain on receivables is included in the
accounts receivable balance on the balance sheet. Other components of the
increase in other accrued liabilities during 2000 included higher marketing
accruals and various other accruals due to the timing of invoice receipts, and
higher foreign tax liabilities primarily in Italy. Another significant change in
working capital in 2000 was an increase in accounts payable of approximately
$2.1 million, primarily due to the timing of payments to vendors.

    Our accounts receivable balance at December 31, 2000 was $48.8 million
compared to $45.6 million at December 31, 1999. The growth was primarily due to
increased receivable balances in countries in which payments tend to be
relatively slow. In certain cases, these slow payment practices reflect the pace
at which governmental entities reimburse our customers. Sales to customers in
countries that tend to be relatively slow paying have in the past increased, and
in the future may further increase, the average length of time that accounts
receivable are outstanding. This, in turn, may increase the financial risk
related to certain of our customers. In certain countries in which payments have
been slow, particularly Greece, Spain and Italy, our accounts receivable are
significant. At December 31, 2000, our past due accounts receivable for Greece,
Spain and Italy totaled approximately $19.3 million, of which approximately
$10.9 million was more than 120 days past due. At December 31, 1999, past due
receivables for these countries was $15.8 million, of which approximately
$5.0 million was more than 120 days past due. To date, we have experienced only
modest losses with respect to the collection of our accounts receivable and
believe that the past due accounts receivable for Greece, Spain and Italy are
collectible. We continually seek to improve our collection process to ensure
that we fully collect amounts due to us based on our product sales and that
collections are timely.

    Other noncurrent assets increased to $29.1 million at December 31, 2000 from
$13.4 million at December 31, 1999. The increase was primarily due to
$11.4 million of long-term prepaid royalties recorded in the fourth quarter of
2000 related to payments made to IOCB/REGA. These prepayments will be amortized
to royalty expense over the expected commercial life of tenofovir DF and
adefovir dipivoxil when and if FDA approval is obtained and sales of the
products commence. Also included in other noncurrent assets at December 31, 2000
is $8.2 million of deferred debt issuance costs related to the $250 million 5%
convertible subordinated notes financing completed in December 2000. These costs
are being amortized to interest expense over the contractual term of the notes.
These increases in other noncurrent assets were offset by a $2.0 million
decrease due to a receivable from Isis related to a payment due to us in
December 2001. This balance was reclassified to current assets as of
December 31, 2000. Additionally, other noncurrent assets as of December 31, 1999
included deferred

                                       47

debt issuance costs of $1.4 million related to our 6.25% subordinated debentures
which were converted to common stock in August 2000; these costs were
reclassified to additional paid-in capital upon the conversion.

    Long-term deferred revenue at December 31, 2000 is $10.7 million. This
balance represents up-front payments received under two collaboration agreements
that are being recognized as contract revenue over the life of the related
research and development collaboration, manufacturing or supply arrangement.
Upon our adoption of SAB 101 effective January 1, 2000, a total of
$13.7 million of previously recognized contract revenue was recorded as deferred
revenue, of which $2.9 million was recognized as contract revenue in 2000.

    We made capital expenditures of $15.6 million in 2000, $12.5 million in 1999
and $11.0 million in 1998. These expenditures were primarily for facilities
improvements to accommodate our growth, as well as for laboratory and
manufacturing equipment. We expect our capital spending to continue at the 2000
level or higher in the future, particularly to accommodate our expanded research
and development activities.

    In August 2000, we redeemed our 6.25% convertible subordinated debentures at
a cash price of $1,030 per $1,000 principal amount of debentures outstanding,
plus accrued interest, which was the redemption price provided for in the
original debentures indenture. Upon redemption, the entire $79.5 million in
principal amount of the debentures outstanding at that time was converted into
3,567,578 newly issued shares of Gilead common stock by August 15, 2000.
Deferred debt issuance costs of $1.6 million related to the debentures were
charged to additional paid in capital in connection with the conversion of the
debentures into common stock.

    On December 13, 2000, we issued $250 million of 5% convertible subordinated
notes due December 15, 2007 in a private offering. The notes are currently
convertible into a total of up to 5,089,058 shares of Gilead common stock at
$49.125 per share. The $49.125 conversion price was higher than our common stock
price at the notes' issuance date. The notes are redeemable in whole or in part,
at our option, at any time on or after December 20, 2003, at specified
redemption prices plus accrued interest. Debt issuance costs of $8.2 million
incurred in connection with the issuance of the notes were recorded as other
noncurrent assets, and are being amortized to interest expense on a
straight-line basis over the contractual term of the notes.

    We maintain a $10.0 million unsecured line of credit that bears interest at
a floating rate with a major financial institution. Under the terms of the line
of credit, we are required to maintain certain financial ratios and there are
limitations on our ability to incur additional debt or to engage in certain
significant transactions. The line of credit, which includes a foreign exchange
facility, expires on April 16, 2001. We currently do not intend to renew this
line when it expires, but we will maintain the foreign exchange facility. As of
December 31, 2000, we had no outstanding borrowings under the line.

    We believe that our existing capital resources, supplemented by net product
revenues and contract and royalty revenues, will be adequate to satisfy our
capital needs for the foreseeable future. As of December 31, 2000, we were
entitled to additional cash payments of up to $11.6 million from Roche if and
when Roche achieves specific additional Tamiflu developmental and regulatory
milestones. We are also entitled to additional cash payments from EyeTech of up
to $25.0 million if and when EyeTech reaches certain NX 1838 development
milestones. We cannot assure you that any of these milestones will be met. Our
future capital requirements will depend on many factors, including:

    - the progress of our research and development efforts,

    - the scope and results of preclinical studies and clinical trials,

    - the cost, timing and outcome of regulatory reviews,

    - the rate of technological advances,

                                       48

    - determinations as to the commercial potential of our products under
      development,

    - the commercial performance of AmBisome and any of our products in
      development that receive marketing approval,

    - administrative expenses,

    - the status of competitive products,

    - the establishment of manufacturing capacity or third-party manufacturing
      arrangements,

    - the expansion of sales and marketing capabilities,

    - our possible geographic expansion, and

    - the establishment of additional collaborative relationships with other
      companies.

    We may in the future require additional funding, which could be in the form
of proceeds from equity or debt financings or additional collaborative
agreements with corporate partners. If such funding is required, we can not
assure you that it will be available on favorable terms, if at all.

PROSPECTIVE ACCOUNTING PRONOUNCEMENT

    Statement of Financial Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, is effective for Gilead
as of January 1, 2001. The standards require that we recognize all derivatives
as either assets or liabilities measured at fair value. If the derivative is
designated as, and meets the definition of, a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as, and
meets the definition of, a cash flow hedge, the effective portions of changes in
the fair value of the derivative are recorded in other comprehensive income and
are recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings immediately. SFAS 133 also requires warrants to purchase
capital stock of a non-public company which include a net settlement feature to
be recorded in the balance sheet at fair value, with an offsetting amount
recorded in the results of operations. The fair value of the warrants are
required to be remeasured at each balance sheet date, with changes in the fair
value of the warrants recorded in results of operations. We have cash flow
hedges and warrants in private companies with a net settlement feature covered
by SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, we will recognize an
aggregate credit to results of operations, recorded as a cumulative change in
accounting principle, of approximately $1.1 million; an increase in net assets
of approximately $1.7 million; and an increase in other comprehensive income of
approximately $0.6 million.

MARKET RISK DISCLOSURES

FOREIGN CURRENCY EXCHANGE RISK

    Our operations include manufacturing and sales activities in the United
States as well as sales activities in Europe and Australia. 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 we distribute our products. Our operating results are exposed
to changes in exchange rates between the U.S. Dollar and various foreign
currencies, the most significant of which are the Euro, the British Pound and
the Australian Dollar. When the U.S. Dollar strengthens against these
currencies, the relative value of sales made in the respective foreign currency
decreases. Conversely, when the U.S. Dollar weakens, the relative amounts of
such sales increase. Overall, we are a net

                                       49

receiver of foreign currencies and, therefore, benefit from a weaker U.S. Dollar
and are adversely affected by a stronger U.S. Dollar relative to those foreign
currencies in which we transact significant amounts of business.

    To mitigate the impact of changes in currency exchange rates on cash flows
from our foreign currency sales transactions, we enter into foreign exchange
forward contracts to hedge our foreign currency-denominated accounts receivable.
Additionally, to mitigate the impact of currency rate fluctuations on our cash
outflows for certain foreign currency-denominated raw materials purchases, we
enter into foreign exchange forward contracts to hedge our foreign
currency-denominated accounts payable.

    The following table summarizes the notional amounts, average currency
exchange rates and fair values of our open foreign exchange forward contracts at
December 31, 2000. The contracts have maturities of one year or less with one
exception. One hedge contract intended to hedge raw materials purchases in the
first quarter of 2002, with a notional amount of $4.1 million and fair value of
$0.2 million, has a maturity of 13 months. Average rates are stated in terms of
the amount of foreign currency per U.S. Dollar. Fair values represent estimated
settlement amounts at December 31, 2000 (notional amounts and fair values in
$U.S. thousands):



                                                                         FAIR VALUE
CURRENCY                            NOTIONAL AMOUNT   AVERAGE RATE   DECEMBER 31, 2000
--------                            ---------------   ------------   ------------------
                                                            
Australian Dollar.................      $ 1,499          1.8021            $   (11)
British Pound.....................        5,314          0.6893               (155)
Danish Krone......................            6          8.1678                 (6)
Euro..............................       37,152          1.1026             (1,451)
Norwegian Krone...................          187          9.2359                (10)
Swedish Krona.....................          235          9.5820                 (4)
Swiss Franc.......................          305          1.7233                (21)
French Franc......................        9,062          7.3891                558


INTEREST RATE RISK

    Our portfolio of available-for-sale investment securities and our fixed-rate
liabilities create an exposure to interest rate risk. With respect to the
investment portfolio, we adhere to an investment policy that requires us to
limit amounts invested in securities based on maturity, industry group,
investment type and issuer, except for securities issued by the U.S. government.
The goals of our investment policy, in order of priority, are as follows:

1.  Safety and preservation of principal and diversification of risk;

2.  Liquidity of investments sufficient to meet cash flow requirements; and

3.  Competitive after-tax rate of return.

                                       50

    The following table summarizes the expected maturities and average interest
rates of our interest-bearing assets and fixed-rate liabilities at December 31,
2000 (dollars in thousands).



                                               YEARS ENDING DECEMBER 31,                                          FAIR VALUE
                                  ----------------------------------------------------                           DECEMBER 31,
                                    2001       2002       2003       2004       2005     THEREAFTER    TOTAL         2000
                                  --------   --------   --------   --------   --------   ----------   --------   -------------
                                                                                         
ASSETS
Available-for-sale securities...  $311,023   $116,693   $25,426         --         --           --    $453,142      $453,142
Average interest rate...........      6.43%      6.54%     6.18%

LIABILITIES
Minimum litigation settlement,
  including current portion.....  $  1,178   $  1,281   $ 1,394     $1,516     $1,649     $    435    $  7,453      $  7,453
Discount rate...................      8.50%      8.50%     8.50%      8.50%      8.50%        8.50%
Long-term obligations, including
  current portion(1)............  $  3,420   $  2,022   $   334         --         --           --    $  5,776      $  5,776
Average interest rate...........      9.58%      9.95%    11.50%
Convertible subordinated
  debentures....................        --         --        --         --         --     $250,000    $250,000      $211,597
Interest rate...................                                                              5.00%


------------------------------

(1) Long-term obligations consist of capital leases and debt secured by
    property, plant and equipment. The interest portion of payments due is
    included.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Quantitative and qualitative disclosure about market risk is included under
the caption "Market Risk Disclosures" in Item 7.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements required by this item are set forth beginning at
page 58 of this report.

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

    Not applicable.

                                       51

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item concerning our directors and executive
officers is incorporated by reference to the sections of our Definitive Proxy
Statement filed with the SEC pursuant to Regulation 14A in connection with the
2001 Annual Meeting (the "Proxy Statement") under the headings "Nominees",
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."

ITEM 11. EXECUTIVE COMPENSATION

    The information required by this Item is incorporated by reference to the
sections of our Proxy Statement under the headings "Executive Compensation" and
"Compensation Committee Report."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item is incorporated by reference to the
section of our Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this Item is incorporated by reference to the
sections of our Proxy Statement under the headings "Compensation Committee
Interlocks and Insider Participation," "Certain Other Transactions" and
"Executive Compensation."

                                       52

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

    (1) Schedule II is included on page 96 of this report. All other schedules
       are omitted because they are not required or the required information is
       included in the financial statements or notes thereto.

    (2) Exhibits

    The following exhibits are filed herewith or incorporated by reference:



       EXHIBIT          EXHIBIT
      FOOTNOTE           NUMBER                      DESCRIPTION OF DOCUMENT
---------------------   --------                     -----------------------
                             
                          3.1      Amended and Restated Certificate of Incorporation of the
                                   Registrant, as amended.

                  (1)     3.2      Bylaws of the Registrant, as amended and restated March 30,
                                   1999.

                          4.1      Reference is made to Exhibit 3.1 and Exhibit 3.2.

                  (4)     4.2      Amended and Restated Rights Agreement dated as of
                                   October 21, 1999 between the Registrant and ChaseMellon
                                   Shareholder Services, LLC.

                 (10)     4.3      Agreement and Plan of Merger dated February 28, 1999 by and
                                   among Registrant, Gazelle Acquisition Sub, Inc. and NeXstar
                                   Pharmaceuticals, Inc.

                 (24)     4.4      Indenture dated as of December 18, 2000 between the
                                   Registrant and Chase Manhattan Bank and Trust Company,
                                   National Association, including therein the forms of the
                                   notes.

                 (24)     4.5      Registration Rights Agreement dated as of December 18, 2000
                                   between the Registrant and J.P. Morgan Securities Inc.,
                                   Chase Securities Inc., Lehman Brothers Inc. and Morgan
                                   Stanley & Co. Incorporated.

                  (5)    10.1      Form of Indemnity Agreement entered into between the
                                   Registrant and its directors and executive officers.

                  (5)    10.2      Form of Employee Proprietary Information and Invention
                                   Agreement entered into between Registrant and certain of its
                                   officers and key employees.

                  (5)    10.3      Registrant's 1987 Incentive Stock Option Plan and related
                                   agreements.

                  (5)    10.4      Registrant's 1987 Supplemental Stock Option Plan and related
                                   agreements.

                 (22)    10.5      Registrant's Employee Stock Purchase Plan, as amended
                                   March 30, 1999.

                         10.6      Registrant's 1991 Stock Option Plan, as amended and restated
                                   April 5, 2000.

                  (5)    10.7      Form of Non-Qualified Stock Option issued to certain
                                   executive officers and directors in 1991.

                  (5)    10.8      Relocation Loan Agreement, dated as of November 1, 1990
                                   among Registrant, John C. Martin and Rosemary Martin.

                  (6)    10.9      Vintage Park Research and Development Net Lease by and
                                   between Registrant and Vintage Park Associates dated March
                                   27, 1992 for premises located at 344B, 346 and 353 Lakeside
                                   Drive, Foster City, California with related addendum,
                                   exhibits and amendments.


                                       53




       EXHIBIT          EXHIBIT
      FOOTNOTE           NUMBER                      DESCRIPTION OF DOCUMENT
---------------------   --------                     -----------------------
                             
                  (5)    10.10     Letter Agreement, dated as of September 23, 1991 between
                                   Registrant and IOCB/ REGA, with exhibits with certain
                                   confidential information omitted.

                  (6)    10.11     Vintage Park Research and Development Net Lease by and
                                   between Registrant and Vintage Park Associates dated
                                   September 16, 1993 for premises located at 335 Lakeside
                                   Drive, Foster City, California with related exhibits.

                  (7)    10.12     Amendment Agreement, dated October 25, 1993 between
                                   Registrant and IOCB/ REGA, and related license agreements
                                   and exhibits with certain confidential information omitted.

                         10.13     Amendment Agreement, dated December 27, 2000 between
                                   Registrant and IOCB/ REGA.

                 (22)    10.14     Patent Rights Purchase Agreement between Registrant and Isis
                                   Pharmaceuticals, Inc. dated December 18, 1998 with certain
                                   confidential information omitted.

                  (2)    10.15     Loan Agreement, dated as of October 1, 1994 among Registrant
                                   and Mark L. Perry and Melanie P. Pena.

                 (21)    10.16     Registrant's 1995 Non-Employee Directors' Stock Option Plan,
                                   as amended January 26, 1999, and related form of stock
                                   option grant.

                  (8)    10.17     Vintage Park Research and Development Lease by and between
                                   Registrant and WCB Sixteen Limited Partnership dated
                                   June 24, 1996 for premises located at 333 Lakeside Drive,
                                   Foster City, California.

                  (8)    10.18     Amendment No. 1 to Vintage Park Research and Development
                                   Lease by and between Registrant and WCB Seventeen Limited
                                   Partnership dated June 24, 1996 for premises located at 335
                                   Lakeside Drive, Foster City, California.

                  (8)    10.19     Amendment No. 2 to Vintage Park Research and Development
                                   Lease by and between Registrant and WCB Seventeen Limited
                                   Partnership dated June 24, 1996 for premises located at
                                   344B, 346 and 353 Lakeside Drive, Foster City, California.

                  (9)    10.20     License and Supply Agreement between Registrant and
                                   Pharmacia & Upjohn S.A. dated August 7, 1996 with certain
                                   confidential information omitted.

                  (9)    10.21     Development and License Agreement between Registrant and F.
                                   Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. dated
                                   September 27, 1996 with certain confidential information
                                   omitted.

                 (22)    10.22     Amendment No. 3 to Vintage Park Research and Development
                                   Lease by and between Registrant and Spieker Properties, L.P.
                                   dated August 14, 1998 for premises located at 355 Lakeside
                                   Drive, Foster City, California.

                  (3)    10.23     NeXstar Pharmaceuticals, Inc.'s 1993 Incentive Stock Plan,
                                   adopted February 8, 1993, as amended.

                 (13)    10.24     NeXstar Pharmaceuticals, Inc.'s 1995 Director Option Plan,
                                   adopted July 25, 1995.

                 (14)    10.25     Vestar, Inc. 1988 Stock Option Plan.

                 (14)    10.26     Lease, dated March 26, 1987, between Vestar, Inc. and
                                   Majestic Realty Co. and Patrician Associates, Inc. and
                                   Amendment No. 1 thereto and Amendment No. 2 thereto, dated
                                   as of June 8, 1992.


                                       54




       EXHIBIT          EXHIBIT
      FOOTNOTE           NUMBER                      DESCRIPTION OF DOCUMENT
---------------------   --------                     -----------------------
                             
                 (12)    10.27     Third Amendment, dated January 11, 1996, between Majestic
                                   Realty Co. and Patrician Associates, Inc. and the
                                   Registrant, to Lease, dated March 26, 1987, between Vestar,
                                   Inc. and Majestic Realty Co. and Patrician Associates, Inc.

                 (15)    10.28     Assignment and Royalty Agreement, dated December 21, 1990,
                                   effective as of June 2, 1989, between Vestar, Inc. and City
                                   of Hope National Medical Center.

                 (12)    10.29     License Agreement, effective as of August 12, 1986, between
                                   Vestar, Inc. and The Regents of the University of
                                   California.

                 (14)    10.30     Agreement by and between Fujisawa USA, Inc. and Vestar,
                                   Inc., dated August 9, 1991, and Amendment No. 1 thereto,
                                   dated as of May 17, 1994.

                 (13)    10.31     Amendment No. 2 to agreement between Fujisawa USA, Inc. and
                                   Vestar, Inc., dated as of April 3, 1995, between Fujisawa
                                   USA, Inc. and Vestar, Inc. with certain confidential
                                   information omitted.

                 (12)    10.32     Amendment No. 3 to Agreement between Fujisawa USA, Inc. and
                                   the Registrant, dated March 4, 1996, to the Agreement by and
                                   between Fujisawa USA, Inc. and Vestar, Inc., dated
                                   August 9, 1991.

                 (14)    10.33     Lease, dated April 13, 1992, between Vestar, Inc. and
                                   Majestic Realty Co. and Patrician Associates, Inc.

                 (12)    10.34     First Amendment to Lease, dated April 10, 1993, between
                                   Majestic Realty Co. and Patrician Associates, Inc. and
                                   Vestar, Inc. amending Lease, dated April 13, 1992, between
                                   Majestic Realty Co. and Patrician Associates, Inc. and
                                   Vestar, Inc.

                 (16)    10.35     Industrial Real Estate Lease, dated July 1, 1996, by and
                                   between Wilderness Place, Ltd. and NeXstar Pharmaceuticals,
                                   Inc.

                 (17)    10.36     Sublease Agreement, dated July 31, 1996, between Sybase,
                                   Inc. and NeXstar Pharmaceuticals, Inc.

                 (11)    10.37     License and Distribution Agreement, dated September 26,
                                   1997, by and between Sumitomo Pharmaceuticals Co., Ltd. and
                                   NeXstar Pharmaceuticals, Inc. with certain confidential
                                   information omitted.

                 (18)    10.38     Settlement Agreement, dated August 11, 1997, by and among
                                   NeXstar Pharmaceuticals, Inc., Fujisawa U.S.A., Inc. and The
                                   Liposome Company, Inc. with certain confidential information
                                   omitted.

                 (19)    10.39     Amended and Restated Limited Liability Company Agreement of
                                   Proligo L.L.C., dated August 15, 1998, by and among NeXstar
                                   Pharmaceuticals International, Inc., SKW Americas, Inc. and
                                   NeXstar Pharmaceuticals, Inc.

                 (20)    10.40     Amendment, dated April 30, 1998, between Sumitomo
                                   Pharmaceuticals Co., Ltd. and NeXstar Pharmaceuticals, Inc.
                                   to the License and Distribution Agreement, dated September
                                   26, 1996, between Sumitomo and NeXstar Pharmaceuticals, Inc.

                 (23)    10.41     Office/Light Manufacturing Lease between THW Partners
                                   Limited Partnership and Registrant dated January 25, 2000.

                         21.1      Subsidiaries of the Registrant.

                         23.1      Consent of Ernst & Young LLP, Independent Auditors.

                         23.2      Consent of PricewaterhouseCoopers LLP, Independent Auditors.


                                       55




       EXHIBIT          EXHIBIT
      FOOTNOTE           NUMBER                      DESCRIPTION OF DOCUMENT
---------------------   --------                     -----------------------
                             
                         24.1      Power of Attorney. Reference is made to Signature Page.


------------------------

 (1) Filed as an exhibit to Registrant's Annual Report on Form 10-K/A for the
     fiscal year ended December 31, 1998, and incorporated herein by reference.

 (2) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
     quarter ended December 31, 1994, and incorporated herein by reference.

 (3) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Quarterly Report on
     Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by
     reference.

 (4) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
     October 22, 1999, and incorporated herein by reference.

 (5) Filed as an exhibit to Registrant's Registration Statement on Form S-1
     (No. 33-55680), as amended, and incorporated herein by reference.

 (6) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
     quarter ended September 30, 1993, and incorporated herein by reference.

 (7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
     fiscal year ended March 31, 1994, and incorporated herein by reference.

 (8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1996, and incorporated herein by reference.

 (9) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
     quarter ended September 30, 1996, and incorporated herein by reference.

 (10) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
      March 9, 1999, and incorporated herein by reference.

 (11) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
      fiscal year ended December 31, 1996, and incorporated herein by reference.

 (12) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
      fiscal year ended December 31, 1995, and incorporated herein by reference.

 (13) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
      quarterly period ended September 30, 1995, and incorporated herein by
      reference.

 (14) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
      fiscal year ended December 31, 1994, and incorporated herein by reference.

 (15) Filed on March 22, 1991 as an exhibit to NeXstar Pharmaceuticals, Inc.'s
      Registration Statement on Form S-2 (File No. 33-39549), and incorporated
      herein by reference.

 (16) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
      quarterly period ended June 30, 1996, and incorporated herein by
      reference.

 (17) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
      quarterly period ended September 30, 1996, and incorporated herein by
      reference.

 (18) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
      quarterly period ended September 30, 1997, and incorporated herein by
      reference.

                                       56

 (19) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
      quarter ended September 30, 1998, and incorporated herein by reference.

 (20) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
      quarter ended June 30, 1998, and incorporated herein by reference.

 (21) Filed as an exhibit to Registrant's Form 10-K/A for the year ended
      December 31, 1998, and incorporated herein by reference.

 (22) Filed as an exhibit to Registrant's Form 10-K for the year ended
      December 31, 1998, and incorporated herein by reference.

 (23) Filed as an exhibit to Registrant's Form 10-K for the year ended
      December 31, 1999, and incorporated herein by reference.

 (24) Filed as an exhibit to Registrant's Registration Statement on Form S-3
      (No. 333-54350), as amended, and incorporated herein by reference.

(b) Reports on Form 8-K

    On December 12, 2000, the Registrant filed a Current Report on Form 8-K
relating to its intention to sell convertible subordinated notes. On
December 14, 2000, the Registrant filed a Current Report on Form 8-K relating to
entering into an agreement to sell convertible subordinated notes. On
January 12, the Registrant filed a Current Report on Form 8-K relating to
entering into an agreement with Cubist Pharmaceuticals, Inc.

                                       57

                             GILEAD SCIENCES, INC.

                       CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

                                    CONTENTS


                                                           
Report of Independent Auditors..............................     59

Audited Consolidated Financial Statements:

Consolidated Balance Sheets.................................     61

Consolidated Statements of Operations.......................     62

Consolidated Statement of Stockholders' Equity..............     63

Consolidated Statements of Cash Flows.......................     64

Notes to Consolidated Financial Statements..................     66


                                       58

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Gilead Sciences, Inc.

We have audited the accompanying consolidated balance sheets of Gilead
Sciences, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in Item 14(a) of
this Annual Report on Form 10-K. These financial statements and schedule are the
responsibility of the management of Gilead Sciences, Inc. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of Proligo L.L.C., a limited
liability company, the investment in which is reflected in the accompanying
consolidated financial statements using the equity method of accounting. The
investment in Proligo L.L.C. represents 1.0% and 1.7% of consolidated total
assets at December 31, 2000 and 1999, respectively, and the Company's equity in
the net loss of Proligo L.L.C. is $2,858,000, $4,656,000, and $1,101,000 in
2000, 1999 and 1998, respectively. The 2000, 1999 and 1998 financial statements
of Proligo L.L.C. have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the 2000, 1999 and 1998 consolidated
financial statements relates to data included for Proligo L.L.C., it is based
solely on their report.

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 and the report of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Gilead Sciences, Inc.
and subsidiaries at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also in our opinion, the financial statement
schedule referred to above, 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 Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for non-refundable
up-front fees received in connection with collaboration agreements.

                                          ERNST & YOUNG LLP

Palo Alto, California
January 23, 2001

                                       59

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Members of Proligo LLC:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of members' equity and of cash flows
present fairly, in all material respects, the financial position of Proligo LLC
and its subsidiaries at December 31, 2000 and November 30, 1999 and 1998, and
the results of their operations and their cash flows for the thirteen-months
ended December 31, 2000, the year ended November 30, 1999, and the period August
15, 1998 to November 30, 1998, respectively, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Broomfield, Colorado
January 12, 2001

                                       60

                             GILEAD SCIENCES, INC.

                          CONSOLIDATED BALANCE SHEETS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                    
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 197,292   $  47,011
  Marketable securities.....................................    315,586     247,383
  Accounts receivable, net of allowance for doubtful
    accounts of $2,300 in 2000 and $2,333 in 1999...........     48,814      45,599
  Inventories...............................................     20,562      20,959
  Prepaid expenses and other................................     11,544      11,029
                                                              ---------   ---------
Total current assets........................................    593,798     371,981
Property, plant and equipment, net..........................     55,174      51,398
Other noncurrent assets.....................................     29,127      13,429
                                                              ---------   ---------
                                                              $ 678,099   $ 436,808
                                                              =========   =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  11,605   $   9,481
  Accrued clinical and preclinical expenses.................      9,925       5,467
  Accrued compensation and employee benefits................      9,995       9,901
  Other accrued liabilities.................................     19,324      15,004
  Deferred revenue..........................................      4,355       4,833
  Long-term obligations due within one year.................      3,034       3,191
                                                              ---------   ---------
Total current liabilities...................................     58,238      47,877
Long-term deferred revenue..................................     10,730          --
Accrued litigation settlement expenses due after one year...      5,769       6,853
Long-term obligations due after one year....................      2,238       5,253
Convertible subordinated debt...............................    250,000      79,533
Commitments and contingencies (see accompanying notes)
Stockholders' equity:
  Preferred stock, par value $.001 per share, issuable in
    series; 5,000,000 shares authorized; none outstanding...         --          --
  Common stock, par value $.001 per share; 100,000,000
    shares authorized; 94,287,602 shares issued and
    outstanding at December 31, 2000 and 88,185,558 shares
    issued and outstanding at December 31, 1999.............         94          88
  Additional paid-in capital................................    857,942     749,037
  Accumulated other comprehensive loss......................       (901)     (2,527)
  Deferred compensation.....................................         (3)        (74)
  Accumulated deficit.......................................   (506,008)   (449,232)
                                                              ---------   ---------
Total stockholders' equity..................................    351,124     297,292
                                                              ---------   ---------
                                                              $ 678,099   $ 436,808
                                                              =========   =========


                             See accompanying notes

                                       61

                             GILEAD SCIENCES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Revenues:
  Product sales, net........................................  $149,709   $139,890   $114,176
  Royalty revenue, net......................................    24,591     10,431      7,305
  Contract revenue..........................................    18,315     18,658     29,638
  Contract revenue--SAB 101.................................     2,940         --         --
                                                              --------   --------   --------
Total revenues..............................................   195,555    168,979    151,119

Expenses:
  Cost of goods sold........................................    33,512     29,546     23,357
  Research and development..................................   131,568    110,212    124,827
  Selling, general and administrative.......................    82,793    100,080     82,447
                                                              --------   --------   --------
Total costs and expenses....................................   247,873    239,838    230,631
                                                              --------   --------   --------
Loss from operations........................................   (52,318)   (70,859)   (79,512)
Gain on sale of a majority interest in a subsidiary.........        --         --     22,132
Interest income.............................................    17,634     16,435     21,765
Interest expense............................................    (4,365)    (6,518)    (7,183)
                                                              --------   --------   --------
Loss before provision for income taxes, equity in loss of
  unconsolidated affiliate and cumulative effect of change
  in accounting principle...................................   (39,049)   (60,942)   (42,798)
Provision for income taxes..................................     1,199        888        859
Equity in loss of unconsolidated affiliate..................    (2,858)    (4,656)    (1,101)
                                                              --------   --------   --------
Loss before cumulative effect of change in accounting
  principle.................................................   (43,106)   (66,486)   (44,758)
Cumulative effect of change in accounting principle.........   (13,670)        --         --
                                                              --------   --------   --------
Net loss....................................................  $(56,776)  $(66,486)  $(44,758)
                                                              ========   ========   ========
Basic and diluted net loss per common share:
  Loss before cumulative effect of change in accounting
    principle...............................................  $  (0.47)  $  (0.78)  $  (0.55)
  Cumulative effect of change in accounting principle.......     (0.15)        --         --
                                                              --------   --------   --------
  Net loss..................................................  $  (0.62)  $  (0.78)  $  (0.55)
                                                              ========   ========   ========
Pro forma amounts assuming the change in accounting
  principle had been applied retroactively:
  Net loss..................................................  $(43,106)  $(62,826)  $(40,098)
                                                              ========   ========   ========
  Basic and diluted net loss per common share...............  $  (0.47)  $  (0.73)  $  (0.49)
                                                              ========   ========   ========
Common shares used to calculate basic and diluted net loss
  per common share..........................................    91,050     85,652     82,030
                                                              ========   ========   ========


                             See accompanying notes

                                       62

                             GILEAD SCIENCES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


                                                                                        ACCUMULATED
                                                                                           OTHER
                                                      COMMON STOCK        ADDITIONAL   COMPREHENSIVE
                                      PREFERRED   ---------------------    PAID-IN        INCOME         DEFERRED     ACCUMULATED
                                        STOCK       SHARES      AMOUNT     CAPITAL        (LOSS)       COMPENSATION     DEFICIT
                                      ---------   ----------   --------   ----------   -------------   ------------   -----------
                                                                                                 
Balance at December 31, 1997........    $  1      80,850,434     $81       $696,119       $   (50)        $(437)       $(337,988)
  Net loss..........................      --              --      --             --            --            --          (44,758)
  Unrealized loss on
    available-for-sale investments,
    net.............................      --              --      --             --          (301)           --               --
  Foreign currency translation
    adjustment......................      --              --      --             --            14            --               --
  Comprehensive loss................      --              --      --             --            --            --               --
  Private issuance of common
    stock...........................      --         728,514       1          9,982            --            --               --
  Employee stock purchase plan......      --         266,808      --          2,879            --            --               --
  Option exercises..................      --       1,279,918       1          7,509            --            --               --
  Amortization of deferred
    compensation....................      --              --      --             --            --           212               --
  Compensatory stock transactions...      --              --      --            434            --            --               --
                                        ----      ----------     ---       --------       -------         -----        ---------
Balance at December 31, 1998........       1      83,125,674      83        716,923          (337)         (225)        (382,746)
  Net loss..........................      --              --      --             --            --            --          (66,486)
  Unrealized loss on
    available-for-sale investments,
    net.............................      --              --      --             --        (1,602)           --               --
  Foreign currency translation
    adjustment......................      --              --      --             --          (588)           --               --
  Comprehensive loss................      --              --      --             --            --            --               --
  Employee stock purchase plan......      --         200,332      --          3,075            --            --               --
  Option exercises, net.............      --       2,506,446       3         26,137            --            --               --
  Warrant exercises, net............      --          64,604      --             80            --            --               --
  Conversion of 1,133,786 shares of
    preferred stock.................      (1)      2,267,572       2             (1)           --            --               --
  Conversion of convertible
    subordinated debentures.........      --          20,930      --            467            --            --               --
  Amortization of deferred
    compensation....................      --              --      --             --            --           151               --
  Compensatory stock transactions...      --              --      --          2,356            --            --               --
                                        ----      ----------     ---       --------       -------         -----        ---------
Balance at December 31, 1999........      --      88,185,558      88        749,037        (2,527)          (74)        (449,232)
  Net loss..........................      --              --      --             --            --            --          (56,776)
  Unrealized gain on
    available-for-sale investments,
    net.............................      --              --      --             --         2,071            --               --
  Foreign currency translation
    adjustment......................      --              --      --             --          (445)           --               --
  Comprehensive loss................      --              --      --             --            --            --               --
  Employee stock purchase plan......      --         203,800      --          3,942            --            --               --
  Option exercises, net.............      --       2,316,996       2         26,507            --            --               --
  Warrant exercises, net............      --          12,550      --             --            --            --               --
  Conversion of convertible
    subordinated debentures.........      --       3,568,698       4         77,943            --            --               --
  Amortization of deferred
    compensation....................      --              --      --             --            --            71               --
  Compensatory stock transactions...      --              --      --            513            --            --               --
                                        ----      ----------     ---       --------       -------         -----        ---------
Balance at December 31, 2000........    $ --      94,287,602     $94       $857,942       $  (901)        $  (3)       $(506,008)
                                        ====      ==========     ===       ========       =======         =====        =========



                                          TOTAL
                                      STOCKHOLDERS'
                                         EQUITY
                                      -------------
                                   
Balance at December 31, 1997........     $357,726
  Net loss..........................      (44,758)
  Unrealized loss on
    available-for-sale investments,
    net.............................         (301)
  Foreign currency translation
    adjustment......................           14
                                         --------
  Comprehensive loss................      (45,045)
  Private issuance of common
    stock...........................        9,983
  Employee stock purchase plan......        2,879
  Option exercises..................        7,510
  Amortization of deferred
    compensation....................          212
  Compensatory stock transactions...          434
                                         --------
Balance at December 31, 1998........      333,699
  Net loss..........................      (66,486)
  Unrealized loss on
    available-for-sale investments,
    net.............................       (1,602)
  Foreign currency translation
    adjustment......................         (588)
                                         --------
  Comprehensive loss................      (68,676)
  Employee stock purchase plan......        3,075
  Option exercises, net.............       26,140
  Warrant exercises, net............           80
  Conversion of 1,133,786 shares of
    preferred stock.................           --
  Conversion of convertible
    subordinated debentures.........          467
  Amortization of deferred
    compensation....................          151
  Compensatory stock transactions...        2,356
                                         --------
Balance at December 31, 1999........      297,292
  Net loss..........................      (56,776)
  Unrealized gain on
    available-for-sale investments,
    net.............................        2,071
  Foreign currency translation
    adjustment......................         (445)
                                         --------
  Comprehensive loss................      (55,150)
  Employee stock purchase plan......        3,942
  Option exercises, net.............       26,509
  Warrant exercises, net............           --
  Conversion of convertible
    subordinated debentures.........       77,947
  Amortization of deferred
    compensation....................           71
  Compensatory stock transactions...          513
                                         --------
Balance at December 31, 2000........     $351,124
                                         ========


                             See accompanying notes

                                       63

                             GILEAD SCIENCES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)



                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                             
OPERATING ACTIVITIES:
  Net loss..................................................  $ (56,776)  $ (66,486)  $ (44,758)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
      Depreciation and amortization.........................     12,008      12,623      13,231
      Net effect of change in accounting principle..........     10,730          --          --
      Compensation expense from stock option transactions...        513       2,356         434
      Gain on sale of a majority interest in a subsidiary...         --          --     (22,483)
      Equity in loss of unconsolidated affiliate............      2,858       4,656       1,101
      Litigation settlement charges.........................        667         754         827
      Net provision for doubtful accounts...................         30         888        (407)
      Reduction in allowance for note receivable............         --          --        (550)
      Net unrealized (gain) loss on foreign currency
        transactions........................................     (1,615)      2,846      (1,628)
      Changes in operating assets and liabilities:
        Accounts receivable.................................     (3,942)     (7,041)     (6,523)
        Inventories.........................................        397      (4,409)        860
        Prepaid expenses and other assets...................        766        (349)      5,298
        Long-term prepaid royalties.........................    (11,367)         --          --
        Accounts payable....................................      2,232       1,443        (502)
        Accrued liabilities.................................      5,775     (11,389)     10,159
        Deferred revenue (excluding net effect of change in
          accounting principle).............................       (478)      1,558      (6,383)
                                                              ---------   ---------   ---------
Net cash used in operating activities.......................    (38,202)    (62,550)    (51,324)

INVESTING ACTIVITIES:
  Purchases of marketable securities........................   (229,862)   (186,997)   (488,407)
  Sales of marketable securities............................     29,490     101,943     390,426
  Maturities of marketable securities.......................    134,240      83,677     166,129
  Capital expenditures......................................    (15,621)    (12,475)    (11,010)
  Proceeds from sale of a majority interest in a subsidiary,
    net of closing costs....................................         --          --      14,652
  Investment in unconsolidated affiliate....................     (2,450)     (2,450)     (4,900)
  Payments received on note receivable......................         --          --         550
                                                              ---------   ---------   ---------
Net cash provided by (used in) investing activities.........    (84,203)    (16,302)     67,440

FINANCING ACTIVITIES:
  Proceeds from issuances of common stock...................     30,451      29,295      20,372
  Payments on short-term borrowings, net....................         --          --      (5,102)
  Proceeds from issuance of long-term debt..................         --          74       4,478
  Repayments of long-term debt..............................     (3,156)     (5,394)     (6,606)
  Proceeds from issuance of convertible subordinated notes,
    net of issuance costs...................................    241,750          --          --
                                                              ---------   ---------   ---------
Net cash provided by financing activities...................    269,045      23,975      13,142
Effect of exchange rate changes on cash.....................      3,641         752         573
                                                              ---------   ---------   ---------
Net increase (decrease) in cash and cash equivalents........    150,281     (54,125)     29,831
Cash and cash equivalents at beginning of year..............     47,011     101,136      71,305
                                                              ---------   ---------   ---------
Cash and cash equivalents at end of year....................  $ 197,292   $  47,011   $ 101,136
                                                              =========   =========   =========


                             See accompanying notes

                                       64

                             GILEAD SCIENCES, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                 (IN THOUSANDS)



                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid.............................................  $   5,417   $   6,234   $   6,793
  Income taxes paid.........................................        493         527         790

DISCLOSURES OF GAIN ON SALE OF A MAJORITY INTEREST IN A
  SUBSIDIARY:
  Cash receipts, net of closing costs.......................  $      --   $      --   $  14,652
  Receipt of 49% interest in manufacturing facility.........         --          --       5,500
  Net present value of guaranteed payments..................         --          --       2,668
  Other.....................................................         --          --          63
  Net book value of 51% interest sold.......................         --          --        (751)
                                                              ---------   ---------   ---------
                                                              $      --   $      --   $  22,132

NON-CASH INVESTING AND FINANCING ACTIVITIES
  Purchase of equipment and leasehold improvements through
    accounts payable........................................  $      48   $     124   $     757
  Common stock issued upon conversion of debentures.........     79,533         467          --
  Reclassification of deferred debt issuance costs to
    additional paid-in capital upon conversion of
    subordinated debentures.................................      1,586          --          --


                             See accompanying notes

                                       65

                             GILEAD SCIENCES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OVERVIEW

    Gilead Sciences, Inc. (the "Company" or "Gilead") was incorporated in
Delaware on June 22, 1987, and is an independent biopharmaceutical company that
seeks to provide accelerated solutions for patients and the people who care for
them. The Company discovers, develops, manufactures and commercializes
proprietary therapeutics for challenging infectious diseases (viral, fungal and
bacterial infections) and cancer. Gilead also has expertise in liposomal drug
delivery technology. Currently, the Company markets
AmBisome-Registered Trademark- ((amphotericin B) liposome for injection), an
antifungal agent, DaunoXome-Registered Trademark- (daunorubicin citrate liposome
injection), a drug approved for the treatment of Kaposi's Sarcoma, and
VISTIDE-Registered Trademark- (cidofovir injection) for the treatment of
cytomegalovirus ("CMV") retinitis. Hoffmann-La Roche, Inc. markets Tamiflu-TM-
(oseltamivir phosphate) for the treatment of influenza, under a collaborative
agreement with Gilead. In addition, Gilead is developing products to treat
diseases caused by human immunodeficiency virus ("HIV") and hepatitis B virus
("HBV"), bacterial infections and cancer.

    As more fully described in Note 3, on July 29, 1999, Gilead entered into a
business combination (the "Merger") with NeXstar Pharmaceuticals, Inc.
("NeXstar"). The business combination was accounted for as a pooling of
interests and the historical consolidated financial statements of Gilead for all
years prior to the business combination have been restated to include the
financial position, results of operations and cash flows of NeXstar. No material
adjustments were necessary to conform the accounting policies of the two
companies. Costs of the Merger were charged to operations in 1999.

    The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority-owned subsidiaries. Significant
intercompany transactions have been eliminated. Certain prior period amounts
have been reclassified to be consistent with the current presentation.

STOCK SPLIT

    On February 22, 2001, Gilead completed a two-for-one stock split, effected
in the form of a stock dividend, to stockholders of record as of February 2,
2001. Accordingly, all share and per share amounts for all periods presented
have been restated to retroactively reflect the split.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

    In the year ended December 31, 2000, Gilead adopted the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"), "REVENUE
RECOGNITION IN FINANCIAL STATEMENTS", resulting in a cumulative effect of a
change in accounting principle. See Note 2.

USE OF ESTIMATES

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

                                       66

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

    Product sales revenue is recognized upon passage of legal title of the
inventory and satisfaction of all of the Company's performance obligations. The
Company does not provide its customers with a general right of product return.
However, the Company will accept returns of product that has expired or is
deemed to be damaged or defective. Provisions are made for doubtful accounts,
estimated product returns, cash discounts and government discounts and rebates.

    In connection with most of its European product sales, the Company prices
its products in the currency of the country into which they are sold ("Payment
Currencies"). A significant majority of the Company's manufacturing costs are in
U.S. Dollars. Therefore, any decline in the value of the Payment Currencies
relative to the U.S. Dollar is likely to negatively impact gross margins since
the Company's manufacturing costs would remain approximately the same while its
revenue in terms of U.S. Dollars would decline. Periodically, the Company's
gross margin is adversely affected by such currency fluctuations.

    Contract revenue for research and development is recorded as earned based on
the performance requirements of the contract. Nonrefundable contract fees for
which no further performance obligations exist, and there is no continuing
involvement by Gilead, are recognized on the earlier of when the payments are
received or when collection is assured.

    Revenue from non-refundable up-front license fees where we continue
involvement through development collaboration or an obligation to supply
product, is recognized as the manufacturing obligation is fulfilled or ratably
over the development period or the period of the manufacturing obligation, as
appropriate based on a substantive risk assessment.

    Revenue associated with substantive performance milestones is recognized
based upon the achievement of the milestones, as defined in the respective
agreements. Revenue under research and development cost reimbursement contracts
is recognized as the related costs are incurred.

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

    Royalty revenue from sales of AmBisome is recognized in the month following
that in which the corresponding sales occur. Royalty revenue from sales of
VISTIDE and Tamiflu is recognized when received, which is the quarter following
the quarter in which the corresponding sales occur.

RESEARCH AND DEVELOPMENT COSTS

    All R&D costs, including those funded by third parties, are charged to
expense as incurred.

STOCK-BASED COMPENSATION

    In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company
has elected to follow Accounting Principles Board Opinion ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its employee stock option plans. Under APB 25, if the exercise
price of the Company's employee and director stock options equals or exceeds the
fair value of the

                                       67

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
underlying stock on the date of grant, no compensation expense is recognized.
See Note 12 for pro forma disclosures of stock-based compensation pursuant to
SFAS 123.

    In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB 25 with respect to stock-related compensation. Gilead's
adoption of FIN 44 on July 1, 2000, did not have a material effect on the
financial position or results of operations of Gilead.

BASIC AND DILUTED LOSS PER COMMON SHARE

    For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of common shares outstanding
during the period. Convertible notes, stock options and warrants could
potentially dilute basic earnings per share in the future, but these
instruments, as well as the convertible debentures that were previously
outstanding, were excluded from the computation of diluted loss per share as
their effect is antidilutive for the periods presented. All share and per share
amounts for all periods presented have been restated to retroactively reflect
the two-for-one stock split of February 22, 2001.

CASH AND CASH EQUIVALENTS

    The Company considers highly liquid investments with insignificant interest
rate risk and a remaining maturity of three months or less at the purchase date
to be cash equivalents. Gilead may enter into overnight repurchase agreements
under which it purchases securities with an obligation to resell them the
following day. Securities purchased under agreements to resell are recorded at
face value and reported as cash and cash equivalents. Under the Company's
investment policy, it may enter into repurchase agreements ("repos") with major
banks and authorized dealers provided that such repos are collateralized by U.S.
government securities with a fair value of at least 102% of the fair value of
securities sold to Gilead.

MARKETABLE SECURITIES

    Management determines the appropriate classification of Gilead's marketable
debt securities at the time of purchase and reevaluates such designation at each
balance sheet date. All of the Company's marketable debt securities are
classified as available-for-sale and carried at estimated fair values and
reported in either cash equivalents or marketable securities. At December 31,
2000, cash and cash equivalents include $137.6 million of securities designated
as available-for-sale ($14.3 million at December 31, 1999). Unrealized gains and
losses on available-for-sale securities are excluded from earnings and reported
as a separate component of stockholders' equity. Interest income includes
interest, dividends, amortization of purchase premiums and discounts, and
realized gains and losses on sales of securities. The cost of securities sold is
based on the specific identification method.

CONCENTRATIONS OF CREDIT RISK

    Gilead is subject to credit risk from its portfolio of cash equivalents and
marketable securities. By policy, the Company limits amounts invested in such
securities by maturity, industry group, investment

                                       68

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
type and issuer, except for securities issued by the U.S. government. Gilead is
not exposed to any significant concentrations of credit risk from these
financial instruments. The goals of the Company's investment policy, in order of
priority, are as follows: safety and preservation of principal and
diversification of risk; liquidity of investments sufficient to meet cash flow
requirements; and competitive after-tax rate of return.

    Gilead is also subject to credit risk from its accounts receivable related
to product sales. A majority of the Company's trade accounts receivable arises
from sales of AmBisome, primarily through sales to the Company's European
subsidiaries and export sales to its distributors in Europe. The Company
performs credit evaluations of its customers' financial condition and generally
has not required collateral. To date, the Company has experienced only modest
credit losses with respect to its accounts receivable.

INVENTORIES

    Inventories are recorded at the lower of cost or market, with cost
determined on a first-in, first-out basis. Management periodically reviews the
composition of inventory in order to identify obsolete, slow-moving or otherwise
unsaleable items. If such items are observed and there are no alternate uses for
the inventory, the Company will record a write-down to net realizable value in
the period that the units are identified as impaired. Historically, inventory
write-downs have been insignificant and consistent with management's
expectations.

PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are recognized
using the straight-line method. Estimated useful lives are as follows:



DESCRIPTION                                          ESTIMATED USEFUL LIFE (IN YEARS)
-----------                                          ---------------------------------
                                                  
Buildings..........................................                   20
Laboratory and manufacturing equipment.............                 4-10
Office and computer equipment......................                  2-6


Office and computer equipment includes capitalized computer software. All of the
Company's capitalized software is purchased. The Company has no internally
developed computer software. Leasehold improvements and capitalized leased
equipment are amortized over the shorter of the lease term or the item's useful
life.

OTHER NONCURRENT ASSETS

    Other noncurrent assets at December 31, 2000 includes $11.4 million
(including withholding taxes of approximately $0.4 million) of prepaid royalties
paid to the Institute of Organic Chemistry and Biochemistry of the Academy of
Sciences of the Czech Republic and Rega Stichting ("IOCB/REGA"), as discussed
under the "IOCB/REGA" caption of Note 5. Also included in other noncurrent
assets at December 31, 2000 are deferred debt issuance costs of $8.2 million
related to the $250.0 million 5% subordinated convertible notes Gilead issued in
December 2000. Other noncurrent assets at

                                       69

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1999 included $1.4 million of deferred debt issuance costs related
to the 6.25% subordinated convertible debentures. Gilead called the debentures
for redemption in August 2000, at which time they were converted to Gilead
common stock. Upon the conversion, the remaining balance of the deferred debt
issuance costs of the debentures was charged to additional paid in capital.

LONG-LIVED ASSETS

    The carrying value of long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances both internally and externally that may
suggest impairment. Specific potential indicators of impairment include:

    - a significant decrease in the fair value of an asset;

    - a significant change in the extent or manner in which an asset is used or
      a significant physical change in an asset;

    - a significant adverse change in legal factors or in the business climate
      that affects the value of an asset;

    - an adverse action or assessment by the U.S. Food and Drug Adminstration or
      another regulator;

    - an accumulation of costs significantly in excess of the amount originally
      expected to acquire or construct an asset; and

    - operating or cash flow losses combined with a history of operating or cash
      flow losses or a projection or forecast that demonstrates continuing
      losses associated with an income-producing asset.

    Should there be indication of impairment, the Company will confirm this by
comparing the estimated future cash flows expected to result from the use of the
asset and its eventual disposition to the carrying amount of the asset. In
estimating these future cash flows, assets are grouped at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows generated by other asset groups. If the sum of the expected future cash
flows (undiscounted and without interest changes) is less than the carrying
amount of the asset, an impairment loss, measured as the excess of the carrying
value of the asset over its fair value, will be recognized. The cash flow
estimates used in such calculations are based on management's best estimates,
using appropriate and customary assumptions and projections at the time.

OTHER CURRENT ACCRUED LIABILITIES

    At December 31, 2000 and December 31, 1999, other accrued liabilities
included $2.4 million of accrued litigation settlement costs. See the Legal
Proceedings discussion in Note 11.

FOREIGN CURRENCY TRANSLATION, TRANSACTIONS AND CONTRACTS

    Adjustments resulting from translating the financial statements of the
Company's foreign subsidiaries into U.S. dollars are excluded from the
determination of net income and are accumulated in a separate component of
stockholders' equity. Net foreign exchange transaction losses are reported

                                       70

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
as a selling, general and administrative expense in the consolidated statements
of operations. Such losses were $0.5 million in 2000, $0.5 million in 1999 and
$0.3 million in 1998.

    The Company hedges certain of its foreign currency exposures related to
outstanding trade accounts receivable and firmly committed purchase transactions
with foreign exchange forward contracts. In general, these contracts do not
expose the Company to market risk because gains and losses on the contracts
offset gains and losses on the transactions being hedged. The Company's exposure
to credit risk from these contracts is a function of changes in interest and
currency exchange rates and, therefore, varies over time. Gilead limits the risk
that counterparties to these contracts may be unable to perform by transacting
only with major U.S. banks. The Company also limits its risk of loss by entering
into contracts that provide for net settlement at maturity. Therefore, the
Company's overall risk of loss in the event of a counterparty default is limited
to the amount of any unrecognized and unrealized gains on outstanding contracts
(i.e., those contracts that have a positive fair value) at the date of default.
The Company does not enter into speculative foreign currency transactions and
does not write options.

    In accounting for hedges of accounts receivable, the Company's aggregate net
foreign currency transaction gain or loss is reported as a selling, general and
administrative expense. The Company recognizes the net unrealized gain or loss
on outstanding forward contracts based on the difference between the contract
exchange rate and the market exchange rate at each balance sheet date. With
respect to hedges of firmly committed purchase transactions, unrealized gains
and losses on the underlying forward contracts are deferred and reported as a
component of the related transaction in the period in which it occurs. At
December 31, 2000, the Company has net unrealized losses on its open foreign
exchange forward contracts of $1.1 million.

    The Company had forward exchange contracts outstanding of $53.8 million at
December 31, 2000 and $42.9 million at December 31, 1999. These contracts have
maturities of one year or less with one exception. One hedge contract intended
to hedge raw materials purchases in the first quarter of 2002, with a notional
amount of $4.1 million, and fair value of $0.2 million, has a maturity of
thirteen months.

    The Company presently does not hedge its net investment in any of its
foreign subsidiaries or its forecasted foreign currency denominated sales.

FAIR VALUE OF FINANCIAL INSTRUMENTS

    The Company's financial instruments consist principally of cash and cash
equivalents, marketable securities, accounts receivable, certain other
non-current assets, forward foreign exchange contracts, accounts payable,
long-term obligations and convertible subordinated notes. Cash and cash
equivalents, marketable securities and forward foreign exchange contracts that
hedge accounts receivable are reported at their respective fair values on the
balance sheet. Forward foreign exchange contracts that hedge firmly committed
purchases are recorded at fair value, net of the related deferred gain or loss,
resulting in a reported net balance of zero. Management believes the remaining
financial instruments, with the exception of the convertible subordinated notes,
are reported on the balance sheet at amounts that approximate current fair
values. The fair value of the convertible subordinated notes at December 31,
2000 was $211.6 million, and the carrying value was $250 million. The fair value
of notes

                                       71

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
was determined by multiplying the number of shares into which the notes can be
converted, by the per share market price of Gilead's common stock at
December 31, 2000, plus accrued interest. The fair value of Gilead's prior
convertible subordinated debentures, which were redeemed and converted to Gilead
common stock in the third quarter of 2000, was $101.8 million at December 31,
1999, and the carrying value was $79.5 million at that date. The fair value of
the debentures at December 31, 1999 was determined by obtaining a quote from a
market maker for the debentures.

PROSPECTIVE ACCOUNTING PRONOUNCEMENT

    Statement of Financial Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, is effective for the
Company as of January 1, 2001. The standards require that the Company recognize
all derivatives as either assets or liabilities measured at fair value. If the
derivative is designated as, and meets the definition of, a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative is
designated as, and meets the definition of, a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings immediately. SFAS 133 also require
warrants to purchase capital stock of a non-public company which include a net
settlement feature to be recorded in the balance sheet at fair value, with an
offsetting amount recorded in the results of operations. The fair value of the
warrants are required to be remeasured at each balance sheet date, with changes
in the fair value of the warrants recorded in results of operations. Gilead has
cash flow hedges and warrants in private companies with a net settlement feature
covered by SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, Gilead will
recognize an aggregate credit to results of operations, recorded as a cumulative
change in accounting principle, of approximately $1.1 million; an increase in
net assets of approximately $1.7 million; and an increase in other comprehensive
income of approximately $0.6 million.

2. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS." Among other things, SAB 101 describes the SEC Staff's position on
the recognition of certain nonrefundable up-front fees received in connection
with collaboration agreements. The Company previously recognized nonrefundable
technology access fees received in connection with collaboration agreements as
revenue when received or when collectibility was probable, and when the
technology had been transferred. Effective January 1, 2000, Gilead changed its
method of accounting for these fees to recognize them as the related
manufacturing obligation is fulfilled or on a straight-line basis over the term
of the related research and development collaboration, manufacturing or supply
arrangement, as appropriate, as this method best matches the effort provided.
Management believes the change in accounting principle is preferable based on
guidance provided in SAB 101.

                                       72

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

2. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
    The cumulative effect of the change in accounting principle was recorded in
the fourth quarter of 2000, retroactively effective as of January 1, 2000, as
deferred revenue that will be recognized as contract revenue over the remaining
term of the research and development, manufacturing or supply arrangements, as
appropriate. For the year ended December 31, 2000, the net impact of the change
in accounting principle was to increase the net loss by $10.7 million, or $0.12
per share. The loss consists of a $13.7 million cumulative effect of the change
as of January 1, 2000, net of $2.9 million of related deferred revenue that was
recognized as contract revenue during the year 2000. The remainder of the
$10.7 million related deferred revenue balance as of December 31, 2000, is
expected to be recognized as revenue in fiscal years 2001 through 2012. The pro
forma results included in the Consolidated Statements of Operations reflect
amounts that would have been reported if the change in accounting principle had
been applied retroactively.

3. ACQUISITION OF NEXSTAR

    On July 29, 1999, the Company acquired all of the outstanding common stock
of NeXstar, a Delaware corporation, under an agreement dated as of February 28,
1999. As a result, NeXstar became a wholly owned subsidiary of Gilead. In
connection with the Merger, Gilead issued a total of 22.4 million shares of
Gilead common stock, or 0.1893 of a share of Gilead common stock for each share
of NeXstar common stock, to NeXstar's stockholders as consideration for all
shares of common stock of NeXstar. In addition, holders of options and warrants
outstanding at the time of the Merger to purchase an aggregate of approximately
2.2 million shares of NeXstar common stock would receive, upon exercise of such
options and warrants, the same fraction of a share of Gilead common stock.
Holders of $80.0 million principal amount of 6.25% convertible subordinated
debentures of NeXstar received the right to convert the debentures into
approximately 3.6 million shares of Gilead common stock. The Merger qualified as
a tax-free reorganization and was accounted for as a pooling of interests.

    The table below presents the separate results of operations for Gilead and
NeXstar for the periods prior to the merger and combined results after the
merger (in thousands):



                                                                        MERGER-RELATED
                                                   GILEAD    NEXSTAR     ADJUSTMENTS         TOTAL
                                                  --------   --------   --------------      --------
                                                                                
Year ended December 31, 1999
  Revenues......................................  $ 24,659   $144,320      $     --         $168,979
  Net income (loss).............................   (73,534)    25,351       (18,303)(a)      (66,486)

Year ended December 31, 1998
  Revenues......................................  $ 32,570   $118,549      $     --         $151,119
  Net income (loss).............................   (56,075)    10,920           397(b)       (44,758)


------------------------

(a) Merger-related costs

(b) Adjustment required to conform accounting policy. NeXstar's policy was to
    capitalize certain patent and trademark costs, while it was Gilead's policy
    to charge such items to selling, general and administrative expense in the
    period incurred. The accompanying financial statements have been restated
    for all periods such that all patent and trademark costs are expensed as
    incurred.

                                       73

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

3. ACQUISITION OF NEXSTAR (CONTINUED)
    As a result of its merger with NeXstar, the Company incurred merger-related
costs consisting of transaction costs (primarily professional fees, filing fees,
printing costs and other related charges), employee severance costs and the
write-down of certain NeXstar assets that would not be used in continuing
operations. The following table shows the details of the merger-related costs
and accruals at December 31, 1999 (in thousands):



                                              CHARGED TO EXPENSE THROUGH              DECEMBER 31, 1999
                                                  DECEMBER 31, 1999        UTILIZED    ACCRUAL BALANCE
                                              --------------------------   --------   ------------------
                                                                             
Merger transaction costs....................           $12,214             $12,196          $   18
Employee severance..........................             5,309               2,821           2,488
Write-down of NeXstar assets................               536                 N/A             N/A
Other.......................................               244                 244              --
                                                       -------             -------          ------
  Total.....................................           $18,303             $15,261          $2,506
                                                       =======             =======          ======


    All employees for which severance costs were accrued had been terminated as
of December 31, 1999. Substantially all remaining accrued severance costs were
paid to former employees by December 31, 2000. All merger transaction costs were
utilized by December 31, 2000.

4. AVAILABLE-FOR-SALE SECURITIES

    The following is a summary of available-for-sale securities. Estimated fair
values of available-for-sale securities are based on prices obtained from
commercial pricing services (in thousands).



                                                                    GROSS        GROSS
                                                      AMORTIZED   UNREALIZED   UNREALIZED   ESTIMATED
                                                        COST        GAINS        LOSSES     FAIR VALUE
                                                      ---------   ----------   ----------   ----------
                                                                                
DECEMBER 31, 2000
U.S. treasury securities and obligations of U.S.
  government agencies...............................  $ 57,938       $ 93        $  (125)    $ 57,906
Certificates of deposit.............................       132          1             --          133
Corporate debt securities...........................   190,604        504           (252)     190,856
Asset-backed securities.............................    43,752        349            (58)      44,043
Other debt securities...............................   160,204         --             --      160,204
                                                      --------       ----        -------     --------
  Total.............................................  $452,630       $947        $  (435)    $453,142
                                                      ========       ====        =======     ========
DECEMBER 31, 1999
U.S. treasury securities and obligations of U.S.
  government agencies...............................  $133,444       $512        $(1,243)    $132,713
Certificates of deposit.............................     5,309          1             --        5,310
Corporate debt securities...........................    70,726         19           (583)      70,162
Asset-backed securities.............................    39,554          2           (266)      39,290
Other debt securities...............................    14,256         --             --       14,256
                                                      --------       ----        -------     --------
Total...............................................  $263,289       $534        $(2,092)    $261,731
                                                      ========       ====        =======     ========


                                       74

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

4. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)

    Other debt securities consist primarily of money market funds.

    The following table presents certain information related to sales of
available-for-sales securities (in thousands):



                                                    YEAR ENDED DECEMBER 31,
                                                 ------------------------------
                                                   2000       1999       1998
                                                 --------   --------   --------
                                                              
Proceeds from sales............................  $29,490    $101,943   $390,426
Gross realized gains on sales..................  $    62    $     92   $  1,127
Gross realized losses on sales.................  $  (146)   $   (475)  $   (654)


    At December 31, 2000, $267.0 million of the Company's portfolio of
marketable securities (excluding $44.0 million of asset-backed securities) has a
contractual maturity of less than one year and $142.1 million of the portfolio
has a contractual maturity greater than one year but less than three years. None
of the estimated maturities of the Company's asset-backed securities exceed
three years.

5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS

EYETECH

    In March 2000, Gilead entered into an agreement with EyeTech
Pharmaceuticals, Inc. relating to Gilead's proprietary aptamer NX 1838.
Currently in early clinical trials, NX 1838 is an inhibitor of vascular
endothelial growth factor, or VEGF, which is known to play a role in the
development of certain ophthalmic diseases. Under the terms of the agreement,
EyeTech received worldwide rights to all therapeutic uses of NX 1838, and, if
the product is successfully commercialized, EyeTech will pay Gilead royalties on
worldwide sales of the product. EyeTech also will be responsible for all
research and development costs. Gilead will provide clinical supplies of the
product to EyeTech through March 2001. Gilead received a $7.0 million up-front
licensing fee from EyeTech in April 2000, which is being recognized as revenue
ratably over the one-year supply agreement period. Accordingly, $5.2 million of
the license fee was recorded as contract revenue under the agreement in 2000,
and the remainder of the license fee will be recognized as revenue in the first
quarter of 2001. Gilead is also entitled to additional cash payments from
EyeTech of up to $25.0 million if and when EyeTech reaches certain NX 1838
development milestones. Additionally, Gilead received a warrant to purchase
833,333 shares of EyeTech series B convertible preferred stock, exercisable at a
price of $6.00 per share, the price at which the stock was issued to other
investors. Gilead is obligated to transfer 5% of the shares subject to the
warrant to the University of Colorado at Boulder under a collaborative agreement
with the university, and Gilead expects to retain the remaining 791,667 shares.
Gilead did not recognize revenue related to the warrant as there was no readily
determinable fair value at the time of the transaction. See the Prospective
Accounting Pronouncement caption under Note 1 for a description of the future
accounting treatment of the warrant.

                                       75

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
FUJISAWA

    The Company's rights to market AmBisome are subject to an agreement between
the Company and Fujisawa Healthcare, Inc., as successor to Fujisawa USA, Inc.
("Fujisawa"). Under the terms of the Fujisawa agreement, as amended, Fujisawa
and the Company co-promote AmBisome in the United States, Fujisawa has sole
marketing rights to AmBisome in Canada and the Company has exclusive marketing
rights to AmBisome in the rest of the world, provided the Company pays royalties
to Fujisawa in connection with sales in most significant Asian markets,
including Japan. In connection with U.S. sales, Fujisawa purchases AmBisome from
the Company at cost. For sales in Canada, Fujisawa purchases AmBisome at cost
plus a specified percentage. Fujisawa collects all payments from the sale of
AmBisome in the United States and Canada. The Company receives 20% of Fujisawa's
gross profits from the sale of AmBisome in the United States. Gross profits
include a deduction for cost of goods sold, giving the Company a current
effective royalty rate of approximately 17% of Fujisawa's net sales of AmBisome
in the United States. In connection with the agreement between the Company and
Fujisawa, Gilead recorded royalty revenue of $13.5 million in 2000,
$8.3 million in 1999 and $4.8 million in 1998.

SUMITOMO

    In September 1996, the Company and Sumitomo Pharmaceuticals Co., Ltd.
("Sumitomo") entered into an agreement ("Sumitomo License") pursuant to which
Sumitomo agreed to develop and market AmBisome in Japan. Under the terms of the
Sumitomo License, Sumitomo paid the Company an initial $7.0 million licensing
fee (less withholding taxes of $0.7 million) in October 1996 and a $3.0 million
milestone payment (less withholding taxes of $0.3 million) in March 1998.
Sumitomo also is required to make additional payments to the Company if certain
clinical and commercial milestones are met and to pay the Company royalties on
all Japanese AmBisome sales. Under the Sumitomo License, Gilead is obligated to
provide a certain quantity of AmBisome to Sumitomo at no charge. AmBisome is not
yet approved for marketing in Japan.

    Subsequent to the cumulative effect of the change in accounting principle
that was recorded effective in the first quarter of 2000 resulting from the
adoption of SAB 101, Gilead is recognizing the initial license fee over the
remaining free supply arrangement period, which is currently expected to be over
the next five years. The net impact of the change in accounting principle for
the Sumitomo License was to increase the net loss in 2000 by $3.4 million. The
cumulative effect of the change in accounting principle was a charge of
$5.0 million. Contract revenue of $1.6 million related to the initial licensing
fee from Sumitomo was recognized as contract revenue in 2000. The remaining
$3.4 million of related deferred revenue at December 31, 2000, will be
recognized as contract revenue over the remaining free supply obligation period.

HOFFMANN-LA ROCHE

    In September 1996, Gilead entered into a collaboration agreement with F.
Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (collectively, "Roche") to
develop and commercialize therapies to treat and prevent viral influenza (the
"Roche Agreement"). Under the Roche Agreement, Roche received exclusive
worldwide rights to Gilead's proprietary influenza neuraminidase inhibitors. In
1996, Roche made an initial license fee payment to Gilead of $10.3 million. Upon
achieving certain

                                       76

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
developmental milestones in 1997, Gilead earned cash payments of $6.0 million.
During 1999, Gilead recognized a total of $12.8 million of additional milestone
payments due to the commencement of certain clinical trials in Japan, the filing
of an application to market Tamiflu in the European Union, and the filing and
subsequent approval to market Tamiflu in the United States. During 2000, Gilead
recognized $9.6 million of contract revenue from milestone payments from Roche
related to Tamiflu milestones achieved during the year. The milestones included
filing for regulatory approval in Japan for treatment of influenza, the Japanese
approval of the application, the filing for U.S. regulatory approval for the
prevention of influenza, and the receipt of such approval in the U.S.

    Subsequent to the cumulative effect of the change in accounting principle
that was recorded effective in the first quarter of 2000 resulting from the
adoption of SAB 101, Gilead recognized the initial license fee over the
remaining research and development period, which ended in the first quarter of
2000. The net impact of the change in accounting for the initial license fee was
zero. The cumulative effect of the change in accounting principle related to the
Roche license fee was a $0.7 million charge to results of operations, and was
offset by additional contract revenue of $0.7 million also recognized in the
first quarter of 2000. There is no remaining deferred revenue related to the
Roche initial license fee as of December 31, 2000.

    As of December 31, 2000, Gilead is entitled to additional cash payments from
Roche of up to $11.6 million upon Roche achieving additional developmental and
regulatory milestones. In addition, Roche is required to pay Gilead royalties on
net product sales. Gilead began receiving royalties from Roche's sales of
Tamiflu in the first quarter of 2000, and recorded a total of $9.6 million of
Tamiflu royalties in the year 2000. No Tamiflu royalties were recorded in 1999.
The Company recognizes royalty revenue from Roche in the quarter following the
quarter in which the related Tamiflu sales occur.

    Under the Roche Agreement, Roche also reimburses the Company for its related
R&D costs under the program by funding such costs quarterly and generally in
advance, based on an annual budget. Reimbursements are included in contract
revenue as the Company incurs the related R&D costs. Amounts incurred by the
Company in excess of amounts funded may also be reimbursed, subject to Roche's
approval. In this event, revenue is not recognized until such approval has been
obtained. Conversely, if amounts funded by Roche exceed the Company's related
R&D costs, the Company may be required to repay such excess funding to Roche.
The Company recorded contract revenue for R&D reimbursements related to the
Roche Agreement of approximately $0.9 million in 2000, $2.1 million in 1999 and
$16.4 million in 1998. The $16.4 million recorded as revenue during 1998
included $5.2 million attributable to R&D expenses incurred in the fourth
quarter of 1997, which were subject to Roche's approval as of December 31, 1997.
Such expenses were approved for reimbursement and recognized in contract revenue
in 1998. Except for this $5.2 million, R&D costs related to the Roche Agreement
approximate the reimbursement revenue in each year presented and are included in
R&D expenses.

PHARMACIA

    In August 1996, the Company and Pharmacia Corporation ("Pharmacia") entered
into a License and Supply Agreement ("Pharmacia Agreement") to market VISTIDE in
all countries outside the United States. Under the terms of the Pharmacia
Agreement, Pharmacia paid Gilead an initial license fee of $10.0 million.

                                       77

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
    Subsequent to the cumulative effect of the change in accounting principle
recorded effective in the first quarter of 2000, Gilead is recognizing the
initial license fee on a straight-line basis over the supply arrangement period,
which is sixteen years from the agreement date. The net impact of the change in
accounting principle for the Pharmacia Agreement was to increase the net loss in
2000 by $7.3 million. The cumulative effect of the change in accounting
principle related to the initial license fee from Pharmacia was a $7.9 million
charge to results of operations, and additional contract revenue of
$0.6 million was recognized in 2000 subsequent to the accounting change. The
remaining $7.3 million of related deferred revenue is expected to be recognized
on a straight-line basis as contract revenue over the remaining supply period,
or twelve years.

    During the second quarter of 1997, VISTIDE was approved for marketing in the
European Union by the European Commission, which triggered an additional cash
milestone payment of $10.0 million by Pharmacia to the Company. Also as a result
of achieving this milestone, in the second quarter of 1997 the Company issued
and Pharmacia purchased 1,133,786 shares of Series B Convertible Preferred Stock
for approximately $40.0 million, or $35.28 per share. The preferred stock
automatically converted into 2,267,572 shares of common stock in 1999. For
additional information about the preferred stock, see Note 12.

    Under the terms of the Pharmacia Agreement and related agreements covering
expanded access programs for VISTIDE outside of the United States, Gilead is
responsible for maintaining the cidofovir patent portfolio and for supplying to
Pharmacia bulk cidofovir used to manufacture the finished VISTIDE product.
Gilead is entitled to receive a royalty based upon Pharmacia's sales of VISTIDE.
Gilead receives a portion of the royalty upon shipping either bulk drug
substance or VISTIDE to Pharmacia, and the remainder upon Pharmacia's sale of
VISTIDE to third parties. Any royalties that Gilead receives before the product
is sold to third parties are recorded as deferred revenue until such third-party
sales occur. At December 31, 2000, the Company has recorded on its balance sheet
approximately $2.2 million of such deferred revenue ($3.7 million at
December 31, 1999). The Company recognized royalty revenue from sales of VISTIDE
outside of the United States by Pharmacia of $1.5 million in 2000, $2.0 million
in 1999 and $1.7 million in 1998.

SOMALOGIC

    In November 1999, Gilead and Somalogic, Inc. ("Somalogic") entered into an
agreement whereby Gilead assigned to Somalogic under a sole and exclusive
license certain intellectual property related to the SELEX process for
diagnostic purposes, including patents and patent applications. Under the terms
of the agreement, Somalogic was required to pay Gilead a total of $2.5 million
in two nonrefundable installments. The first $1.5 million was paid in
November 1999 and was included in contract revenue for the year ended
December 31, 1999. The remaining $1.0 million, which was reported as deferred
revenue at December 31, 1999, was received and recorded as contract revenue in
2000. Gilead has no ongoing research or funding obligations under the agreement.

SCHERING A.G.

    In 1993, the Company entered into a collaborative research agreement
("Schering Research Agreement") and license agreement ("Schering License
Agreement") with Schering A.G. Under the Schering Research Agreement, Schering
A.G. has funded research at Gilead for the discovery and

                                       78

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
development of aptamers as IN VIVO diagnostic agents. The level of funding under
this agreement varied annually, from a high of $2.4 million to $0.3 million
received and recorded as contract revenue in 1999. The Schering Research
Agreement expired in 1999 and the Company does not expect to receive any
additional payments thereunder.

    Under the Schering License Agreement, Schering A.G. has the right to develop
and commercialize aptamers as IN VIVO diagnostic agents or radiotherapeutics
discovered and developed under the Schering Research Agreement. Schering A.G. is
required to make milestone and royalty payments to the Company upon
commercialization and sale of any products developed under the collaboration
with the Company. The milestone payments for any one product total $6.0 million
and are triggered by the filing of an Investigational New Drug application, the
initiation of Phase III clinical trials, the filing of an NDA and approval of a
product for commercial sale. The Schering License Agreement, which was still in
effect as of December 31, 2000, permits the Company to develop and commercialize
aptamers discovered under the Schering Research Agreement outside the field of
IN VIVO diagnostic agents or radiotherapeutics, subject to royalty payments to
Schering A.G.

ISIS PHARMACEUTICALS

    In December 1998, Gilead and Isis Pharmaceuticals, Inc. ("Isis") entered
into an agreement under which Gilead sold to Isis certain intellectual property,
including patents and patent applications covering antisense chemistry and
antisense drug delivery systems. Under the terms of the agreement, Isis is
required to pay to Gilead a total of $6.0 million in four nonrefundable
installments. The first installment of $2.0 million was paid to Gilead in
December 1998, the second installment of $1.0 million was paid in
December 1999, the third installment of $1.0 million was paid in December 2000,
and remaining $2.0 million is payable in December 2001. The total sale price of
$6.0 million was included in contract revenue for the year ended December 31,
1998. Gilead has no ongoing research or funding obligations under the agreement.

GLAXOSMITHKLINE

    In December 2000, Gilead entered into an agreement with Glaxo Wellcome, now
GlaxoSmithKline ("Glaxo") giving Gilead the rights to GS 7904L, a novel
anti-tumor compound. Gilead is developing GS 7904L in a liposome and is
evaluating it in preclinical studies. Under this agreement, Gilead has exclusive
worldwide rights to develop and commercialize GS 7904L for all indications other
than malaria. Gilead paid Glaxo an upfront fee which was included in R&D expense
in 2000, and may be required to make additional payments to Glaxo if certain
developmental goals related to regulatory approval are achieved. Additionally,
if the product is successfully commercialized, Gilead would be required to pay
Glaxo a percentage of the product's net sales. The agreement expires ten years
after the first commercial sale of the product or the date the last related
patent expires.

    In May 1998, Gilead entered into a three-part collaboration with Glaxo in
which (a) Glaxo received a non-exclusive right to use Gilead's proprietary SELEX
process for target validation; (b) Gilead received the exclusive rights (subject
to Glaxo's right to elect to participate in such activities) to develop and
commercialize NX 211, a liposomal formulation of Glaxo's proprietary
topoisomerase I inhibitor (lurtotecan); and (c) Glaxo acquired 728,514 shares of
Gilead common stock for $10.0 million in a private offering. In December 2000,
the collaboration and license agreement was

                                       79

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

5. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
modified. Under the revised terms of agreement, Glaxo waived its right to
participate in the development and commercialization of NX 211 and its right to
receive royalties, giving Gilead exclusive rights to the compound. In exchange,
Gilead agreed to increase milestone payments to Glaxo upon achieving certain
regulatory approvals.

    In July 1990, Gilead entered into a collaborative research agreement with
Glaxo with respect to Gilead's antisense technology. Under the terms of the
Glaxo agreement, as amended over time, the Company received $1.8 million in
1998, which was reported as contract revenue, to fund research. The R&D costs
reimbursed by Glaxo approximate the related revenue and are included in R&D
expense. This agreement and the related funding were terminated in June 1998.

IOCB/REGA

    In 1991 and 1992, Gilead entered into agreements with the Institute of
Organic Chemistry and Biochemistry of the Academy of Sciences of the Czech
Republic and Rega Stichting ("IOCB/REGA") relating to certain nucleotide
compounds discovered at these two institutions. Under the agreements, Gilead
received the exclusive right to manufacture, use and sell these nucleotide
compounds, and Gilead is obligated to pay IOCB/REGA a percentage of net revenues
received from sales of products containing the compounds, subject to minimum
royalty payments. The compounds covered by the agreement include cidofovir,
adefovir dipivoxil and tenofovir DF, but exclude Tamiflu or other compounds that
Gilead has in clinical development. Gilead currently makes quarterly payments to
IOCB/REGA based on a percentage of VISTIDE sales. If marketing approval is
received from the FDA for adefovir dipivoxil or tenofovir DF, Gilead would be
obligated to pay additional amounts to IOCB/REGA upon future sales of these
products.

    In December 2000, the agreements with IOCB/REGA were amended to provide for
a reduced royalty rate on future sales of adefovir dipivoxil or tenofovir DF, in
return for a upfront payment from Gilead of $11.0 million (plus withholding
taxes of approximately $0.4 million) upon signing the agreement. This payment
was recorded as a long-term prepaid royalty and is classified in other
noncurrent assets on the balance sheet at December 31, 2000. It will be
recognized as royalty expense over the expected commercial life of the related
products when and if FDA approval is obtained and sales of the products
commence.

SOUTHERN RESEARCH INSTITUTE

    In December 2000, Gilead entered into an agreement with Southern Research
Institute giving Gilead worldwide rights to develop and commercialize GS 7836,
an anti-tumor compound that Gilead is evaluating in preclinical studies. Under
the terms of the agreement, Gilead paid Southern Research Institute an up-front
fee, which is included in R&D expense in 2000, and may be required to make
additional payments to Southern Research Institute if Gilead achieves certain
development and regulatory goals. Gilead would also be required to pay Southern
Research Institute royalties on net sales of GS 7836 if the product is
successfully commercialized.

                                       80

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

6. INVENTORIES

    Inventories are summarized as follows (in thousands):



                                                               DECEMBER 31,
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
                                                                 
Raw materials.............................................  $ 9,647    $10,703
Work in process...........................................    7,781      6,793
Finished goods............................................    3,134      3,463
                                                            -------    -------
                                                            $20,562    $20,959
                                                            =======    =======


7. PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment consist of the following (in thousands):



                                                             DECEMBER 31,
                                                          -------------------
                                                            2000       1999
                                                          --------   --------
                                                               
Building and improvements (including leasehold
  improvements).........................................  $ 55,877   $ 46,597
Laboratory and manufacturing equipment..................    34,167     27,204
Office and computer equipment...........................    21,511     20,127
Capitalized leased equipment............................    13,530     16,042
Construction in progress................................     2,961      5,540
                                                          --------   --------
                                                           128,046    115,510
Less accumulated depreciation and amortization..........   (72,872)   (64,112)
                                                          --------   --------
                                                          $ 55,174   $ 51,398
                                                          ========   ========


8. INVESTMENT IN UNCONSOLIDATED AFFILIATE

    In late 1997, the Company established its NeXstar Technology Products
division which included the Company's proprietary technology called Product
Anchored Sequential Synthesis ("PASS"), a method of synthesizing the
oligonucleotides that are the basis for the products being developed using the
SELEX process. In July 1998, the Company established Proligo L.L.C., a Delaware
limited liability company ("Proligo"), as a wholly owned subsidiary and
transferred all of the assets of the NeXstar Technology Products division to
Proligo. Proligo supplies nucleic acid and peptide synthesis products to the
pharmaceutical and biopharmaceutical industry for sale and use as laboratory
research reagents and in therapeutic and diagnostic products.

    On August 15, 1998, the Company sold a 51% interest (the "Interest") in
Proligo to SKW Americas, Inc. ("SKW"). As payment for the Interest, the Company
received $15.0 million in cash and a 49% interest in PerSeptive Biosystems GmbH,
a company in Hamburg, Germany (the "Hamburg Company"), which specializes in the
manufacture of nucleoside phosphoramidite monomers. The 49% interest in the
Hamburg Company had a fair market value of approximately $5.5 million. In
addition, SKW agreed to pay the Company $3.0 million in guaranteed payments
(discounted at 8.5% for gain recognition purposes) and up to $20.5 million in
performance-based milestones over the next

                                       81

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

8. INVESTMENT IN UNCONSOLIDATED AFFILIATE (CONTINUED)
four years. Gilead received $0.1 million of the guaranteed payments from SKW in
2000, and $2.6 million in 1999. In 1999, Gilead also received a
performance-based milestone payment of $1.0 million which was included in
contract revenue. As part of the original transaction, the Company contributed
$4.9 million and its 49% interest in the Hamburg Company to Proligo. The Company
recorded a $22.1 million gain in connection with this sale in 1998. SKW
contributed $5.1 million and the remaining 51% interest in the Hamburg Company
to Proligo. Also in connection with this transaction, the Company and Proligo
agreed that Proligo would manufacture oligonucleotides required by the Company
at cost plus a fixed percentage. The Company purchased oligonucleotides from
Proligo for a total of $0.1 million in 2000 and $0.4 million in 1999. The
purchases were charged to R&D expense.

    The Company accounts for its investment in Proligo using the equity method
of accounting. The net book value of its investment was $6.9 million at
December 31, 2000 and $7.6 million at December 31, 1999, and is reported in
other noncurrent assets on the Company's consolidated balance sheets. In 2000,
Gilead recognized $2.9 million equity in Proligo's net loss, representing our
49% share of Proligo's loss for the thirteen-month period ended December 31,
2000. During the fourth quarter of 2000, Proligo changed its fiscal year end to
December 31 from November 30. In 1999, Gilead recorded $4.7 million equity in
the loss of Proligo for Proligo's fiscal year ended November 31, 1999. In 1998,
the Company recorded its equity in the loss of Proligo of $1.1 million for the
period from August 15, 1998 through November 30, 1998.

    In January 2000, Gilead made an additional cash investment in Proligo of
$2.5 million to maintain its 49% ownership interest in Proligo. In
October 1999, Gilead also made a $2.5 million cash investment in Proligo to
maintain its 49% ownership interest. Gilead has no commitments to provide
additional funding to Proligo.

9. LONG-TERM OBLIGATIONS

    Long-term obligations consist of the following (in thousands):



                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Capital lease obligations: Monthly installments; interest
  rates ranging from 6.89% to 11.50%........................   $3,512     $5,681
Fixed rate debt: Monthly installments through 2003; secured
  by equipment; interest rates ranging from 11.49% to
  12.56%....................................................    1,760      2,763
                                                               ------     ------
Total long-term obligations.................................    5,272      8,444
Less current portion........................................   (3,034)    (3,191)
                                                               ------     ------
Long-term obligations due after one year....................   $2,238     $5,253
                                                               ======     ======


                                       82

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

9. LONG-TERM OBLIGATIONS (CONTINUED)

    Maturities of long-term obligations, including capital lease obligations,
are as follows (in thousands):



YEAR
----
                                                           
2001........................................................   $3,420
2002........................................................    2,022
2003........................................................      334
                                                               ------
                                                               $5,776
Less amount representing interest...........................     (504)
                                                               ------
Total.......................................................   $5,272
                                                               ======


    The terms of the various debt agreements require the Company to comply with
certain financial and operating covenants. At December 31, 2000, the Company was
in compliance with all such covenants.

10. CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES

    On December 13, 2000, Gilead issued $250 million of 5% convertible
subordinated notes due December 15, 2007 in a private offering to J.P. Morgan &
Co., Lehman Brothers and Morgan Stanley Dean Whitter, which resold the notes to
private institutional investors. The notes are convertible into a total of up to
5,089,058 shares of Gilead common stock at $49.125 per share. The $49.125
conversion price is higher than Gilead's common stock price on the note's issue
date. The notes are redeemable in whole or in part, at the option of the
Company, at any time on or after December 20, 2003, at specified redemption
prices plus accrued interest. Debt issuance costs of $8.2 million incurred in
connection with the issuance of the notes were recorded as other noncurrent
assets, and are being amortized to interest expense on a straight-line basis
over the contractual term of the notes.

    During the third quarter of 1997, Gilead issued $80.0 million of 6.25%
convertible subordinated debentures due 2004 in a private offering to SBC
Warburg Inc. and Oppenheimer & Co., Inc., which resold the debentures to a group
of private investors. The debentures were issued pursuant to an indenture and
were convertible into a total of up to 3,589,688 shares of Gilead common stock
at $22.285 per share. The debentures were redeemable in whole or in part, at the
option of the Company, at any time on or after August 10, 2000, at specified
redemption prices plus accrued interest. Gilead called the debentures for
redemption on August 15, 2000 at a cash price of $1,030 per $1,000 principal
amount of debentures outstanding, plus accrued interest, which was the
redemption price provided for in the original debenture indenture. The entire
$79.5 million in principal amount of the debentures outstanding at that time was
converted into 3,567,578 newly issued shares of Gilead common stock prior to
August 15, 2000. Deferred debt issuance costs of $1.6 million related to the
debentures were charged to additional paid in capital in connection with the
conversion of the debentures into common stock.

                                       83

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

11. COMMITMENTS AND CONTINGENCIES

LEASES ARRANGEMENTS

    The Company has entered into various long-term noncancelable operating
leases for facilities in Foster City and San Dimas, California and Boulder,
Colorado. Leases in Foster City and San Dimas expire on various dates in 2003
and 2006; and leases in Boulder expire in 2001 and 2005. Each of the leases has
two five-year renewal options, with the exception of one lease in Foster City
that expires in 2003 and contains no renewal options. The Company has operating
leases for sales, marketing and administrative facilities in Europe and
Australia with various terms, and miscellaneous equipment leases.

    Rent expense net of sublease income under the Company's operating leases
totaled approximately $8.6 million in 2000, $7.9 million in 1999 and
$6.8 million in 1998.

    The Company has entered into capital leases to finance equipment purchases
and facilities improvements. Title to assets acquired under lease lines of
credit resides with the lessor. The Company has the option to purchase the
assets at the end of the lease terms at fair market value. The leases have
remaining terms of up to three years. At December 31, 2000, no additional
amounts were available under these agreements.

    Aggregate noncancelable future minimum rental payments under operating and
capital leases, net of aggregate future minimum rentals to be received by the
Company under noncancelable subleases, are as follows (in thousands):



                                             OPERATING LEASES, NET OF
YEARS ENDING DECEMBER 31,                    NONCANCELABLE SUBLEASES    CAPITAL LEASES
-------------------------                    ------------------------   --------------
                                                                  
2001.......................................           $ 7,675              $ 2,450
2002.......................................             9,149                1,296
2003.......................................             9,060                   23
2004.......................................             5,875                   --
2005.......................................             5,808                   --
Thereafter.................................             1,817                   --
                                                      -------              -------
                                                      $39,384                3,769
                                                      =======
Less amount representing interest..........                                   (257)
                                                                           -------
Total capital lease obligations............                                  3,512
Less current portion.......................                                 (2,228)
                                                                           -------
Capital lease obligations due after one
  year.....................................                                $ 1,284
                                                                           =======


    The Company has placed $0.5 million in a bank escrow deposit to secure
aggregate future payments due under one of its facilities leases. At
December 31, 2000, a total of $0.5 million was secured under this deposit.

CONTINGENT LIABILITY

    In connection with the August 1998 sale of a majority interest in its
Proligo subsidiary, as described in Note 8, the Company transferred certain
property and equipment with a net book value of

                                       84

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$4.5 million to Proligo. The majority of such property and equipment is financed
or leased by the Company in accordance with the capital leases described above.
Concurrent with this transfer of property and equipment, the Company transferred
the underlying debt to Proligo pursuant to various Sublease, Consent and
Assignment Agreements (collectively, the "Sublease Agreements"). As a result,
the Company is required to pay the debt financing and lease liabilities to the
financial institutions and lessors directly for Proligo's share of the
liabilities. Proligo is required to reimburse the Company for these amounts and
is bound by the same terms and conditions as those in the Company's agreements
with the financial institutions and lessors. If Proligo were to default on its
obligations under the Sublease Agreements, the Company would continue to be
liable for amounts outstanding as of the date of the default. However, in this
event, SKW would be obligated to reimburse the Company for 51% of such amounts
paid. At December 31, 2000, Proligo was current with respect to its
reimbursements to the Company and the balance of Proligo's future lease and debt
obligations under the Sublease Agreements was $1.1 million.

    Additionally, the Company and Proligo entered into Assignment, Assumption
and Consent Agreements ("Agreements") with the landlords of two laboratory
facilities Proligo occupies. Under the Agreements, Proligo has assumed the
obligations to the landlords, but the Company remains contingently liable in the
event of default. The total unpaid amount of such operating lease commitments as
of December 31, 2000 was approximately $0.2 million.

    Gilead has subleased certain of its facilities, primarily in California,
through 2003. If any of the sublessees default on their obligations under these
subleases, the Company would be primarily liable to the original lessor. The
total amount due under these subleases as of December 31, 2000 is $2.1 million.

LINE OF CREDIT

    In September 1997, the Company entered into an unsecured bank line of credit
for $10.0 million. Under the terms of the line of credit, the Company is
required to maintain certain financial ratios and was in compliance with all
required ratios at December 31, 2000. There are also limitations on the
Company's ability to incur additional debt or to engage in certain significant
transactions. The Credit Agreement, which includes a foreign exchange facility,
was renegotiated as of December 31, 1999 and was subsequently extended until
April 2001. There were no amounts outstanding under this agreement as of either
December 31, 2000 or 1999.

LEGAL PROCEEDINGS

    On August 11, 1997, the Company and Elan Corporation, plc ("Elan", the
successor company to The Liposome Company, Inc.) reached a settlement
("Settlement Agreement") in which both companies agreed to dismiss all legal
proceedings involving AmBisome, Gilead's liposomal formulation of amphotericin
B. In the Settlement Agreement, Elan granted the Company immunity from suit in
connection with the worldwide production and sales of AmBisome and a worldwide
right to use two of their patents. Under the terms of the Settlement Agreement,
Gilead made an initial payment to Elan of $1.8 million and was required to make
payments beginning in 1998 based on AmBisome sales over the next several years.
Because the payments are subject to certain minimum and maximum amounts, the
Company recorded accounting charges in 1997 of $11.8 million, of which
$10.0 million represented

                                       85

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the net present value of all future minimum payments and $1.8 million
represented the initial cash payment. Beginning in 1998, Gilead records an
expense each quarter based on the difference between all future minimum payments
and the expense recorded in 1997. In addition, beginning in 1998, the Company is
recognizing as cost of goods sold the difference between the minimum and maximum
payments, if any. Gilead does not expect the difference between its future
minimum and maximum payments to Elan to be material.

    The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. In the opinion of management, none of these
matters is expected to have a material adverse effect on the financial position
or operations of the Company based on factors currently known to management.

12. STOCKHOLDERS' EQUITY

STOCK SPLIT

    On February 22, 2001, Gilead completed a two-for-one stock split, effected
in the form of a stock dividend, to stockholders of record as of February 2,
2001. Accordingly, all share and per share amounts for all periods presented
have been restated to retroactively reflect the split.

PREFERRED STOCK

    The Company has 5,000,000 shares of authorized preferred stock issuable in
series. The Company's Board of Directors ("Board") is authorized to determine
the designation, powers, preferences and rights of any such series. The Company
has reserved 400,000 shares of preferred stock for potential issuance under the
Preferred Share Purchase Rights Plan.

    In June 1997, the Company issued 1,133,786 shares of Series B Convertible
Preferred Stock ("Preferred Stock") to Pharmacia for approximately
$40.0 million, or $35.28 per share. On July 15, 1999, the average of the closing
price of Gilead's common stock for the thirty days then ended was $24.90. This
event triggered the automatic conversion of the Preferred Stock owned by
Pharmacia into the Company's common stock. Accordingly, the Preferred Stock
converted into 2,267,572 shares of common stock at a price of $17.64 per share
on July 16, 1999. There was no preferred stock outstanding as of December 31,
2000.

EMPLOYEE STOCK PURCHASE PLAN

    Under Gilead's Employee Stock Purchase Plan ("ESPP"), employees can purchase
shares of Gilead common stock based on a percentage of their compensation. The
purchase price per share must equal at least the lower of 85 percent of the
market value on the date offered or the date purchased. A total of 3,160,000
shares of common stock have been reserved for issuance under the ESPP. As of
December 31, 2000, 1,966,366 shares of the total shares reserved had been issued
under the ESPP (1,762,566 shares as of December 31, 1999).

    Emerging Issues Task Force ("EITF") Issue No. 97-12, ACCOUNTING FOR
INCREASED SHARE AUTHORIZATIONS IN AN IRS SECTION 423 EMPLOYEE STOCK PURCHASE
PLAN UNDER APB OPINION NO. 25, provides that new shares authorized under
existing Section 423 employee stock purchase plans may give rise to

                                       86

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

12. STOCKHOLDERS' EQUITY (CONTINUED)
compensation expense under circumstances specified in that accounting standard.
During 1998, Gilead recognized compensation expense of $0.4 million related to
an ESPP share authorization approved in 1998 in accordance with the provisions
of EITF Issue No. 97-12. In future years, the Company will not be required to
recognize additional compensation expense related to the 1998 share
authorization.

STOCK OPTION PLANS

    In December 1987, Gilead adopted the 1987 Incentive Stock Option Plan and
the Supplemental Stock Option Plan for issuance of common stock to employees,
consultants and scientific advisors. In April 1991, the Board approved the
granting of certain additional nonqualified stock options with terms and
conditions substantially similar to those granted under the 1987 Supplemental
Stock Option Plan. None of the options described above had exercise prices that
were less than the fair value of the underlying stock on the date of grant. The
options vest over five years pursuant to a formula determined by the Board and
expire after ten years. No shares are available for grant of future options
under any of these plans.

    In November 1991, Gilead adopted the 1991 Stock Option Plan ("1991 Plan")
for issuance of common stock to employees and consultants. Options issued under
the 1991 Plan shall, at the discretion of the Board, be either incentive stock
options or nonqualified stock options. In May 1998, the 1991 Plan was amended
such that the exercise price of all stock options must be at least equal to the
fair value of Gilead's common stock on the date of grant. The options vest over
five years pursuant to a formula determined by the Board and expire after
ten years. In May 2000 the shareholders approved an Amendment to the 1991 Plan
that increased the total number of authorized shares under the plan from
20,000,000 to 21,500,000. At December 31, 2000, there were 5,918,370 shares
available for grant of future options under the 1991 Plan.

    In November 1995, Gilead adopted the 1995 Non-Employee Directors' Stock
Option Plan ("Directors' Plan") for issuance of common stock to non-employee
Directors pursuant to a predetermined formula. The exercise price of options
granted under the Directors' Plan must be at least equal to the fair value of
Gilead's common stock on the date of grant. The options vest over five years
from the date of grant in quarterly five percent installments and expire after
ten years. At December 31, 2000, there were 390,000 shares available for grant
of future options under the Directors' Plan.

    NeXstar's stock plans include the 1988 Stock Option Plan ("1988 Plan"), the
1993 Incentive Stock Plan, and the 1995 Director Option Plan (collectively,
"NeXstar Plans"). Options pursuant to the 1988 Stock Option Plan and the 1993
Incentive Stock Plan that were issued and outstanding as of July 29, 1999 have
been converted into options to purchase Gilead common stock as a result of the
Merger and remain subject to their original terms and conditions. Options
outstanding under the 1995 Director Option Plan became fully vested at the close
of the Merger and are exercisable for a period of 24 months thereafter. No
shares are available for grant of future options under any of the NeXstar Plans.

    NeXstar's 1988 Plan allows certain option holders to execute cashless
exercises of options. In a cashless exercise transaction, the option holder
specifies how many shares will be exercised and the Company issues the specified
number of shares, less the number that would be required to cover the

                                       87

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

12. STOCKHOLDERS' EQUITY (CONTINUED)
exercise price based on the fair value of the stock on the exercise date. During
2000 and 1999, several option holders performed cashless exercises. As a result,
such option awards are considered to be variable and, therefore, the Company
recognized compensation expense of $0.5 million in 2000 and $2.3 million in
1999. Of the 2000 amount, $0.4 million relates to exercised options and the
remaining $0.1 million relates to options that remain outstanding under the 1988
Plan at December 31, 2000.

    The following table summarizes activity under all Gilead and NeXstar stock
option plans for each of the three years in the period ended December 31, 2000.
All option grants presented in the table had exercise prices not less than the
fair value of the underlying stock on the grant date (shares in thousands):



                                                                       YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------------------------------
                                                          2000                  1999                  1998
                                                   -------------------   -------------------   -------------------
                                                              WEIGHTED              WEIGHTED              WEIGHTED
                                                              AVERAGE               AVERAGE               AVERAGE
                                                              EXERCISE              EXERCISE              EXERCISE
                                                    SHARES     PRICE      SHARES     PRICE      SHARES     PRICE
                                                   --------   --------   --------   --------   --------   --------
                                                                                        
Outstanding, beginning of year...................   11,262     $16.68     11,312     $12.19     10,492     $11.18
  Granted........................................    3,032      34.37      3,338      27.42      2,856      13.75
  Forfeited......................................   (1,104)     21.98       (742)     16.81       (756)     15.60
  Exercised......................................   (2,354)     11.58     (2,646)     10.76     (1,280)      5.87
                                                    ------                ------                ------
Outstanding, end of year.........................   10,836     $22.18     11,262     $16.68     11,312     $12.19
                                                    ======                ======                ======
Exercisable, end of year.........................    4,226     $14.63      4,552     $11.28      5,036     $10.26
Weighted average fair value of options granted...              $22.50                $16.77                $ 7.73


    The following is a summary of Gilead options outstanding and options
exercisable at December 31, 2000 (options in thousands):



                                                       OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                              --------------------------------------   ----------------------------
                                                              WEIGHTED
                                                               AVERAGE      WEIGHTED
                                                              REMAINING     AVERAGE                     WEIGHTED
                                                OPTIONS      CONTRACTUAL    EXERCISE     OPTIONS        AVERAGE
RANGE OF EXERCISE PRICES                      OUTSTANDING   LIFE IN YEARS    PRICE     EXERCISABLE   EXERCISE PRICE
------------------------                      -----------   -------------   --------   -----------   --------------
                                                                                      
$0.30-$13.06................................      3,226           5.39       $ 9.99       2,142          $ 9.18
$13.13-$22.12...............................      2,668           5.92       $16.85       1,554          $16.80
$22.13-$29.63...............................      2,882           8.71       $28.73         348          $28.54
$30.03-$49.38...............................      2,060           9.24       $39.01         182          $33.66
                                                 ------                                   -----
  Total.....................................     10,836           7.14       $22.18       4,226          $14.63
                                                 ======                                   =====


PRO FORMA DISCLOSURES

    The table below presents the combined net loss and basic and diluted net
loss per common share if compensation cost for the Gilead and NeXstar stock
option plans and the ESPP had been

                                       88

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

12. STOCKHOLDERS' EQUITY (CONTINUED)
determined based on the estimated fair value of awards under those plans on the
grant or purchase date.



                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                           
Pro forma net loss (in thousands)...........................  $(91,775)  $(93,816)  $(61,444)
Pro forma basic and diluted net loss per share..............  $  (1.01)  $  (1.10)  $  (0.75)


    Fair values of awards granted under the stock option plans and ESPP were
estimated at grant or purchase dates using a Black-Scholes option pricing model.
The Company used the multiple option approach and the following assumptions:



                                                                  YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------------
                                                        2000               1999               1998
                                                    ------------       ------------       -------------
                                                                                 
Expected life in years (from vesting date):
  Stock options..............................           1.88               1.86            1.44 to 1.78
  ESPP.......................................           1.45               1.21                    1.51
Discount rate:
  Stock options..............................            6.3%               5.6%           4.7% to 5.5%
  ESPP.......................................            5.5%               5.0%                   5.2%
Volatility(1)................................             84%                67%                    66%
Expected dividend yield......................              0%                 0%                     0%


------------------------

(1) NeXstar's volatility rate for 1998 was 61%.

    The weighted average estimated fair value of ESPP shares purchased was
$12.12 for 2000, $8.11 for 1999 and $5.99 for 1998.

PREFERRED SHARE PURCHASE RIGHTS PLAN

    In November 1994, the Company adopted a Preferred Share Purchase Rights
Plan. The plan provides for the distribution of a preferred stock purchase right
as a dividend for each share of Gilead common stock held of record at the close
of business on December 14, 1994. The purchase rights are not currently
exercisable. Under certain conditions involving an acquisition or proposed
acquisition by any person or group of 15% or more of the Company's common stock,
the purchase rights permit the holders (other than the 15% holder) to purchase
Gilead common stock at a 50% discount from the market price at that time, upon
payment of an exercise price of a specified exercise price per purchase right.
In addition, in the event of certain business combinations, the purchase rights
permit the purchase of the common stock of an acquirer at a 50% discount from
the market price at that time. Under certain conditions, the purchase rights may
be redeemed by the Board in whole, but not in part, at a price of $.005 per
purchase right. The purchase rights have no voting privileges and are attached
to and automatically trade with Gilead common stock.

    In October 1999, the Board of Directors approved an amendment to the
purchase rights plan. The amendment provided, among other things, for an
increase in the exercise price of a right under the

                                       89

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

12. STOCKHOLDERS' EQUITY (CONTINUED)
plan from $30 to $200 and an extension of the term of the plan from
November 21, 2004 to October 20, 2009.

13. COMPREHENSIVE INCOME

    The following reclassification adjustments are required to avoid
double-counting net realized gains (losses) on sales of securities that were
previously included in comprehensive income prior to the sales of the securities
(in thousands):



                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
                                                        2000       1999       1998
                                                      --------   --------   --------
                                                                   
Net gain (loss) on sales of securities included in
  interest income...................................   $  (84)   $  (383)    $ 473
                                                       ======    =======     =====
Other comprehensive income:
  Net unrealized gain (loss) arising during the
    year............................................   $1,987    $(1,985)    $ 172
  Reclassification adjustment.......................       84        383      (473)
                                                       ------    -------     -----
Net unrealized gain (loss) reported in other
  comprehensive income..............................   $2,071    $(1,602)    $(301)
                                                       ======    =======     =====


    The balance of accumulated other comprehensive loss as reported on the
balance sheet consists of the following components (in thousands):



                                                               DECEMBER 31,
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
                                                                 
Net unrealized gain (loss) on available-for-sale
  securities..............................................  $   512    $(1,559)
Cumulative loss on foreign currency translation...........   (1,413)      (968)
                                                            -------    -------
  Accumulated other comprehensive loss....................  $  (901)   $(2,527)
                                                            =======    =======


                                       90

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

14. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

    The Company has determined that it has only one reportable segment because
management has organized the business along its functional lines.

    Product sales revenues consisted of the following (in thousands):



                                                   YEAR ENDED DECEMBER 31,
                                                ------------------------------
                                                  2000       1999       1998
                                                --------   --------   --------
                                                             
AmBisome......................................  $141,118   $129,177   $103,430
DaunoXome.....................................     4,354      4,775      4,672
VISTIDE.......................................     4,237      5,938      6,074
                                                --------   --------   --------
                                                $149,709   $139,890   $114,176
                                                ========   ========   ========


    The following table summarizes revenues from external customers and
collaborative partners by geographic region. Revenues are attributed to
countries based on the location of the customer or collaborative partner (in
thousands).



                                                   YEAR ENDED DECEMBER 31,
                                                ------------------------------
                                                  2000       1999       1998
                                                --------   --------   --------
                                                             
United States.................................  $ 37,476   $ 28,389   $ 23,601
United Kingdom................................    23,827     19,259     17,241
Switzerland...................................    21,531     15,763     16,400
Germany.......................................    21,340     21,647     22,254
Italy.........................................    16,978     16,293     13,420
Spain.........................................    15,074     14,625     11,934
France........................................     9,528      8,347      4,993
Other European countries......................    32,053     31,500     27,036
Other countries...............................    17,748     13,156     14,240
                                                --------   --------   --------
Consolidated total............................  $195,555   $168,979   $151,119
                                                ========   ========   ========


    At December 31, 2000, the net book value of the Company's property, plant
and equipment was $55.2 million. Approximately 95% of such assets were located
in the United States. At December 31, 1999, the net book value of property,
plant and equipment was $51.4 million, and approximately 93% of such assets were
located in the United States.

    Product sales to one distributor accounted for approximately 12% of total
revenues in 2000, 11% in 1999 and 10% in 1998. Total revenues from Fujisawa
Healthcare, Inc., which included product sales and royalties, were approximately
13% of total revenues in 2000, 11% in 1999 and less than 10% in 1998. Revenues
from Roche, including royalties, milestone payments and reimbursement of
research and development expenses, accounted for approximately 11% of total
revenues in 2000, 9% in 1999 and 11% in 1998.

                                       91

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

15. INCOME TAXES

    The Company has no deferred provision for income taxes. The current
provision for income taxes consisted of the following (in thousands):



                                                            YEAR ENDED DECEMBER 31,
                                                         ------------------------------
                                                           2000       1999       1998
                                                         --------   --------   --------
                                                                      
Current provision:
  Federal..............................................   $   --      $ 65       $160
  State................................................       21        30         21
  Foreign..............................................    1,178       793        678
                                                          ------      ----       ----
                                                          $1,199      $888       $859
                                                          ======      ====       ====


    Foreign pre-tax (loss) income was $(40.3) million in 2000, $2.0 million in
1999 and $0.1 million in 1998.

    The difference between the provision for taxes on income and the amount
computed by applying the federal statutory income tax rate to income before
provision for income taxes, equity in loss of unconsolidated affiliate and the
cumulative effect of a change in accounting principle is explained below (in
thousands):



                                                    YEAR ENDED DECEMBER 31,
                                                 ------------------------------
                                                   2000       1999       1998
                                                 --------   --------   --------
                                                              
Loss before provision for income taxes, equity
  in loss of unconsolidated affiliate and the
  cumulative effect of a change in accounting
  principle....................................  $(39,049)  $(60,942)  $(42,798)
                                                 ========   ========   ========
Tax at federal statutory rate..................  $(13,277)  $(20,720)  $(14,552)
Unbenefitted losses............................    13,617     21,074     14,698
Other..........................................       859        534        713
                                                 --------   --------   --------
                                                 $  1,199   $    888   $    859
                                                 ========   ========   ========


    At December 31, 2000, the Company had U.S. federal net operating loss
carryforwards of $484.3 million and state net operating loss carryforwards of
$33.0 million. The federal net operating loss carryforwards will expire at
various dates beginning in 2002 through 2020, if not utilized. The state net
operating loss carryforwards will expire at various dates from 2001 through
2013, if not utilized. Utilization of net operating losses may be subject to an
annual limitation due to ownership change limitations provided in the Internal
Revenue Code and similar state provisions. This annual limitation may result in
the expiration of the net operating losses and credits before utilization.

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

                                       92

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

15. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows (in thousands):



                                                            DECEMBER 31,
                                                        ---------------------
                                                          2000        1999
                                                        ---------   ---------
                                                              
Net operating loss carryforwards......................  $ 166,500   $ 144,600
Research and other credits............................     35,400      27,400
Capitalized R&D for California........................     17,100      14,800
Other, net............................................      9,600       7,400
                                                        ---------   ---------
  Total deferred tax assets...........................    228,600     194,200
Valuation allowance...................................   (228,600)   (194,200)
                                                        ---------   ---------
Net deferred tax assets recognized....................  $      --   $      --
                                                        =========   =========


    The valuation allowance increased by $34.4 million for the year ended
December 31, 2000, and by $23.6 million for the year ended December 31, 1999.
Approximately $42.5 million of the valuation allowance at December 31, 2000
relates to the tax benefits of stock option deductions, which will be credited
to additional paid-in capital when realized.

16. RETIREMENT SAVINGS PLAN

    As of December 31, 2000, Gilead maintained two separate retirement savings
plans under which eligible employees may defer compensation for income tax
purposes under Section 401(k) of the Internal Revenue Code of 1986. One plan
primarily covers NeXstar employees ("NeXstar Plan"), and the other plan
primarily covers Gilead's remaining eligible employees ("Gilead Plan"). Under
the NeXstar Plan, employee contributions may not exceed 15% of eligible annual
compensation. In addition, the NeXstar Plan includes a Company match of 50% of
employee contributions up to a maximum of 6% of eligible annual compensation up
to an annual maximum Company match of $2,500. At December 31, 2000,
approximately $0.6 million, representing 13,857 shares of Gilead common stock,
was held by the NeXstar Plan in trust for plan participants. Effective
February 1995, contributions to the NeXstar Plan may not be invested in the
Company's common stock. Under the Gilead Plan, employees may contribute up to
15% of their eligible annual compensation. Effective January 1, 2000, Gilead
began making matching contributions under the Gilead Plan. The Company
contributes up to 50% of an employee's first 6% of contributions up to an annual
maximum Company match of $2,500. The Company's total matching contribution for
the NeXstar Plan and the Gilead Plan was $0.9 million in 2000. The Company's
matching contribution related to the NeXstar Plan was $0.5 million in 1999 and
$0.5 million in 1998. In January 2001, the NeXstar Plan was terminated and
combined with the Gilead Plan.

17. RELATED PARTY TRANSACTIONS

    During 2000, Gilead paid an aggregate of $10.2 million to PharmaResearch
Corporation, a contract research organization, for services rendered in
connection with clinical studies. The Chairman of Gilead's Board of Directors is
a senior advisor to an investment fund that owns a controlling interest

                                       93

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

17. RELATED PARTY TRANSACTIONS (CONTINUED)
in PharmaResearch Corporation. Gilead's payments to PharmaResearch Corporation
were $6.7 million in 1999 and $4.7 million in 1998.

18. SUBSEQUENT EVENTS

CUBIST COLLABORATION

    In January 2001, Gilead entered into an agreement with Cubist
Pharmaceuticals, Inc. ("Cubist") relating to Cubist's antibacterial compound
daptomycin, including Cidecin, an intravenous formulation of the compound which
is currently in Phase III clinical trials for treatment of bacterial infections.
Under the terms of the agreement, Gilead paid Cubist an upfront license fee of
$13.0 million and received exclusive commercial rights to the compound in
sixteen European countries ("Gilead's territory"). Cubist will continue to be
responsible for worldwide clinical development of Cidecin, while Gilead will be
responsible for both regulatory filings and marketing and sales of the product
within Gilead's territory. Gilead may make additional payments to Cubist of up
to $31.0 million if certain clinical and regulatory milestones are reached.
Additionally, if Cidecin is successfully commercialized in Gilead's territory,
Gilead will pay Cubist a royalty on net sales of the product.

INCREASE IN AUTHORIZED SHARES OF COMMON STOCK

    On February 2, 2001, at a special meeting of stockholders, the stockholders
approved an amendment to Gilead's certificate of incorporation to increase the
number of authorized shares of common stock from 100,000,000 to 500,000,000.

19. QUARTERLY RESULTS (UNAUDITED)

    The following table is in thousands, except per share amounts:



                                                  1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                                  -----------   -----------   -----------   -----------
                                                  (RESTATED)    (RESTATED)    (RESTATED)
                                                                                
2000(1)(2)
Total revenues..................................    $ 47,712      $ 50,129      $ 45,239      $ 52,475
Total costs and expenses........................      52,163        55,764        66,030        73,916
Loss before cumulative effect of change in
  accounting principle..........................      (3,271)       (4,036)      (17,414)      (18,385)
Cumulative effect of change in accounting
  principle.....................................     (13,670)           --            --            --
Net loss........................................     (16,941)       (4,036)      (17,414)      (18,385)
Basic and diluted amounts per share:
  Loss before cumulative effect of change in
    accounting principle........................    $  (0.04)     $  (0.04)     $  (0.19)     $  (0.20)
  Cumulative effect of change in accounting
    principle...................................    $  (0.15)           --            --            --
                                                    --------      --------      --------      --------
  Net loss......................................    $  (0.19)     $  (0.04)     $  (0.19)     $  (0.20)
                                                    ========      ========      ========      ========


                                       94

                             GILEAD SCIENCES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 2000

19. QUARTERLY RESULTS (UNAUDITED) (CONTINUED)



                                                          AS PREVIOUSLY REPORTED
                                                  ---------------------------------------
                                                  1ST QUARTER   2ND QUARTER   3RD QUARTER
                                                  -----------   -----------   -----------
                                                                                
2000 as previously reported:
  Total revenues................................    $ 45,222      $ 49,979      $ 45,089
  Total costs and expenses......................      52,163        55,764        66,030
  Net loss......................................      (5,761)       (4,186)      (17,564)
  Basic and diluted net loss per share..........    $  (0.06)     $  (0.05)     $  (0.19)




                                                  1ST QUARTER   2ND QUARTER   3RD QUARTER   4TH QUARTER
                                                  -----------   -----------   -----------   -----------
                                                                                
1999(2)
Total revenues..................................    $ 38,276      $ 43,537      $ 38,390      $ 48,776
Total costs and expenses........................      54,828        55,900        69,608        59,502
Net loss........................................     (15,476)      (11,691)      (30,365)       (8,954)
Basic and diluted net loss per share............    $  (0.19)     $  (0.14)     $  (0.35)     $  (0.10)


------------------------

(1) In the year ended December 31, 2000, Gilead adopted SAB 101 and reported the
    change as the cumulative effect of a change in accounting principle. The
    accounting change was adopted in the fourth quarter of 2000, effective as of
    the first quarter of 2000, and the first three quarters of 2000 were
    restated to retroactively reflect the change. Quarterly information as
    originally reported is presented under the caption "2000 as previously
    reported."

(2) On February 22, 2001, Gilead completed a two-for-one stock split, effected
    in the form of a stock dividend, to stockholders of record as of
    February 2, 2001. Accordingly, all share and per share amounts for all
    periods presented have been restated to retroactively reflect the split.

                                       95

                             GILEAD SCIENCES, INC.

                 SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)



                                                                ADDITIONS
                                           BALANCE AT    -----------------------                BALANCE AT
                                          BEGINNING OF   CHARGED TO   CHARGED TO                  END OF
                                             PERIOD       EXPENSE       OTHER      DEDUCTIONS     PERIOD
                                          ------------   ----------   ----------   ----------   ----------
                                                                                 
Year ended December 31, 2000:
  Allowance for doubtful accounts.......    $  2,333       $   30       $    --      $   63      $  2,300
  Valuation allowance for deferred tax
    assets..............................     194,200           --        34,400(3)       --       228,600
                                            --------       ------       -------      ------      --------
                                            $196,533       $   30       $34,400      $   63      $230,900
                                            ========       ======       =======      ======      ========
Year ended December 31, 1999:
  Allowance for doubtful accounts.......    $  1,480       $1,059       $    --      $  206      $  2,333
  Valuation allowance for deferred tax
    assets..............................     170,611           --        23,589(3)       --       194,200
                                            --------       ------       -------      ------      --------
                                            $172,091       $1,059       $23,589      $  206      $196,533
                                            ========       ======       =======      ======      ========
Year ended December 31, 1998:
  Allowance for doubtful accounts.......    $  1,883       $ (294)(1)   $    --      $  109      $  1,480
  Allowance for other noncurrent
    assets..............................       1,737         (550)(2)        --       1,187(2)         --
  Valuation allowance for deferred tax
    assets..............................     136,411           --        34,200(3)       --       170,611
                                            --------       ------       -------      ------      --------
                                            $140,031       $ (844)      $34,200      $1,296      $172,091
                                            ========       ======       =======      ======      ========


------------------------

(1) In August 1996, a major customer of the Company filed for bankruptcy
    protection under Chapter 11 of the U.S. Bankruptcy Code. The total
    outstanding receivable of $0.6 million from that customer as of
    December 31, 1996 was reserved. In 1997, the Company collected approximately
    $0.1 million of this amount by assigning its claim to a third party. In
    1998, the Company reversed that portion of the allowance for doubtful
    accounts no longer deemed necessary.

(2) The Company accepted $550,000 in full settlement of an outstanding note
    receivable that was fully reserved on the balance sheet.

(3) Charged to deferred tax benefit.

                                       96

                                   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.


                                                      
                                                       GILEAD SCIENCES, INC.

                                                       BY:              /S/ JOHN C. MARTIN
                                                            -----------------------------------------
                                                                          John C. Martin
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER


    POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints John C. Martin and Mark L.
Perry, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his or
here name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that all said attorneys-in-fact and agents, or any of them or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

    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
                      ---------                                    -----                     ----
                                                                                 
                 /s/ JOHN C. MARTIN                    President and Chief Executive
     -------------------------------------------         Officer, Director (Principal   March 16, 2001
                   John C. Martin                        Executive Officer)

                                                       Vice President, Chief
              /s/ SHARON SURREY-BARBARI                  Financial Officer (Principal
     -------------------------------------------         Financial and Accounting       March 16, 2001
                Sharon Surrey-Barbari                    Officer)

                 /s/ JAMES M. DENNY                    Chairman of the Board of
     -------------------------------------------         Directors                      March 16, 2001
                   James M. Denny

                    /s/ PAUL BERG                      Director
     -------------------------------------------                                        March 16, 2001
                      Paul Berg


                                       97

                             SIGNATURES (CONTINUED)



                      SIGNATURE                                    TITLE                     DATE
                      ---------                                    -----                     ----
                                                                                 
               /s/ ETIENNE F. DAVIGNON                 Director
     -------------------------------------------                                        March 16, 2001
                 Etienne F. Davignon

                 /s/ GORDON E. MOORE                   Director
     -------------------------------------------                                        March 16, 2001
                   Gordon E. Moore

                /s/ GEORGE P. SHULTZ                   Director
     -------------------------------------------                                        March 16, 2001
                  George P. Shultz


                                       98