---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

---

FORM 10-K

|(Mark one) |                                                                                      
|---------- | -------------------------------------------------------------------------------------
|/x/        | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2001

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

For the transition period from
 to

Commission File Number: 0-12798

---

CHIRON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

94-2754624(I.R.S. Employer Identification No.)


4560 Horton Street,
Emeryville, California 94608(Address of principal executive offices) (Zip code)

(Registrant's
telephone number, including area code)(510) 655-8730

(Former name, former address and former fiscal year, if changed since last report)Not Applicable

---

Securities registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value
Warrant to Purchase Common Stock, $0.01 Par Value

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 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. / /

The
aggregate market value of voting stock held by nonaffiliates of the Registrant as of January 31, 2002 was $4.7 billion. The number of shares outstanding of each of the
Registrant's classes of common stock as of January 31, 2002:

|Title of Class                |  | Number of shares
|----------------------------- |  | ----------------
|Common Stock, $0.01 par value |  | 189,509,955     

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held on May 16,
2002 are incorporated by reference into Part III of this Report.

---

---

---



PART I

ITEM 1. BUSINESS

Our Policy on Forward-Looking Statements

This 10-K contains forward-looking statements concerning plans, objectives, goals, strategies, future events or performance,
and all other statements which are not statements of historical fact. These statements contain words such as, but not limited to, "believes," "anticipates," "expects," "estimates," "projects," "will,"
"may" and "might." The forward-looking statements contained in this 10-K reflect our current beliefs and expectations on the date of this 10-K. Actual results, performance or
outcomes may differ from what is expressed in the forward-looking statements. We have discussed the important factors, which we believe could cause actual results to differ from what is expressed in
the forward-looking statements, in Part II, Item 7. of this 10-K, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption
"Factors That May Affect Future Results." We are not obligated to publicly announce any revisions to these forward-looking statements to reflect a change in facts or circumstances.

Company Summary

Chiron Corporation is a global pharmaceutical company that leverages a diverse business model to develop and commercialize high-value products that
make a difference in people's lives. We apply our advanced understanding of the biology of cancer and infectious disease to develop products from our platforms in proteins, small molecules and
vaccines. We commercialize our products through three business units: biopharmaceuticals, vaccines and blood testing.

Focus on Cancer and Infectious Disease

Chiron is focused on developing products for cancer and infectious disease. We continue to build upon our cancer franchise, which has three dimensions; immune
system modulators, monoclonal antibodies and novel anti-cancer agents. In the infectious disease area, we have a range of products spanning all three of our business units.

Biopharmaceuticals

Chiron Biopharmaceuticals discovers, develops, manufactures and markets a range of therapeutic products. Our products include:



Vaccines

Chiron Vaccines, the fifth largest vaccines business in the world, currently offers more than 30 vaccines for adults and children. We provide a range of vaccines,
including:



2

---



Blood Testing

Chiron Blood Testing provides products used by the blood banking industry. With our collaborator, Gen-Probe Incorporated, we are developing and
commercializing nucleic acid testing blood screening assays, including the Procleix HIV-1/HCV Assay. Through our joint business with Ortho-Clinical Diagnostics, Inc., a
Johnson & Johnson company, we develop and market a line of immunodiagnostic screening and supplemental tests for infectious diseases.

Intellectual Property

Chiron has a large portfolio of intellectual property, with material positions in HIV and hepatitis C virus. Chiron has entered into numerous collaborations and
licensing agreements with major companies, particularly in the areas of blood screening and diagnostics.

Corporate History and Headquarters Information

We were incorporated in California in 1981 and merged into a Delaware corporation in November 1986. Our principal executive offices are located at 4560
Horton Street, Emeryville, California 94608, and our main telephone number is (510) 655-8730.

Product Descriptions

Biopharmaceuticals

Chiron manufactures Betaseron® (interferon beta-1b) for sale outside of Europe by Berlex Laboratories, Inc. and its parent company,
Schering AG of Germany. Betaseron® is approved for relapsing/remitting multiple sclerosis in over 60 countries, including the U.S. and the European Union, and for secondary progressive
multiple sclerosis in approximately 40 countries, including the European Union, Canada, Australia and New Zealand. Multiple sclerosis is an autoimmune disease in which the patient's immune system
attacks and destroys an element of the patient's own central nervous system. The active ingredient in Betaseron® is a modified form of a beta interferon produced naturally by the human
body. Interferons help to regulate the immune system, and Betaseron® is thought to help slow down the immune system's attack on nerve tissue. While the ways in which Betaseron®
actually affects multiple sclerosis are not clearly understood, it has been demonstrated clinically that Betaseron® may decrease the nerve damage associated with multiple sclerosis. It has
been shown to reduce the overall frequency of multiple sclerosis relapses, which are also called exacerbations or attacks, as well as the number of moderate and severe relapses. We also receive
royalties from the sale of an identical product in Europe, Betaferon®, which is manufactured by Boehringer Ingelheim and marketed by Schering in Europe to treat patients with relapsing
remitting and secondary progressive multiple sclerosis.

TOBI®
is a stable, premixed, proprietary formulation of the antibiotic tobramycin for delivery by inhalation using a nebulizer. TOBI® has been tested and approved
for cystic fibrosis patients withPseudomonas aeruginosalung infections. Cystic fibrosis is caused by a genetic mutation which prevents cells from
building a special protein required for normal movement of sodium and chloride (salt) in and out of cells lining the lungs and other organs. This abnormal movement causes secretion of thick, sticky
mucus. This mucus is not cleared from the airways and, as a result, bacteria begin to grow, causing infection. Respiratory infections are treated with antibiotics, often in aerosol form. The medicated
aerosol fights infection, relieves constriction of the airways and reduces systemic toxicity associated with the antibiotic agent.Pseudomonas aeurginosais the most common bacterium causing lung
infections in people with cystic fibrosis. Appropriate treatment of these chronic lung infections is a major contributor to the
extended life span of patients with cystic fibrosis and to improved quality of life. The TOBI® formulation is well tolerated by patients, thereby leading to increased patient compliance
and more effective elimination of infection compared to other antibiotic aerosols. Antibiotic therapy rarely eradicates bacteria in the respiratory tract of patients with cystic fibrosis. However,
treatment with TOBI® decreases the bacterial

3

---

load, reduces the associated inflammatory response, and improves overall lung function. TOBI® is the first inhaled antibiotic solution to be approved by the U.S. Food and Drug
Administration and has been sold in the U.S. since January 1998. TOBI® is approved for sale in the U.S., Canada, Switzerland, Finland, Israel, Argentina, Australia, New Zealand and
Brazil. TOBI® also has cleared the mutual recognition process required for marketing the drug in the European Union. Under this mutual recognition process, TOBI® has received
marketing authorizations from all European Union member countries.

Chiron
manufactures and markets Proleukin®, a recombinant form of interleukin-2. Interleukin-2 is a protein produced naturally in the body in very
small quantities. Interleukin-2 stimulates the immune system to increase the production and function of immune cells. While the precise anti-tumor mechanism of
Proleukin® is unknown, research has demonstrated that Proleukin® induces the
proliferation of immune cells, including natural killer and cytotoxic T cells that can recognize and mobilize against tumor-specific antigens on the surface of malignant cells. We market
Proleukin® directly or through distributors in the U.S. and over 50 other countries in North America, Europe, Asia and South America to treat metastatic renal cell carcinoma (a type of
kidney cancer), and in the U.S. and Canada to treat metastatic melanoma (a form of skin cancer).

Chiron
manufactures PDGF, the active ingredient in Regranex® Gel. PDGF was developed with Ortho-McNeil Pharmaceutical, Inc. through a collaboration in growth factor
research that began in 1984. Ortho-McNeil Pharmaceutical markets Regranex® in the U.S. to treat diabetic foot ulcers. Regranex® works by enhancing the body's natural wound
healing processes. It stimulates the migration of cells to the site of the ulcer, encouraging the patient's body to grow new tissue that helps heal these open wounds. Regranex® was the
first product demonstrated to assist in the healing of diabetic foot ulcers. Regranex® also has been approved for marketing in Canada, Europe, Asia and other regions of the world.

Sales
of Betaseron®, which include product sales to Berlex Laboratories and Schering and royalties earned on Schering's European sales of Betaferon®, accounted
for approximately 12% (9% product sales and 3% royalties), 12% (8% product sales and 4% royalties) and 13% (9% product sales and 4% royalties) of total revenues in 2001, 2000 and 1999, respectively.
Sales of TOBI® accounted for approximately 11% and 3% of our consolidated total revenues in 2001 and 2000, respectively. Sales of Proleukin® accounted for approximately 8%, 12%
and 15% of our consolidated total revenues in 2001, 2000 and 1999, respectively. No other biopharmaceutical product accounted for 10% or more of our consolidated total revenues in any of the last
three fiscal years.

Vaccines

In 2000, Chiron commenced sales of Menjugate, a conjugate vaccine against meningococcal meningitis caused by the bacterium N. meningitidis serogroup
C. Invasive infection with the bacteria N. meningitidis can lead to meningitis and septicemia (blood poisoning). Meningococcal meningitis, which can be caused by multiple serogroups (A, B, C, Y and
others), is associated with a high mortality rate. In March 2000, the Medicines Control Agency approved Menjugate for sale in the United Kingdom. The National Health Service in the
United Kingdom accepted our tender to supply Menjugate in 2000 and 2001. We are also selling Menjugate in Canada, Ireland, Spain and Hungary. We have received approval to
market Menjugate elsewhere in the European Union through the mutual recognition procedure.

Chiron
also developed and markets Fluad, an adjuvanted flu vaccine, which uses our recently developed MF-59, an adjuvant which improves the body's immunologic
reaction. This gives older patients long-lasting protection from influenza and its complications. Fluad currently is marketed in Italy, Germany, Austria and Spain (under a
different trade name). We have gained approval to market Fluad in 12 countries of the European Union through the European mutual recognition procedure.

In
2000, we entered into a co-promotion and co-marketing agreement with Aventis Pasteur MSD related to Menjugate and Fluad. Under the
agreement, Aventis Pasteur will assist Chiron in marketing and sales efforts (co-promotion) related to Menjugate in the United Kingdom and Ireland. Aventis

4

---

Pasteur will distribute, market and sell (co-market) Menjugate under its own label in the rest of Europe. Aventis Pasteur will similarly co-market and
co-promote Fluad in Europe.

In
Italy, we manufacture and market vaccines for:



Also
in Italy, under license, we market vaccines for:



In
Germany, we manufacture and market vaccines for:



Also
in Germany, under distribution agreements with other manufacturers, we market vaccines for:



5

---



In
India, we manufacture, through Chiron Behring Vaccines Limited, a vaccine against rabies.

We
market most of our manufactured vaccines in other European countries and in the Middle East, the Far East, Africa and South America, and to international health agencies such as the
World Health Organization. We market our rabies vaccine in the U.S.

In
addition to revenues from the sale of the vaccines described above, Chiron receives royalties from the sale of certain vaccines from Merck and Company, Inc. and SmithKline
Beecham Biologics (now part of GlaxoSmithKline plc), based upon technology developed by Chiron. Merck's hepatitis B virus vaccine, based on Chiron technology, was the first genetically engineered
vaccine licensed by the U.S. Food and Drug Administration for human use.

Sales
of Menjugate accounted for approximately 9% and 12% of our consolidated total revenues in 2001 and 2000, respectively. No other single vaccine product or class of
vaccine product accounted for 10% or more of our consolidated total revenues in any of the last three fiscal years.

Blood Testing

Our blood testing business consists of two separate collaborations: an alliance with Gen-Probe Incorporated and a joint business with Ortho-Clinical
Diagnostics, Inc.

Our
collaboration with Gen-Probe is focused on developing and commercializing nucleic acid testing products using transcription-mediated amplification technology to screen
donated blood in blood banks and plasma in the plasma industry for viral infection. Compared to immunodiagnostic testing, testing directly for the presence of viral nucleic acids improves the
sensitivity of the test and enables infection to be detected earlier than currently approved technologies. Under the terms of the collaboration agreement, Gen-Probe performs certain
product development and assay and instrument manufacturing functions, while Chiron and Gen-Probe jointly participate in new assay and instrument research and development. Chiron sells the
collaboration's products under the Procleix brand name, and Gen-Probe receives a percentage of our sales revenues. The Chiron/Gen-Probe collaboration's first
product is a combined test for HIV and hepatitis C virus using a semi-automated instrument system. The Procleix system has been used to screen blood under an Investigational
New Drug application in the U.S. since 1999. On February 27, 2002, the U.S. Food and Drug Administration approved the Procleix HIV-1/HCV Assay. The nucleic acid
amplification test is designed to detect the presence of all known HIV-1 subtypes and hepatitis C virus genotypes in whole blood and plasma during the very early stages of infection, when
such agents would not be detected by immunodiagnostic screening technologies. The Procleix system is also approved for use in France, Germany, Australia, Portugal, Spain, Singapore,
Italy, Austria, Switzerland and New Zealand, and is under evaluation in other European, South American and Asian countries.

Our
joint business with Ortho-Clinical Diagnostics was formed in 1989, to develop and sell immunodiagnostic tests to detect human immunodeficiency and hepatitis viruses in blood. The
joint business sells a full line of tests for hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to automate test performance and data
collection. We manufacture,
and perform research on, viral antigens for further manufacture by Ortho-Clinical Diagnostics into testing assays and supplemental hepatitis tests. Ortho-Clinical Diagnostics manufactures and sells
assays and instrument systems. Chiron and Ortho-Clinical Diagnostics share equally in the pretax operating earnings generated by the joint business. The joint business holds the immunodiagnostic
rights to our hepatitis and retrovirus technology and receives royalties from the sale of hepatitis C virus and HIV tests by Abbott

6

---

Laboratories, Inc. and from sales of hepatitis C virus tests by Bio-Rad Laboratories, Inc. and certain other licensees.

No
single blood testing product or class of blood testing products accounted for 10% or more of our consolidated total revenues in any of the last three fiscal years.

Research and Development

As a global pharmaceutical company, our focus on cancer and infectious disease starts with the discovery process, using our three product
platformstherapeutic proteins, small molecules and vaccinesand continues into the clinic and eventually into one of our three business units. In addition to our research and
development activities, technologies that are developed in collaborations with third parties, as well as technologies licensed from outside parties, also are sources of potential products for our
business units.

Products
or product candidates that are inappropriate for our commercial organization are out-licensed to other companies. This portfolio of intellectual property is, and
will continue to be, an important part of our business model.

Therapeutic Proteins

Proteins produced naturally by the human body play a variety of roles in controlling disease. When administered as therapeutic agents, certain proteins or
specific antibodies can enhance the patient's natural ability to fight disease. However, traditional methods of isolating or producing proteins can be expensive, particularly in the quantities needed
for pharmaceutical use. Through genetic engineering, certain proteins can be produced in relatively large quantities at reasonable cost.

Chiron
and our collaborators have a number of recombinant proteins in clinical development. Proleukin®, already approved for marketing as a treatment for certain forms of
kidney and skin cancer, is being clinically evaluated for other uses. These uses include treatment, in combination with antiviral drugs, of patients with HIV infection, treatment of acute myelogenous
leukemia and treatment for non-Hodgkin's lymphoma in conjunction with an approved antibody therapeutic. Fibroblast Growth
Factor, a growth factor that can stimulate the formation of new blood vessels, is in clinical studies for use as a treatment for peripheral artery disease. Tifacogin (recombinant Tissue Factor Pathway
Inhibitor), a coagulation inhibitor, was developed in collaboration with Pharmacia & Upjohn, Inc. Chiron and Pharmacia & Upjohn conducted clinical studies on the use of tifacogin
as a treatment for patients with severe sepsis. The results from the trial indicated that tifacogin did not meet the primary endpoint of reducing 28-day all-cause mortality. We
are undertaking a full review of the data from the Phase 3 trial, and we will make future development decisions about tifacogin after we have completed the analysis of the data. In 2000, Chiron and
Cephalon, Inc. discontinued their joint collaboration to develop Myotrophin® (mecasermin) Insulin-like Growth Factor-I to treat amyotrophic lateral sclerosis
(also known as ALS or Lou Gehrig's disease).

Small Molecule Drug Discovery

Our small molecule drug discovery program combines multiple disciplines. These disciplines include combinatorial and computational chemistry, robotic screening
and selection and molecular biology, to screen, identify and refine compounds which may be used as drugs for treating medical conditions or disorders. In addition to drug discovery against specific
disease targets of interest to us, we occasionally enter into collaboration agreements with third parties under which we use our proprietary technologies to identify drug candidates for others. We
have identified certain compounds that may be of interest to us. We will further optimize and test those compounds before moving them into clinical development.

7

---

Angiozyme®
is a synthetic ribozyme designed as an angiogenesis inhibitor for cancer. Angiozyme® is under development in a collaboration led by Ribozyme
Pharmaceuticals, Inc. Several phase 2 solid tumor studies are currently underway.

We
are working to develop and register a product combining TOBI® and a new inhalation device. In December 2001, we entered into a collaboration with Inhale
Therapeutics Systems, Inc. to develop this device. Our goal is to improve convenience and to reduce the time to deliver TOBI® to the cystic fibrosis patient's lungs. In addition to
TOBI®, we are conducting clinical research on PA-1806, a novel, patented drug candidate that was licensed from Bristol-Myers Squibb Company in 1998. In the laboratory,
PA-1806 has demonstrated activity against gram-negative lung bacteria, a broad subset of serious lung infections. Chiron intends to initiate preclinical programs on other
inhaled antibiotics.

Vaccines

We are developing a new generation of vaccines to prevent disease utilizing genetic engineering and other techniques of modern biotechnology, including vaccines
based on recombinant antigens. We are currently conducting preclinical studies on vaccines for a number of diseases, including hepatitis C virus
and HIV. We are also developing novel adjuvants. Adjuvants are compounds that amplify the immune response generated by vaccine antigens. One of our adjuvants, MF-59, is a component of
Fluad, our novel flu vaccine. In addition, we are conducting preclinical investigations of alternative delivery systems for vaccines that may be used in lieu of injection, such as inhaled
or oral vaccines.

We
are investigating the potential use of vaccines for therapeutic purposes, in which antigens are used to stimulate an immune response against established infections and cancer. Our
therapeutic vaccine for treatment of chronic hepatitis B virus is in clinical development. We have also started a phase 1 clinical study of a vaccine for the H. pylori infection.

Chiron
participates in the development of a range of hepatitis and retrovirus assays forin-vitroclinical diagnostics use for
the joint business with Ortho-Clinical Diagnostics, Inc.

Chiron
and Gen-Probe Incorporated are working toward widening the menu from HIV-1 and hepatitis C virus to include other transfusion transmitted viruses, such as
hepatitis B, hepatitis A and the Parvo B19.

The
Chiron/Gen-Probe collaboration also has two instrument systems in development, both of which are designed for use with HIV-1 and hepatitis C virus nucleic
acid tests for whole blood and plasma. Gen-Probe is continuing development of the Procleix Fully Automated System.

Research and Development Expenses and Related Revenues

Research and development expense for the years ended December 31, 2001, 2000 and 1999 for Chiron-sponsored research, including payments to collaboration
partners, was $344.4 million, $298.8 million and $303.4 million, respectively. Under contracts where we recognize revenue based upon work performed, the related research and
development activities amounted to $9.1 million, $6.0 million and $49.7 million in 2001, 2000 and 1999, respectively. We recorded these revenues in "Collaborative agreement revenues" in
the Consolidated Statements of Operations. Generally, collaborative agreement revenues include fees for research services as they are performed or completed and milestone payments upon attainment of
specified benchmarks.

8

---

Commercialization

Technologies arising out of Chiron's research and development efforts are commercialized in various ways:



Sales and Marketing

We maintain several specialized marketing and sales forces that concentrate on individual classes of customers and markets.

Our
biopharmaceutical marketing and sales organization for the U.S. is headquartered in Emeryville, California, and has European offices in Amsterdam, The Netherlands and London,
England. We focus our sales efforts on specialist physicians, principally oncologists and pulmonologists, who are based in hospitals and large clinics. Generally, we sell products to wholesalers,
distributors, clinics and hospital pharmacies.

Our
vaccine international marketing organization and our marketing and sales organization for the German market are based in Marburg, Germany. Marketing and sales structures for the
Italian market are headquartered in Siena, Italy. We focus our direct sales efforts on pediatricians and general practitioners. We also sell products to the public sector through tenders (a bid
solicitation process) and to private sector pharmacies directly and through wholesalers and distributors.

Our
blood testing marketing, sales and distribution organization for nucleic acid testing products is based in Emeryville, California and has representatives around the world. We sell
products to the public sector through tenders and to private sector blood banks and hospitals directly and through distributors.

9

---

Patents

Patents are very important to our business. We have a policy of seeking patents on inventions arising from our research and development activities. The time and
expense required to develop and obtain regulatory approval to market human healthcare products is significant. Without the protection of patents or trade secrets, competitors may be able to use our
inventions to manufacture and market competitive products without being required to undertake the lengthy and expensive development efforts made by Chiron. We also receive significant revenue through
the licensing of these patents to third parties. We have a substantial number of granted patents and pending patent applications in the U.S. and other important markets. Additionally, we have licensed
a number of patents and patent applications from third parties. Additional information is provided below on the central patents held or licensed by Chiron that cover our key products. The existence of
such patents does not mean they are valid or can be enforced against competitive products. We are often engaged in litigation to determine the scope and validity of these patents. We also seek term
extensions for patents, which are available in
certain countries based on delays in the grant of regulatory approvals for the sale of products covered by these patents. For these reasons the expiration dates provided below are not definitive.

To
a lesser extent, trade secrets and confidential information are important to our commercial success. Although we seek to protect trade secrets and confidential information, others may
obtain access to such information or develop the same or similar information independently. Also, third parties may obtain patent protection that precludes us from using our trade secrets or
confidential information.

Biopharmaceuticals

The central patents that cover Betaseron® and Betaferon® in the U.S. and Europe cover the gene and serine-17
interferon-beta protein used in manufacturing the product. The U.S. patents expire in 2005 and 2007. The European patents expire between 2003 and 2009, depending on the country.

The
central TOBI® patents include claims that cover the TOBI® product formulation and methods of treatingpseudomonas
aeruginosainfections with the TOBI® product. The U.S. and European patents expire in 2014 and 2015, respectively.

The
central patents that cover Proleukin® in the U.S. and Europe cover the gene expressed in manufacturing the product, the serine-125 Interleukin-2
mutein in the product and the 95% pure form of recombinant Interleukin-2. The U.S. patents expire in 2006 and 2012. The European patents expire between 2003 and 2006.

Chiron
and its collaborator are assignees or licensees of a number of U.S. and European patents that cover PDGF, the active ingredient in Regranex® Gel. These patents begin
to expire in 2005.

Vaccines

Fluad®, our adjuvanted flu vaccine, contains the proprietary adjuvant MF-59. The U.S. and German patents containing claims directed to
MF-59 expire in 2018 and 2010, respectively.

Blood Testing

Procleix HIV-1/HCV assay is covered by numerous patents held by Chiron in the U.S. and worldwide. These patents contain claims directed to methods of
hybridization, methods for determining the presence of the hepatitis C virus in a sample and to probes/primers utilized in such a process. The U.S. patents expire in 2015 and 2016. The European
patents expire in 2008. Procleix is also covered by several patents held by Gen-Probe Incorporated and licensed to Chiron.

The
hepatitis C virus immunoassay diagnostic products sold by our joint business with Ortho-Clinical Diagnostics, Inc. are covered by numerous patents in the U.S. and worldwide.
These patents contain claims

10

---

directed to hepatitis C virus immunoassay methods, kits and hepatitis C virus polypeptides. In the U.S., these patents expire between 2011 and 2017. In Europe, the patent expires in 2011.

Trademarks

Registered trademarks of Chiron and our subsidiaries:



Trademarks
of Chiron and our subsidiaries:

    Menjugate

    ELVS    Fluad

    Polioral    Begrivac

    Triacelluvax    Encepur

    Procleix


Registered
trademark owned by Chiron and SkyePharma plc:



The
following registered trademarks are owned by the indicated companies:



Seasonality

Sales of certain of our products, particularly the flu vaccine, are seasonal, with higher sales in the third and fourth quarters of the year.

Major Revenue Sources

We have a joint immunodiagnostics business with Ortho-Clinical Diagnostics, Inc. See "Products-Blood Testing" above. The Ortho-Clinical Diagnostics joint
business, together with certain other

11

---

arrangements with Johnson & Johnson and its affiliates, contributed 11%, 13% and 14% of total revenues in 2001, 2000 and 1999, respectively.

We
have a supply agreement with Berlex Laboratories, Inc. and its parent company, Schering AG of Germany. Revenues recognized under this agreement, together with certain other
arrangements with
Berlex Laboratories and Schering, contributed 12% to our total revenues in both 2001 and 2000 and 13% to our total revenues in 1999.

In
2000, the National Health Service accepted our tender to supply Menjugate for a universal vaccination program in the United Kingdom. This arrangement contributed 3% and
10% to total revenues in 2001 and 2000, respectively. Revenues from Aventis Pasteur MSD related to the sales of vaccines contributed 9% and 10% to total revenues in 2001 and 2000, respectively.

We
have a strategic alliance with Novartis AG, including a series of arrangements with Novartis. See "Relationship with Novartis" below. These arrangements contributed 2% of total
revenues in both 2001 and 2000 and 8% of total revenues in 1999.

Competition

We operate in a highly competitive environment, and we expect competition to increase. Competitors include large pharmaceutical, chemical and blood testing
companies, and biotechnology companies. Some of these competitors, particularly large pharmaceutical and blood testing companies, have greater resources than Chiron. Chiron and our competitors apply
rapidly evolving technologies and new developments that frequently result in price competition and product obsolescence. Substantial consolidation is underway in the global healthcare industry and is
expected to produce greater efficiencies and even more intense competition. To compete effectively, we invest heavily in research and development, maintain specialized sales forces that concentrate on
individual classes of customers and spend significant amounts on advertising, promotion and selling.

Important
biotechnology research is performed in universities and nonprofit research organizations. These entities are becoming more active in seeking patent protection and licensing
revenues for their discoveries. The competition among large pharmaceutical companies and smaller biotechnology companies to acquire technologies from these entities also is intensifying. We actively
collaborate with such entities in research, and have and will continue to license their technologies for further development. However, these institutions also compete with us to recruit scientific
personnel and to establish proprietary positions in technology.

Biopharmaceuticals

Betaseron®, as a treatment for multiple sclerosis, competes with Avonex®, a recombinant
beta interferon sold by Biogen, Inc. and with Copaxone® from Teva Pharmaceutical Industries, Ltd. Novantrone® from Immunex Corporation was approved and launched
to treat secondary progressive multiple sclerosis in March 2000. Betaferon®, sold in Europe by Schering AG also faces competition from Serono, which sells Rebif®,
another form of beta interferon that is used for, among other purposes, the treatment of multiple sclerosis. Other companies have treatments for multiple sclerosis in clinical development.

TOBI® is the first inhaled antibiotic solution to be approved by the U.S. Food and Drug Administration. However, the use of
oral and intravenous antibiotics to treat pseudomonal and other bacterial infections is well-established. In cystic fibrosis patients with pseudomonal lung infections, tobramycin is the
most commonly used intravenous antibiotic. The advantage of inhalation is that it permits higher antibiotic concentrations in the lung and reduces side effects by limiting systemic exposure.
Competitive medical therapies include generic antibiotics, anti-inflammatory drugs, oral replacement enzymes to maintain nutrition and mucolytics to clear pulmonary secretions.

12

---

Proleukin® is the only product approved by the U.S. Food and Drug Administration to treat metastatic renal cell carcinoma and
one of two approved treatments for metastatic melanoma. However, there are numerous products that are used to treat both cancers on an off-label basis, including alpha interferons sold by F. Hoffmann
La-Roche Limited and Schering-Plough Corporation. Other competitors include Eli Lilly and Company, Bristol-Myers Squibb Company and Celgene Corporation. We estimate that about 90% of
Proleukin® sales are from metastatic renal cell carcinoma and metastatic melanoma.

Regranex® was the first product approved by the U.S. Food and Drug Administration to treat diabetic foot ulcers.
Regranex® indirectly competes with Dermagraft®, a product from Advanced Tissue Sciences, Inc. & Smith and Nephew, and Apligraf®, a product from
Novartis AG which was approved by the U.S. Food and Drug Administration to treat venous leg ulcers. Apligraf® is also in clinical trials to treat diabetic foot ulcers.

Vaccines

Four large companies hold the greatest share of the worldwide vaccine market: Merck and Company, Inc., GlaxoSmithKline plc, Wyeth Lederle Vaccines &
Pediatrics (a division of American Home Products Corporation), and Aventis Pasteur MSD. Aventis Pasteur has a strategic alliance with Merck in Europe. All four of these companies, and other
biotechnology companies, have substantial research and development programs.

The
competitive factors in vaccines are price, the introduction of new products, including vaccines against diseases for which no vaccine was previously available, and new combination
vaccines that combine existing vaccines for several diseases into a single product. Public health authorities, medical practitioners and patients frequently favor combination vaccines, particularly in
pediatric vaccines, because they eliminate the need for multiple injections and may increase overall compliance with recommended vaccination schedules. As new combination vaccines are introduced,
older combinations and single products often become obsolete. We may be limited in our ability to develop and market certain combination vaccines if one of the vaccines, which would otherwise be
included in the
combination, is covered by valid and enforceable patent or other proprietary rights held by third parties.

Specifically,
Menjugate faces competition from vaccines produced by two other companies, both of which participated in the National Health Services' tender in the United
Kingdom. These companies are also competing for future meningococcus vaccine business.

Blood Testing

We are the sole manufacturer of hepatitis C virus antigens for use in immunodiagnostic assays of the Ortho-Clinical Diagnostics, Inc. joint business. We
also manufacture hepatitis C virus antigens for Abbott Laboratories, Inc.'s immunodiagnostic assays. In the immunodiagnostic blood testing market, the Ortho-Clinical Diagnostics joint business
competes with Abbott Laboratories. The joint business anticipates increased competitive pressures from Abbott Laboratories with the introduction of the Abbott Laboratories PRISM®
instrument system. The joint business is also developing immunodiagnostic instruments and assays to detect hepatitis, retrovirus and other agents in clinical diagnostic applications. Many other
companies, including F. Hoffmann La-Roche Limited and Bayer Corporation, have substantial positions in the market segment.

The
Procleix system for the detection of HIV-1 and hepatitis C virus has received approval in France, Germany, Australia, Portugal, Spain, Singapore, Italy,
Austria, Switzerland and New Zealand. On February 27, 2002, the U.S. Food and Drug Administration approved the Procleix HIV-1/HCV Assay. The
Chiron/Gen-Probe product line is expected to compete primarily with polymerase chain reaction based products supplied by F. Hoffmann La-Roche or developed in-house
by customers and, in some markets, the hepatitis C virus antigen test under development by the Ortho-Clinical Diagnostics joint business. The commercial market for nucleic acid testing products in the
blood banking and plasma

13

---

industries is developing very rapidly as regulatory agencies began in 1999 to develop policies and mandates that require this new technology to be implemented as an additional measure to improve
blood safety.

Government Regulation

Regulation by governmental authorities in the U.S. and other important markets is a significant factor in the manufacture and sale of Chiron's products and in our
research and development activities.

Biopharmaceuticals and Vaccines

In the U.S., Chiron's therapeutic and vaccine products (both commercial and investigational) are primarily regulated under federal law and are subject to rigorous
U.S. Food and Drug Administration approval procedures. No product can be marketed in the U.S. until an appropriate application is approved by the U.S. Food and Drug Administration. The U.S. Food and
Drug Administration applies the approval procedures on a product-by-product basis and typically requires, among other things, an extensive three-phase human clinical testing
program. In phase 1, studies are conducted with a relatively small number of subjects to assess the safety of the product. In phase 2, the product is evaluated in a larger group of subjects to begin
to assess efficacy and appropriate dosing. Phase 3 studies are conducted in the target population with a number of subjects that is large enough to provide sufficient data to establish statistically
the safety and efficacy of the product. The U.S. Food and Drug Administration limits its product approval to treat specified medical conditions or disorders. Further studies would be required to
market the product for other uses. The U.S. Food and Drug Administration must inspect and approve all facilities used to manufacture, fill, test and distribute biologic products. If any change in
manufacturing facilities or processes occurs after U.S. Food and Drug Administration approval, additional regulatory review and possibly additional clinical studies may be required.

Licensing
procedures in Europe are comparable to those in the U.S. In 1995, the European Union established a centralized procedure for licensing of products derived from the use of high
technology/biotechnology processes. This procedure leads to the grant of a single license for the entire European Union. Effective January 1, 1998, the European Union has also adopted a
decentralized procedure under which a license granted in one member state is mutually recognized by the other member states, leading to a grant of licenses in member states recognizing the original
license. This procedure is replacing independent national licensing of products in the European Union. In addition, each product must receive individual country pricing approvals before it can be
marketed in that country.

Blood Testing

In the U.S., blood testing products, whether based upon immunodiagnostic or nucleic acid testing technologies, may only be used pursuant to the terms of approval
of specific license applications in which the product's safety and effectiveness must be demonstrated based upon well controlled studies. Upon approval of the license application, the product may be
marketed for the specific uses, which were identified in the approval. Facilities, processes and operations used for the manufacture, testing, storage and distribution of Chiron's blood testing
products in the U.S. are subject to U.S. Food and Drug Administration approval and periodic inspection.

In
Europe, our blood testing products are currently regulated by local country regulation. However, in June 2000, the In Vitro Diagnostic Medical Devices Directive was approved in
the European Union. During the transition period that ends in December 2003, manufacturers and distributors ofin vitrodiagnostic devices can
sell these products under the current local country regulations or under the
provisions of the Directive. Our blood testing products are currently registered and sold according to local country legislation but will comply in 2003 with the provisions of the Directive.

For
all our products, the time and expense needed to complete the required clinical studies, prepare and submit the required applications and supporting documentation and respond to
inquiries generated by regulatory review can far exceed the time and expense of the research initially required to create the product. These factors largely determine the speed with which a successful
research program is translated into a marketed product.

14

---



Compliance with Environmental Laws

We do not expect expenses for compliance with environmental laws to have a material impact upon our capital expenditures, earnings or competitive position.

Employees

On December 31, 2001, Chiron and its subsidiaries had 3,736 employees.

Relationship With Novartis AG

In January 1995, we established an alliance with Novartis, a life sciences company headquartered in Basel, Switzerland. As of February 1, 2002,
Novartis owns 42% of our outstanding common stock.

We
have entered into a series of agreements with Novartis which provide, among other things and subject to certain conditions and exceptions:



ITEM 2. PROPERTIES

Emeryville Campus

Our
principal executive offices are located in Emeryville, California. As of December 31, 2001, our campus consists of 26 buildings, of which 16 are leased and 10 are owned. Our
Emeryville facilities include research and development, manufacturing and administrative facilities for our biopharmaceutical, vaccine and blood testing businesses.

In
February 2001, our Board of Directors approved a capital expansion project, which includes the construction of a parking structure and a research and development facility
(including a supporting central utility facility) in Emeryville, California. Chiron will own the parking structure. We began construction on the parking structure in June 2001. Related to the
research and development facility, we are evaluating

15

---

various financing alternatives. We expect to begin construction on the research and development facility in the second half of 2002.

Other Facilities

We
also own and lease manufacturing facilities in Vacaville, California used principally for our biopharmaceutical business. The owned facility has available capacity due to lower than
expected demand for certain of our products and improved production yields from other facilities. As a result, we have entered into contract manufacturing agreements to utilize this available capacity
(see the Biopharmaceuticals section in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" below).

In
December 1999, we sold our Amsterdam facility and are leasing back office and warehouse space for some operational and administrative activities.

We
have the following facilities for our biopharmaceutical operations:



We
have vaccine research and development, manufacturing and administrative facilities for our vaccines business in Siena, Italy; Marburg, Germany; Mumbai, India; and Ankleshwar, India.
We also have manufacturing facilities in Rosia, Italy. The Siena, Mumbai, Ankleshwar and Rosia facilities are owned, and the Marburg facilities are leased.

We
leased research and development facilities in San Diego, California in connection with our gene therapy activities. We sold this business in January 2001, and the purchaser
assumed all facility leases.

We
owned research and development, manufacturing and administrative facilities in Claremont, California. We used the facilities principally for our former ophthalmic products business,
which we sold to Bausch & Lomb Incorporated in December 1997. Bausch & Lomb occupied a significant portion of the facilities under a three-year lease, which expired in
December 2000. We sold the last warehouse on the Claremont campus in April 2001.

We
lease a number of other facilities in North America, Europe and Asia, primarily for sales and service offices.

We
believe that our current facilities are in good operating condition and are adequate for our current needs; however, we are expanding to meet future requirements. We continually
evaluate future requirements for our facilities.

ITEM 3. LEGAL PROCEEDINGS

Bayer Corporation

In January 2002, Bayer Corporation filed a complaint in the United States District Court for the District of Delaware against Chiron relating to the Stock
Purchase Agreement dated September 17, 1998 between Chiron, Bayer Corporation and Chiron Diagnostics Corporation. Bayer Corporation alleges that Chiron violated certain representations and
warranties made in the Stock Purchase Agreement and additionally seeks damages for alleged misrepresentation and fraud made in connection with the sale of

16

---

Chiron Diagnostics Corporation. Based on these allegations, Bayer Corporation seeks both compensatory and punitive damages. It is not known when nor on what basis this matter will be resolved.

Citizens for Consumer Justice, et al.

In December 2001, Citizens for Consumer Justice and 13 other named plaintiffs filed a class action lawsuit in the United States District Court for the
District of Massachusetts against 29 biotechnology and pharmaceutical companies, including Chiron, in connection with setting average wholesale prices for various products, including
DepoCyt®, which are reimbursed by Medicare. Plaintiffs allege that defendants violated federal antitrust and racketeering laws by devising and implementing a fraudulent pricing scheme
against Medicare and Medicare beneficiaries. Plaintiffs seek a declaratory judgment that defendants violated the Social Security Act, as well as unspecified equitable remedies. It is not known when
nor on what basis this matter will be resolved.

Cystic Fibrosis Pharmacy

In May 2000, PathoGenesis Corporation initiated an action against Cystic Fibrosis Pharmacy, Inc. in the United States District Court For The Middle
District Of Florida, Orlando Division. PathoGenesis Corporation asserted that Cystic Fibrosis Pharmacy's advertising and sale of an inhaled antibiotic infringes PathoGenesis Corporation's U.S. Patent
No. 5,508,269 (the "  '269 patent"). PathoGenesis Corporation sought injunctive relief and damages. Cystic Fibrosis Pharmacy filed a counterclaim seeking a declaratory judgment of
invalidity regarding the '269 patent. In September 2000, the court entered a consent order enjoining Cystic Fibrosis Pharmacy from advertising, compounding or selling the aerosol formulation
alleged to infringe the '269 patent or use any imitation of the TOBI® trademark until further order of the court. On February 1, 2001, the dispute was settled by agreement of the
parties. Among the settlement provisions, Cystic Fibrosis Pharmacy acknowledged the validity and enforceability of the '269 patent, agreed not to infringe the '269 patent, and agreed to certain
restrictions on future advertising. A Consent Order and Final Judgment setting forth these terms of settlement was entered by the court on April 11, 2001.

Dade Behring Marburg GmbH and Dade Behring S.p.A.

In January 2001, Dade Behring Marburg GmbH and Dade Behring S.p.A. (collectively, "Dade Behring") filed suit in the Court of Milan, Italy against Chiron
seeking a pan European declaration that Dade Behring's Enzygnost® HIV 1 /2 plus immunoassay kit does not infringe Chiron's European Patent No. 0 181 150 (the "  '150
patent") relating to HIV technology, and to nullify the Italian portion of the '150 patent. In April 2001, Chiron filed a counterclaim seeking a declaration of infringement of the Italian
portion of the '150 patent by the Enzygnost® HIV 1 /2 plus kit and related damages. It is not known when nor on what basis this matter will be resolved.

In
May 2001, Chiron filed a petition for a preliminary injunction in the German Federal Court ("Landgericht") in Dusseldorf, asserting that the manufacture and sale of Dade's
Enzygnost® HIV 1 /2 plus immunoassay kit infringes the '150 patent. In October 2001, the Court ruled that, due to a procedural insufficiency irrelevant to the validity of the
patent, Chiron's petition would not be granted. Chiron did not appeal, and the matter is therefore concluded.

Federal Express

On September 3, 1999, Federal Express Corporation filed suit in the Supreme Court of the State of New York, County of Orange against Perseptive
Biosystems, Inc., Perkin-Elmer Corporation, PE Biosystems Group and PE Corporation (together, the "PE Defendants") and Chiron. The Federal Express Corporation complaint related to a fire
that allegedly destroyed a Federal Express Corporation aircraft and the majority of its cargo in September 1996. The matter was removed to the United States

17

---

District Court for the Southern District of New York. In March 2000, the Federal court, on its own motion, dismissed the matter for lack of subject matter jurisdiction. Federal Express
Corporation appealed the dismissal, arguing for remand to state court. Defendants filed cross-appeals. In December 2000, the Second Circuit Court of Appeals dismissed those cross-appeals for
lack of jurisdiction, and remanded the matter to the Supreme Court of the State of New York, County of Orange. It is not known when nor on what basis this litigation will be concluded.

F. Hoffmann La-Roche A.G.

Chiron was involved in certain previously reported litigation in the U.S. and several other countries with F. Hoffmann-LaRoche AG and related foreign entities
(collectively "Roche") concerning infringement and/or validity of certain patents related to hepatitis C virus and HIV technology. In October 2000, Chiron and Roche resolved all litigation
regarding hepatitis C virus and HIV nucleic acid technology. Among the settlement provisions, Chiron granted Roche licenses to manufacture and sell hepatitis C virus and HIV nucleic acid clinical
diagnostic tests. In May 2001, Chiron further granted Roche licenses to manufacture and sell hepatitis C virus and HIV nucleic acid tests for blood screening.

These
licensing agreements, however, did not resolve disputes regarding hepatitis C virus immunoassay technology. In connection therewith, Chiron initiated an action in July 2000
against Roche Diagnostics GmbH in the German Federal Court ("Landgericht") in Dusseldorf, asserting that Roche's manufacture and sale of hepatitis C virus immunoassay products infringe Chiron's German
Patent Nos. DD 298 527 (the "  '527 patent"), DD 298 524 (the "  '524 patent"), DD 287 104 (the "  '104 patent"), DD 297 446 (the "  '446 patent")
(collectively, the "German patents") and Chiron's European Patent No. EP 0 450 931 (the "  '931 patent"). The Landgericht subsequently separated the matter into five individual actions,
and then stayed oral hearings on the '931 patent and German patents pending results of the nullity proceedings described below.

In
July 2000, Chiron initiated an action against Roche Diagnostics GmbH and related foreign entities in the German Administrative Court ("Verwaltungsgericht") in Karlsruhe,
asserting that Roche's manufacture and sale of hepatitis C virus immunoassay products in various European countries infringe the '931 patent. Over Roche's objections, the action was referred to the
District Court of Mannheim in March 2001. Following an oral hearing on January 18, 2002, Chiron voluntarily withdrew its application
with respect to certain jurisdictions and the Court dismissed the case as to the remaining countries finding that it lacked jurisdiction to entertain Chiron's application for cross-border relief with
the facts presented. The Court made no finding with regard to validity or infringement of the '931 patent.

In
December 2000, Roche initiated two nullity actions against three of Chiron's German patents (the '104, '524 and '527 patents), and the '931 patent in the German Federal Patent
Court ("Bundespatentgericht"). In January 2001, the Bundespatentgericht divided these two nullity actions into four separate actions. The Bundespatentgericht has indicated that oral hearings on
the nullity actions will not occur before August 2002.

It
is not known when nor on what basis the remaining matters will be resolved.

The
October 2000 settlement also did not resolve disputes between Chiron and Dr. Daniel Bradley. In January 1998, Chiron initiated an action against Roche and
Dr. Daniel Bradley in the United States District Court for the Northern District of California. With respect to Dr. Daniel Bradley, the action asserted that Dr. Daniel Bradley
breached a 1990 settlement agreement with Chiron, that Roche wrongfully induced this breach, and that Dr. Daniel Bradley committed slander of title with respect to Chiron's hepatitis C virus
technology. In October 2001, Dr. Daniel Bradley and Chiron entered into a consent judgment declaring (1) that Dr. Bradley was not an inventor of the disputed patents or of
patents related thereto; (2) that he was properly not named as an inventor of Chiron's hepatitis C virus patents; and (3) that he has no ownership interest in said patents. Chiron and
Dr. Bradley entered a confidential settlement agreement on October 25, 2001, which fully resolves Chiron's action against Dr. Bradley.

18

---

Gen-Probe Incorporated

In February 2001, Gen-Probe Incorporated filed a demand for arbitration alleging Chiron breached certain of the terms of their June 1998
collaboration agreement regarding nucleic acid tests used for blood screening. Gen-Probe Incorporated seeks various declarations of the parties' rights under the agreement and compensatory
damages. Chiron denied Gen-Probe Incorporated's claims and asserted certain cross claims against Gen-Probe Incorporated. In August 2001, the arbitrator entered summary
judgment in Chiron's favor on several of the issues in dispute. In October 2001, the arbitrator denied Gen-Probe Incorporated's motion for summary judgment. In December 2001,
the dispute was settled by agreement of the parties.

German Red Cross Donation Service and Working Society of Physicians

In October 2001, the German Red Cross Donation Service and Working Society of Physicians brought a complaint against Chiron and Roche before the Commission
of the European Communities (the "Commission"). These matters generally allege that Chiron and Roche have engaged in certain anticompetitive actions that violate Articles 81 and 82 of the Treaty
Establishing the European Community (the "EC Treaty") in connection with HIV and hepatitis C virus nucleic acid tests in blood screening. Chiron filed its response with the Commission in
January 2002. In February 2002, the Sanquin Blood Services Foundation in the Netherlands also filed a complaint against Chiron and Roche before the Commission. The Sanquin complaint was
filed in support of the German complaint, and similarly alleges that Chiron and Roche violate Articles 81 and 82 of the EC Treaty in connection with HIV and hepatitis C virus nucleic acid tests in
blood screening. Chiron has been informed that blood banking entities from Finland, Luxembourg and United Kingdom have filed similar complaints. It is not known when nor on what basis this matter will
be resolved.

Innogenetics N.V.

In November 2000, Innogenetics N.V. brought a complaint against Chiron and Ortho-Clinical Diagnostics Systems, Inc. before the Commission.
Innogenetics N.V. alleges that Chiron and Ortho violate Articles 81 and 82 of the Treaty relating to competitive practices. Pursuant to the complaint, the Commission has sought information from Chiron
and Ortho-Clinical Diagnostics Systems, Inc. related to hepatitis C virus and HIV licensing practices in the European Union. It is not known when nor on what basis this matter will be resolved.

Lipton et al.

On February 18, 2000, the United States District Court for the Western District of Washington dismissed with prejudice all eight consolidated putative
class action lawsuits that had been filed in March and April 1999 against PathoGenesis Corporation, its chief executive officer and its chief financial officer. The eight consolidated lawsuits
alleged claims on behalf of all purchasers of PathoGenesis Corporation common stock during the period January 15, 1999 to March 22, 1999. Plaintiffs claimed that PathoGenesis Corporation
and its officers violated certain provisions of the federal securities laws by making statements in early 1999 regarding PathoGenesis Corporation's 1998 financial results. The court's order dismissed
the consolidated cases and bars plaintiffs from filing another lawsuit on the matter. In October 2001, the United States Court of Appeals for the Ninth Circuit heard oral argument based on
plaintiffs' appeal of the dismissal order. It is not known when nor on what basis this matter will be resolved.

Medicare, Medi-Cal Investigations

Chiron is responding to two subpoenas from the Office of the Inspector General of the United States Department of Health and Human Services. Chiron believes the
subpoenas were issued in connection with a pending, but as yet unserved,qui tamlawsuit against Chiron and a number of pharmaceutical companies

19

---

in the United States. With respect to Chiron, the subpoenas relate to pricing to Medicare and state Medicaid programs of certain generic oncology drugs sold by Cetus-Ben Venue
Therapeutics, a joint venture between Chiron and Ben Venue Laboratories. Chiron sold its interest in that joint venture in 1996.

Chiron
is also responding to a subpoena served on September 18, 2000, by the Office of the Attorney General of the State of California Department of Justice. Chiron believes that
the subpoena was issued in connection with a pending, but as yet unserved,qui tamlawsuit against Chiron and a number of other pharmaceutical
companies. With respect to Chiron, the subpoena seeks information related to pricing to the Medi-Cal program of certain generic oncology drugs sold by Cetus-Ben Venue
Therapeutics. It is not known when nor on what basis these matters will be concluded.

Sorin Biomedica/Snia

In June 1994, Sorin Biomedica S.p.A. filed a lawsuit with the Court of Milan, Italy against Chiron and Ortho Diagnostic Systems S.p.A. seeking a
declaration of nullity and non-infringement of the Italian counterpart to Chiron's European Patent 0 318 216 (the "  '216 patent") claiming hepatitis C virus immunodiagnostic
technology. Chiron denied Sorin Biomedica's allegations and filed a counterclaim seeking a declaration of infringement. In February 1997, the Court enjoined Sorin Biomedica from manufacturing
or selling hepatitis C virus immunoassay kits in Italy. After Sorin Biomedica made further objections, the Court ruled in October 1999 that certain '216 patent claims were valid and that Sorin
Biomedica's hepatitis C virus immunoassay infringed the '216 patent. In June 2000 the European Patent Office Technical Board Of Appeals upheld the validity of the '216 patent in an amended form
which deleted claims that Chiron alleged to have been infringed by Sorin Biomedica. In December 2000, Snia S.p.A., Sorin Biomedica's parent company, filed an appeal in the Court of Milan asking
the Court to declare the Italian portion of the '216 patent null and void and to award Snia damages. On March 14, 2001, Chiron denied Snia's allegations and asked the Court to dismiss the case.

In
January 2002, Chiron filed a complaint against Snia in the Court of Milan asserting that Snia's manufacture and sale of certain hepatitis C virus immunodiagnostics infringe
Chiron's '931 patent. Chiron seeks a declaration of infringement based on the '931 patent, as well as damages. It is not known when nor on what basis these matters will be resolved.

State of Montanaex rel.,Mike McGrath, Attorney General

In February 2002, the State of Montana through its Attorney General filed a complaint in the First Judicial District Court in Lewis and Clark County
against 18 biotechnology and pharmaceutical companies, including Chiron, in connection with setting average wholesale prices for various products, including DepoCyt®, that are reimbursed
by Medicare and Medicaid. The Attorney General alleges that the Defendants violated Montana state and common laws on unfair trade practices and consumer protection, deceptive trade practices, Medicaid
fraud, breach of contract and false claims, and seeks both compensatory and punitive damages. It is not known when nor on what basis this matter will be resolved.

Washington Research Foundation

In March 2001, the Washington Research Foundation filed a demand for arbitration with the American Arbitration Association alleging Chiron breached the
terms of a February 1989 license agreement regarding patents claiming recombinant yeast expression production technology jointly held by Washington Research Foundation and
Genentech, Inc., and that the license agreement was therefore terminated. Washington Research Foundation sought either a judgment declaring the license agreement terminated and royalty damages
accrued up to the alleged termination date, or in the case that the license agreement was held not to have terminated, royalty damages accrued up to the judgment date. In April 2001, Chiron
responded to the arbitration demand, denying that it was in breach of the license, and Chiron also filed suit against Washington Research Foundation and Genentech, Inc. in the United States

20

---

District Court for the Northern District of California seeking to have the underlying Washington Research Foundation and Genentech, Inc. U.S. patents declared invalid. In February 2002,
the dispute was settled by agreement of the parties.

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

No matters were brought to a vote of Chiron's stockholders in the quarter ended December 31, 2001.

21

---

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, who serve at the discretion of the Board of Directors, are as follows, in alphabetical order:

|Name             |  | Age |  | Title                                                       
|---------------- |  | --- |  | ------------------------------------------------------------
|Rajen K. Dalal   |  | 48  |  | Vice President; President, Chiron Blood Testing             
|William G. Green |  | 57  |  | Senior Vice President, General Counsel and Secretary        
|Peder K. Jensen  |  | 47  |  | Vice President; Head of Development                         
|John A. Lambert  |  | 49  |  | Vice President; President, Chiron Vaccines                  
|Séan P. Lance    |  | 54  |  | Chairman of the Board; President and Chief Executive Officer
|Linda W. Short   |  | 56  |  | Vice President, Corporate Resources                         
|David V. Smith   |  | 42  |  | Vice President, Finance and Principal Accounting Officer    
|James R. Sulat   |  | 51  |  | Vice President, Chief Financial Officer                     
|Craig A. Wheeler |  | 41  |  | Vice President; President, Chiron BioPharmaceuticals        

Mr. Dalaljoined Chiron in December 1991 as Vice President, Corporate Development. In 1998, he was appointed President of
Chiron Blood Testing. From 1983 until joining Chiron, he was employed by the international consulting firm of McKinsey & Company, where he performed general management consulting in the firm's
pharmaceuticals, medical devices and diagnostics industries practice. In January 2001, Mr. Dalal was appointed to the Department of Health and Human Services' Advisory
Committee on Blood Safety and Availability, which advises, assists and counsels the Secretary of Health and Human Services on implications for blood safety and availability in areas such as blood
banking, transfusion medicine, bioethics and blood testing. In February 2002, Mr. Dalal joined the Board of Directors for Sagres Discovery. Mr. Dalal resigned from his positions
with Chiron to be effective as of March 11, 2002.

Mr. Greenjoined Chiron as Vice President and General Counsel in October 1990, having served as Secretary or Assistant
Secretary since Chiron's inception in 1981. In February 1992, he became Senior Vice President, General Counsel and Secretary. From 1981 to 1990, he was a partner in the San Francisco law firm
of Brobeck, Phleger & Harrison.

Dr. Jensenjoined Chiron as Vice President and Head of Development in August 1999, responsible for managing all aspects of
Chiron's product development, including pre-clinical, clinical, project management, regulatory and medical affairs. Most recently, Dr. Jensen was development director, chief medical
officer and a member of the board of British Biotech plc, and President of British Biotech, Inc., responsible for all aspects of drug development including chemical, pharmaceutical and clinical
development, quality control and assurance, manufacturing and regulatory affairs. Dr. Jensen served as a non-executive director of British Biotech plc until January 31, 2001.
From 1991 to 1998, Dr. Jensen was a Vice President at Schering-Plough Research Institute, where he managed a number of worldwide drug development projects, including the submission of several
New Drug Applications, Abbreviated New Drug Applications, Investigational New Drug applications and a number of European applications. Before joining Schering-Plough, Dr. Jensen worked in
various clinical positions at Ciba-Geigy Limited.

Mr. Lambertjoined Chiron as Vice President; President of Chiron Vaccines in March 2001. Based in Europe, Mr. Lambert
is responsible for the commercial operations of Chiron's global vaccines business. Prior to joining Chiron, Mr. Lambert headed John Lambert Associates, a company that provided consulting and
coaching at the chief executive level to organizations both in the United Kingdom and internationally. From 1998 to 2000, Mr. Lambert was the President of Aventis Pasteur MSD, where he

22

---

headed the vaccines venture formed between Pasteur Mérieux Connaught (now Aventis Pasteur) and Merck and Company, Inc. following four years as that company's Vice President of
Operations. From 1987 to 1994, Mr. Lambert held various positions with the Pasteur Mérieux Connaught Group, in increasing levels of responsibility, including Managing Director,
Mérieux UK Ltd. Mr. Lambert also is the President of the European Vaccine Manufacturers. Mr. Lambert is a non-executive director of a U.K. Stock
Exchange listed company, S.R. Pharma PLC in London, which conducts research in the fields of cancer and allergy. He is a Fellow of the Institute of Financial Accountants. Mr. Lambert also heads
his own company, J.G. Solutions Ltd. in the United Kingdom.

Mr. Lancejoined Chiron as President and Chief Executive Officer in May 1998, and became Chairman of the Board in
May 1999. Mr. Lance joined Chiron from Glaxo Wellcome plc where he spent more than 12 years in positions of national and global management responsibility including positions as
Chief Operating Officer and Chief Executive designate of Glaxo Wellcome plc. Mr. Lance began his pharmaceutical industry career in the Republic of South Africa at the Noristan Group of
Companies, Ltd. in 1967. Mr. Lance has assumed leadership roles in a variety of national and
international pharmaceutical associations, and is a past president of the International Federation of Pharmaceutical Manufacturers Associations. Mr. Lance currently serves on the Board of
Directors for the California Healthcare Institute, Global Alliance for TB Drug Development, Bay Area Bioscience and iKnowMed.

Ms. Shortjoined Chiron in November 1997 as Vice President, Human Resources. In May 1999, she was promoted to Vice
President, Corporate Resources with increased responsibilities, overseeing human resources, facilities planning, information management, organizational learning, payroll and benefits, compensation and
stock administration. Prior to joining Chiron, she was the Director of Human Resources of Industrial Indemnity from 1994 to 1997. From 1983 to 1994, Ms. Short held various managerial positions
with the Bank of America.

Mr. Smithjoined Chiron as Vice President, Controller in February 1999 and was designated Chiron's principal accounting
officer. In February 2002, Mr. Smith was appointed Vice President, Finance. Prior to joining Chiron, Mr. Smith served as the Vice President, Finance and Chief Financial Officer of
Anergen, Inc. from 1997 until he joined Chiron. From 1988 to 1997, Mr. Smith held various financial management positions with Genentech, Inc., in both the United States and
Europe, most recently as Director of Accounting.

Mr. Sulatjoined Chiron as Vice President, Chief Financial Officer in April 1998. He was the Chief Financial Officer of
Stanford Health Services, the clinical healthcare delivery arm of the Stanford University Medical Center, from 1993 to October 1997. In November 1997, Stanford Health Services merged
with the hospital facilities of the University of California, San Francisco, and Mr. Sulat served as the Treasurer of the merged entity, UCSF Stanford Health Care, until joining Chiron.
Mr. Sulat is also a director of Vans, Inc., a shoe manufacturer, and several private companies.

Mr. Wheelerjoined Chiron in August 2001 as Vice President; President of Chiron Biopharmaceuticals, responsible for the
commercial operations of Chiron's biopharmaceuticals business. Prior to joining Chiron, Mr. Wheeler was a senior member of The Boston Consulting Group's health care practice and a key
contributor to the firm's practice in hospital strategy, disease management, and pharmaceutical capabilities. Based in Boston, he joined the firm in 1988. Before joining The Boston Consulting Group,
Mr. Wheeler worked for Merck's MSDRL research unit, where he served as a senior engineer in process development. He recently served as the leader of The Boston Consulting Group's Scientist's
Network. In partnership with the Rockefeller Foundation, he has joined the Global Alliance for TB Drug Development, a public-private partnership to develop new anti-tuberculosis drugs.

23

---

PART II

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

Our common stock is traded in the NASDAQ National Market System under the symbol CHIR. As of December 31, 2001, there were 4,757 holders of record of
Chiron common stock and no remaining holders of record of Cetus Corporation common stock or Viagene, Inc. common stock, corporations we acquired in 1991 and 1995, respectively. We have declared
no cash dividends since our inception and do not expect to pay any dividends in the foreseeable future. Pursuant to an agreement with Novartis, it is required that Novartis approve our declaration and
payment of dividends. See "Relationship with Novartis" above. The quarterly high and low closing sales prices (rounded to the nearest one-hundredth) of our common stock for 2001 and 2000
are shown below.

|               |  | 2001 |       | 2000
|-------------- |  | ---- | ----- | ----
|
|First Quarter  |  | $    | 48.05 |     
|Second Quarter |  |      | 55.28 |     
|Third Quarter  |  |      | 52.26 |     
|Fourth Quarter |  |      | 56.80 |     

ITEM 6. SELECTED FINANCIAL DATA

|                                                      |  | Year Ended December 31,
|----------------------------------------------------- |  | -----------------------
|
|
|Total revenues                                        |  | $                      
|Income from continuing operations                     |  |                        
|Basic earnings per share from continuing operations   |  |                        
|Diluted earnings per share from continuing operations |  |                        
|Total assets                                          |  |                        
|Long-term debt                                        |  |                        

Factors
that affected the comparability of information between 2001 and 2000 were (i) issuance of zero coupon Liquid Yield Option Notes in June 2001 for proceeds of
$401.8 million, (ii) a full-year of TOBI® sales of $123.1 million and (iii) a full year of amortization expense on goodwill and other acquired
intangible assets of $38.4 million recognized in 2001 as a result of our acquisition of PathoGenesis Corporation in the fourth quarter 2000. In 2000, we recognized TOBI® sales of
$27.8 million (including $2.2 million from the last seven days in September 2000) and amortization expense on goodwill and other acquired intangible assets of $9.6 million.
We have described the issuance of the Liquid Yield Option Notes in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
ResourcesSources and Uses of CashFinancing activities" below. We have described the acquisition of PathoGenesis in both Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of OperationsResults of OperationsBiopharmaceuticalsProduct sales" and "Management's Discussion and Analysis of Financial
Condition and Results of OperationsResults of OperationsOtherAmortization expense" below.

Factors
that affected the comparability of information between 2000 and 1999 were (i) shipments of $101.5 million of Menjugate for a universal vaccination
program in the United Kingdom, which began in the second quarter 2000 and (ii) our acquisition of PathoGenesis for $720.7 million in cash in the fourth

24

---

quarter 2000, including the $171.6 million write-off of purchased in-process technologies. We described the universal vaccination program in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsVaccinesProduct sales" of the Form 10-K filed for
the fiscal year ended December 31, 2000. We described the acquisition of PathoGenesis in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsResults of OperationsOtherWrite-off of purchased in-process technologies" of the Form 10-K filed for the
fiscal year ended December 31, 2000.

A
factor that affected the comparability of information between 1998 and 1997 was our acquisition of the remaining 51% interest in, and subsequent consolidation of, Chiron Behring
GmbH & Co. for $54.8 million in cash in the second quarter 1998. Chiron Behring contributed revenues of $119.2 million and a loss from continuing operations before income taxes of $6.7
million to our consolidated operating results in 1998. We described this transaction in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesSources and Uses of Cash" of the Form 10-K filed for the fiscal year ended January 3, 1999.

See
Note 16, "Segment Information," of Notes to Consolidated Financial Statements for operating results by operating segment.

25

---

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

Overview

We are a global pharmaceutical company that participates in three healthcare markets: biopharmaceuticals, vaccines and blood testing. The biopharmaceuticals
segment consists of therapeutic products and services, with an emphasis on the treatment of cancer and infectious disease, using the development and acquisition of technologies related to therapeutic
proteins and small molecules. The biopharmaceuticals segment also includes collaborations with Berlex Laboratories, Inc. and its parent company, Schering AG of Germany, related to
Betaseron®, and Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson company, related to PDGF. The vaccines segment consists principally of adult and pediatric vaccines for
viral infections including flu, rabies and tick-borne encephalitis, and bacterial infections, including meningococcus C and haemophilius influenzae type B. We sell these vaccines primarily
in Germany, Italy, the United Kingdom, Canada and other international markets. Our vaccines segment is also involved in the development of novel vaccines and vaccination technology. The blood testing
segment consists of an alliance with Gen-Probe Incorporated and our one-half interest in the pretax operating earnings of our joint business with Ortho-Clinical
Diagnostics, Inc., a Johnson & Johnson company. Our alliance with Gen-Probe is focused on commercializing and selling nucleic acid testing products using
transcription-mediated amplification technology to screen donated blood and plasma products for viral infection. Our joint business with Ortho-Clinical Diagnostics sells a line of immunodiagnostic
tests to detect hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to automate test performance and data collection. We view certain other
revenues and expenses as not belonging to any one segment. As a result, we have aggregated these items into an "Other" segment.

The
preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to investments; inventories; derivatives; intangible
assets; product discounts, rebates and returns; bad debts; collaborative, royalty and license arrangements; restructuring; pension and other post-retirement benefits; income taxes; and
litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form
our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different
assumptions or conditions.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:



26

---



27

---



The
accounting policies of our reportable segments are the same as those described in Note 1, "The Company and Summary of Significant Accounting Policies," in the Notes to
Consolidated Financial Statements.

On
February 20, 2002, we acquired Matrix Pharmaceutical, Inc., a company that develops drugs (including tezacitabine) to treat cancer. We will account for the acquisition
as an asset purchase and include Matrix Pharmaceutical's operating results in our consolidated operating results beginning on March 1, 2002. Matrix Pharmaceutical's operating results for the
remaining business days in
February 2002 were not significant to our consolidated operating results. Matrix Pharmaceutical will be part of our biopharmaceuticals segment.

On
September 21, 2000, we acquired PathoGenesis Corporation, a company that developed and marketed drugs to treat infectious diseases, particularly serious lung infections. We
accounted for the acquisition under the purchase method of accounting and included PathoGenesis' operating results, including the seven business days from September 21 to 30, 2000, in our
consolidated operating results beginning on October 1, 2000. PathoGenesis' operating results for the seven business days in September 2000 were not significant to our consolidated
operating results. PathoGenesis is part of our biopharmaceuticals segment.

On
December 29, 1997, we completed the sale of Chiron Vision, our ophthalmics business to Bausch & Lomb Incorporated, and on November 30, 1998, we completed the sale
of Chiron Diagnostics, ourin vitrodiagnostics business, to Bayer Corporation. Our Consolidated Statements of Operations reflect the
after-tax results of Chiron Vision and Chiron Diagnostics as discontinued operations.

Certain
minor arithmetical variances between the narrative and the consolidated financial statements may arise due to rounding.

Results of Operations

Biopharmaceuticals

Product salesBiopharmaceutical product sales were $337.9 million, $239.8 million and $187.6 million in
2001, 2000 and 1999, respectively. Biopharmaceutical product sales in 2001 consisted principally of Betaseron®, TOBI®, Proleukin® and PDGF. Biopharmaceutical
product sales in 2000 and 1999 consisted principally of Betaseron®, Proleukin® and PDGF.

Betaseron®We manufacture Betaseron® for sale outside of Europe by Berlex Laboratories, Inc.
and its parent company, Schering AG of Germany. Betaseron® is approved for relapsing/remitting multiple sclerosis in over 60 countries, including the U.S. and the European Union, and for
secondary progressive multiple sclerosis in approximately 40 countries, including the European Union, Canada, Australia and New Zealand. We recognize a portion of revenue for product sales of
Betaseron® upon shipment to Berlex Laboratories and Schering, and the remainder based on a contractual percentage of
sales by Berlex Laboratories and Schering. We also earn royalties on Schering's European sales of Betaferon®, which we record in royalty and license fee revenues for the biopharmaceuticals
segment.

Betaseron®
product sales were $96.4 million, $82.1 million and $66.0 million in 2001, 2000 and 1999, respectively. The increases in
Betaseron® product sales in 2001 as compared with 2000, and in 2000 as compared with 1999, primarily related to fluctuations in Berlex Laboratories and Schering's inventory levels and
increased underlying sales to end users in the U.S. and other countries driven by increased

28

---

utilization of beta interferon therapy for multiple sclerosis. As discussed in "Royalties and license fee revenues" below, Betaferon® royalties also increased in 2001 as compared with
2000, and in 2000 as compared with 1999. The increase in Betaseron®product sales in 2000 as compared with 1999 also included the effects of
the second quarter 1999 conclusion of certain promotional pricing campaigns. Inventory levels may continue to fluctuate as Berlex Laboratories changes its distribution structure in the U.S.

Pursuant
to the agreement with Schering, we will begin to supply Betaferon® to Schering in the fourth quarter 2002 for the European market. This will result in a shift of
revenue recognized under this agreement to product sales, with a commensurate decrease in royalty revenues, in 2003.

TOBI®We obtained TOBI® as part of our acquisition of PathoGenesis Corporation on
September 21, 2000. We sell TOBI® directly in the U.S. and certain international markets. The U.S. Food and Drug Administration approved TOBI® for cystic fibrosis lung
infections in December 1997. PathoGenesis launched TOBI® in the U.S. in January 1998. TOBI® was approved in Canada in February 1999. TOBI®
cleared the mutual recognition process required for marketing in the European Union in August 2000 and was subsequently launched in several European countries. We recognized TOBI®
sales of $123.1 million and $27.8 million (including $2.2 million from the last seven days in September 2000) in 2001 and 2000, respectively. Sales of TOBI® by
Chiron and PathoGenesis were $86.0 million and $60.1 million in 2000 and 1999, respectively. The growth was due to (i) increased TOBI® use in the U.S. and Canada by
patients with cystic fibrosis and (ii) increased TOBI® sales related to the launch in various European countries. We continue to pursue the use of TOBI® to treat other
serious lung infections and to seek approval in other countries. Wholesaler inventory management practices and foreign exchange rate fluctuations may influence future TOBI® sales.

Proleukin®Proleukin® is approved in over 50 countries for the treatment of metastatic
(stage 4) renal cell carcinoma and in Canada and the U.S. for the treatment of metastatic (stage 4) melanoma, for which it became the first approved therapy in more than 20 years
when the U.S. Food and Drug Administration approved it in 1998. Sales of Proleukin® were $93.3 million, $112.7 million and $111.8 million in 2001, 2000 and 1999,
respectively. Proleukin® product sales in 2001 as compared with 2000, and in 2000 as compared with 1999, primarily were affected by (i) fluctuations in wholesaler inventory
management practices, (ii) the increasing cost sensitivity from reimbursement authorities, particularly in Europe, and (iii) a weaker exchange rate of the Euro as compared with the U.S.
dollar. We expect these factors to continue into 2002.

PDGFWe manufacture PDGF for Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson company. PDGF is the active
ingredient in Regranex® Gel, a treatment for diabetic foot ulcers. The U.S. Food and Drug Administration approved Regranex® Gel in December 1997. Ortho-McNeil
Pharmaceutical launched it in early 1998. Regranex® Gel was approved to treat diabetic foot ulcers in Canada in December 1998 and Europe in March 1999. Net sales of PDGF to
Ortho-McNeil Pharmaceutical were $11.3 million and $10.9 million in 2001 and 2000, respectively. There were no commercial sales of PDGF to Ortho-McNeil Pharmaceutical from the first
quarter 1999 through the first quarter 2000, as our 1998 sales had filled Ortho-McNeil Pharmaceutical's inventory requirements. The increase in PDGF product sales in 2000 as compared with 1999
primarily was due to the resumption of commercial sales to Ortho-McNeil Pharmaceutical. In addition, net sales of PDGF in 2000 included a decrease in the product returns allowance of
$3.7 million primarily due to additional historical return information provided by Johnson & Johnson. Historically, our sales of PDGF have fluctuated based upon the inventory management
practices of Ortho-McNeil Pharmaceutical.

The
balance of product sales recognized in our biopharmaceuticals segment consisted of various other products, which individually were not material.

29

---

We
expect competitive pressures related to many of our biopharmaceutical products to continue into the foreseeable future, primarily as a result of the introduction of competing products
into the market, as listed in Part I, Item 1., "BusinessCompetition" above.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Our biopharmaceuticals segment recognized collaborative agreement revenues of $25.0 million, $17.6 million and $20.0 million in 2001,
2000 and 1999, respectively.

NovartisUnder the terms of a November 1995 agreement with Novartis AG, we granted Novartis a license to utilize our
combinatorial chemistry techniques. In exchange for this license, Novartis paid us $26.0 million over a five-year period. In addition, this agreement provided for research funding
by Novartis, and certain up-front milestone and royalty payments, as well as product commercialization rights for both parties. This agreement expired in the fourth quarter 2000. In 2000
and 1999, we recognized collaborative agreement revenues of $3.3 million and $4.2 million, respectively.

In
November 1996, Chiron and Novartis entered into a consent order with the Federal Trade Commission. We granted a royalty-bearing license to Rhone-Poulenc Rorer, Inc.
under certain of our patents related to the Herpes Simplex Virus-thymidine kinase gene in the field of gene therapy. Chiron and Novartis entered into a separate agreement which provided, among other
things, for certain cross licenses between Chiron and Novartis, and under which Novartis paid us $60.0 million over five years.
In connection with this agreement, we recognized collaborative agreement revenues of $10.0 million in 2001, 2000 and 1999. This agreement expired in the fourth quarter 2001.

Our
"Other" segment also earns collaborative agreement revenues under a third Novartis agreement. See "OtherCollaborative agreement revenues" below.

S*BIOIn the second quarter 2000, we invested in a Singapore-based venture, S*BIO Pte Ltd, to research and develop
therapeutic, diagnostic, vaccine and antibody products (see "Liquidity and Capital ResourcesSources and uses of cashInvesting activities" below). We also granted S*BIO
certain rights to our gene expression and combinatorial chemistry technology. Under this arrangement, we will receive approximately $22.0 million over two years for technology transfer. We
recognized collaborative agreement revenues of $12.1 million and $2.8 million in 2001 and 2000, respectively, under this arrangement.

MedivirIn 1999, Medivir AB licensed certain of our combinatorial chemistry technology in the research and development of
pharmaceuticals for human use. Revenue recognized under this agreement was $2.0 million in 1999.

The
balance of collaborative agreement revenues recognized in our biopharmaceuticals segment consisted of various other agreements, which individually were not material.

Collaborative
agreement revenues tend to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones. Due
to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. In addition, the collaboration agreements
typically provide for certain milestone payments and various royalties on future product sales if the collaborative partners commercialize a product using our technology. However, we have no assurance
that the collaborative partners will meet their development objectives or commercialize a product using our technology. Also, our ability to generate additional collaborative agreement revenues may
depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners. We have no assurance that new relationships will be established or that
current collaborative agreement revenues will not decline.

Royalty and license fee revenuesOur biopharmaceuticals segment earns royalties on third party sales of several products,
including Betaferon® and recombinant insulin and glucagon products. Our biopharmaceuticals segment also earns license fees for technologies, such as hepatitis C virus patents, used

30

---

by third parties to develop therapeutic products. The biopharmaceuticals segment recognized royalty and license fee revenues of $59.8 million, $50.9 million and $52.4 million in
2001, 2000 and 1999, respectively.

Betaferon®We earn royalties on Schering AG's European sales of Betaferon®. In 2001, 2000 and 1999,
we recognized $38.9 million, $35.7 million and $29.7 million, respectively, under this arrangement. As discussed in "Product salesBetaseron®" above, the
increases in Betaferon® in 2001 as compared with 2000, and in 2000 as compared with 1999, primarily related to increased utilization of beta interferon therapy for multiple sclerosis,
offset by a weaker exchange rate of the Euro as compared with the U.S. dollar. Betaferon® is the only product that is approved in Europe for the treatment of both relapsing/remitting and
secondary progressive multiple sclerosis. As discussed in "Product salesBetaseron®" above, we will begin to supply Betaferon® to Schering in the fourth quarter
2002 for the European market. This will result in a shift of revenue recognized under this agreement to product sales, with a commensurate decrease in royalty revenues, in 2003.

Novo NordiskWe estimate recombinant insulin and glucagon royalty revenues based on previous period actual recombinant
insulin and glucagon product sales by Novo Nordisk AS. We recognized $6.9 million, $6.1 million and $11.2 million in 2001, 2000 and 1999, respectively, under this arrangement. The
decrease in 2000 as compared with 1999 primarily related to a $5.0 million positive adjustment related to a royalty audit recovery in 1999.

DepoCyt®In the fourth quarter 2000, we recognized a license fee of $3.5 million upon the resumption of
phase 4 clinical trials for DepoCyt® in December 2000. In the second quarter 1999, we recognized a license fee of $9.7 million upon the grant of a European and Canadian
DepoCyt® license to SkyePharma plc in April 1999.

GlaxoIn March 2000, we granted Glaxo Group Limited (now part of GlaxoSmithKline plc) rights under certain of our
hepatitis C virus patents, for which we recognized a license fee in the first quarter 2000.

Japan TobaccoIn January 2001, we granted Japan Tobacco, Inc. rights under certain of our hepatitis C virus
patents. The agreement provides for the payment of a license fee, which we received and recognized as revenue in the first quarter 2001.

ZarixIn January 2001, we granted Zarix Incorporated rights under our recombinant protein technology, for which we
recognized a license and technology transfer fee in the second quarter 2001.

Bristol-Myers SquibbIn July 2001, we granted Bristol-Myers Squibb Company rights under certain of our hepatitis C
virus patents, for which we recognized a license fee in the third quarter 2001.

ScheringIn October 2001, we granted Schering AG rights relating to the technology used in the manufacturing of
Hirudin, for which we recognized a license fee in the fourth quarter 2001.

The
balance of royalty and license fee revenues recognized in our biopharmaceuticals segment consisted of various other agreements, which individually were not material.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. Also, the license agreements typically provide for certain milestone payments and various royalties on future product sales if the licensees
commercialize a product using our technology. However, we have no assurance that the licensees will meet their development objectives or commercialize a product using our technology. In addition, our
ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our technologies. We have no assurance that we will be able to do so or
that future royalty and license fee revenues will not decline.

31

---

Other revenuesOur biopharmaceuticals segment recognized other revenues of $19.7 million, $16.4 million and
$14.9 million in 2001, 2000 and 1999, respectively.

Contract manufacturing revenuesOur biopharmaceuticals segment recognized contract manufacturing revenues of
$16.1 million in 2001 and $13.3 million for both 2000 and 1999, respectively. The increase resulted from the level of activity and the timing of contract manufacturing activities.

OtherIn the fourth quarter 2001, we recognized $2.0 million related to a royalty audit recovery.

The
balance of other revenues recognized in our biopharmaceuticals segment consisted of various other arrangements, which individually were not material.

Other
revenues recognized in our biopharmaceuticals segment may fluctuate due to the nature of the revenues recognized and the timing of events giving rise to these revenues. We cannot
guarantee that we will be successful in obtaining additional revenues or that these revenues will not decline.

Gross profitBiopharmaceutical gross profit as a percentage of net product sales was 71%, 70% and 68% in 2001, 2000 and 1999,
respectively. The increase in biopharmaceutical gross profit margins in 2001 as compared with 2000 primarily related to a more favorable mix of biopharmaceutical product sales, including
TOBI®, offset by a decrease in gross profit margins caused by the timing of Betaseron® shipments. The increase in biopharmaceutical gross profit margins in 2000 as compared
with 1999 primarily related to a favorable mix of biopharmaceutical product sales.

We
are obligated to pay royalties on sales of certain therapeutic products in the U.S. and in Europe to the former limited partners of Cetus Healthcare Limited Partnership (see
Note 12, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements). One of these agreements expired on December 31, 2001. As a result, we expect gross profit
margins in 2002 to be slightly higher than 2001. However, biopharmaceutical gross profit percentages may fluctuate significantly in future periods as the biopharmaceutical product and customer mixes
change.

Research and developmentOur biopharmaceuticals segment recognized research and development expenses of
$265.9 million, $221.8 million and $214.1 million in 2001, 2000 and 1999, respectively. The increase in research and development spending in 2001 as compared with 2000 was due to
the furtherance of our clinical trials related to tifacogin (recombinant Tissue Factor Pathway Inhibitor) for severe sepsis, Proleukin® for HIV and progress in various other development
platforms, including those obtained as part of the acquisition of PathoGenesis Corporation on September 21, 2000. In December 2001, we entered into a collaboration agreement with Inhale
Therapeutic Systems, Inc. related to, among other things, the development of an inhaled TOBI® product for the treatment ofpseudomonas
aeruginosain cystic fibrosis patients. The increases were offset by the conclusion of phase 2 clinical trials for Fibroblast Growth Factor for coronary and peripheral artery
diseases and a reduction in gene therapy activities with the sale of the San Diego facility in January 2001 (see "Gain (loss) on sale of assets" below).

The
increase in 2000 as compared with 1999 was due to the furtherance of clinical trials related to Proleukin® for HIV and tifacogin for severe sepsis, offset by the timing
of various other clinical trials, including Fibroblast Growth Factor for coronary and peripheral artery diseases. In addition, the acquisition of PathoGenesis contributed research and development
expenses of approximately $9.0 million in 2000.

Research
and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related
activities.

Selling, general and administrativeOur biopharmaceuticals segment recognized selling, general and administrative expenses of
$79.8 million, $50.1 million and $50.0 million in 2001, 2000 and 1999, respectively. The increase in selling, general and administrative expenses in 2001 as compared with 2000
primarily was due to the acquisition of PathoGenesis Corporation, and increased sales and marketing costs related to the relaunch of DepoCyt® in the first quarter 2001. Selling, general
and administrative expenses

32

---

in 2000 also were affected by our worldwide implementation of an integrated information system in April 1999, offset by a change in the method of allocating certain legal costs to segments.
Beginning in 2000, we allocated certain legal costs to the "Other" segment, whereas in 1999, we allocated these certain legal costs to all segments.

Vaccines

Product salesWe sell pediatric and adult vaccines in Germany, Italy, the United Kingdom, Canada and other international
markets. Certain of our vaccine products, particularly our flu vaccine, are seasonal and typically have higher sales in the second half of the year. In addition, we expect Menjugate sales
to continue to fluctuate as public health authorities potentially adopt broad vaccination programs. Vaccine product sales were $365.8 million, $344.5 million and $208.7 million in
2001, 2000 and 1999, respectively.

The
fluctuations in product sales in 2001 as compared with 2000, and in 2000 as compared with 1999, primarily were due to sales of Menjugate, our conjugate vaccine against
meningococcal meningitis caused by the bacterium N. meningitidis serogroup C. Menjugate sales commenced in 2000 and amounted to $105.6 million and $114.9 million in 2001 and
2000, respectively. During 2001, shipments to the United Kingdom continued and shipments to Canada commenced, which offset the significant shipments that occurred during 2000. In 2000, we shipped
$101.5 million of Menjugate to the National Health Service under a tender to begin a universal vaccination program in the United Kingdom. We are exploring opportunities for
additional Menjugate sales in other countries.

Sales
of all other vaccine products were $260.2 million, $229.6 million and $208.7 million in 2001, 2000 and 1999, respectively. Contributing to the increase in 2001
other vaccine product sales as compared with 2000 was an increase in (i) tick-borne encephalitis vaccine sales, attributed to regulatory problems of certain of our competitors,
(ii) influenza vaccine sales, as we were the first to the German market this season and (iii) rabies vaccine sales, due to greater market penetration.

Contributing
to the increase in 2000 other vaccine product sales as compared with 1999 was an increase in flu vaccine sales, attributed to (i) increasing demand,
(ii) manufacturing problems of certain of our competitors and (iii) the launch of Fluad, our adjuvanted influenza vaccine, in Germany and Austria. In May 2000, we
received approval in certain western European countries to market Fluad. The 2000 increase also was attributable to the re-launch of our tick-borne encephalitis
vaccine. In the first half of 1999, our tick-borne encephalitis vaccine inventory failed to meet manufacturing specifications for purity and a portion of inventory was written off.

We
expect competitive pressures related to many of our vaccine products to continue into the future, primarily as a result of the introduction of competing products into the market,
including, but not limited to, new combination vaccines, as listed in Part I, Item 1., "BusinessCompetition" above.

Royalty and license fee revenuesOur vaccines segment earns royalties on third party sales of and license fees on several
products. The vaccines segment recognized royalty and license fee revenues of $16.5 million, $29.0 million and $30.5 million in 2001, 2000 and 1999, respectively.

SmithKline BeechamAn agreement with SmithKline Beecham (now part of GlaxoSmithKline plc) provides for royalties on sales of
certain vaccine products. Under this agreement, we recognized $6.1 million, $7.0 million and $7.3 million of such royalties in 2001, 2000 and 1999, respectively. The decreases in
2001 as compared with 2000, and in 2000 as compared with 1999, primarily were due to a decrease in GlaxoSmithKline sales due to competitive vaccine products.

OtherIn 2001, 2000 and 1999, we recognized $10.4 million, $19.0 million and $23.2 million,
respectively, of royalty revenues primarily on third party sales of hepatitis B virus vaccine products. The decrease in 2001 as compared with 2000, and in 2000 as compared with 1999, primarily related
to a decrease in sales of hepatitis B virus vaccine products due to competitive multivalent hepatitis B virus

33

---

vaccine products. In addition, certain terms of one of the hepatitis B virus arrangements expired in the third quarter 2001. The decrease in 2000 as compared with 1999 also related to a hepatitis A
virus royalty arrangement, which expired in 1999, and, to a lesser extent, a rabies royalty arrangement, which expired in the second quarter 1999.

The
balance of royalty and license fee revenues recognized in our vaccines segment in 2000 consisted of another agreement, which was not material.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our
technologies. We have no assurance that we will be able to do so or that future royalty and license fee revenues will not decline.

Other revenuesOur vaccines segment recognized other revenues of $20.9 million, $21.7 million and
$27.3 million in 2001, 2000 and 1999, respectively.

Commission revenuesWe earn commission revenues on sales of hepatitis B virus vaccine products. Previously, we also earned
commission revenues on sales of immunoglobulin products. The immunoglobulin arrangement expired on December 31, 2000. Commission revenues were $2.6 million, $7.7 million and
$13.9 million in 2001, 2000 and 1999, respectively. The decrease in commission revenues in 2001 as compared with 2000, and in 2000 as compared with 1999, primarily related to a decrease in
sales of hepatitis B virus vaccine products due to competitive multivalent hepatitis B virus vaccine products.

National Institutes of HealthIn the second quarter 2000, we entered into an agreement with the U.S. National Institutes of
Health to advance our HIV vaccine program into human clinical trials. Under this arrangement, we could receive $23.2 million over five years. Under a supplemental arrangement, we may perform
other work related to the National Institutes of Health's HIV vaccine program on a contract-by-contract basis. We recognized $9.9 million and $2.0 million in 2001
and 2000, respectively, under this arrangement.

The
balance of other revenues recognized in our vaccines segment consisted of various other arrangements, which individually were not material.

Other
revenues recognized in our vaccines segment may fluctuate due to the nature of the revenues recognized and the timing of events giving rise to these revenues. We cannot guarantee
that we will be successful in obtaining additional revenues or that these revenues will not decline.

Gross profitVaccines gross profit as a percentage of net product sales was 63%, 65% and 52% in 2001, 2000 and 1999,
respectively. The decrease in vaccine gross profit margins in 2001 as compared with 2000 primarily related to sales of Menjugate, including the fourth quarter 2001 commencement of
royalties based on Menjugate sales paid to Novartis AG under the December 1995 Limited Liability Company Agreement (see Note 8, "Related Party Transactions," in the Notes to
Consolidated Financial Statements), offset by a favorable mix of other vaccine product sales. The increase in vaccine gross profit margins in 2000 as compared with 1999 primarily related to
(i) sales of Menjugate, (ii) manufacturing efficiencies resulting from increased production and (iii) a favorable mix of other vaccine product sales. We recorded a
significantly higher gross profit on 2000 Menjugate sales, because a significant portion of Menjugate production occurred in 1999. As we had not received approval to market
Menjugate at the end of fiscal year 1999, we expensed manufacturing costs to research and development.

Vaccines
gross profit percentages may fluctuate significantly in future periods as the vaccines product and customer mixes change.

Research and developmentOur vaccines segment recognized research and development expenses of $61.7 million,
$62.3 million and $72.5 million in 2001, 2000 and 1999, respectively.

34

---

The
decrease in research and development spending in 2001 as compared with 2000 primarily was due to the timing of clinical trials related to our various vaccine programs, partially
offset by some spending under our collaboration agreement with Rhein Biotech N.V. and GreenCross Vaccine Corporation. In April 2001, we entered into a collaboration agreement with Rhein Biotech
and GreenCross Vaccine to research and develop certain pediatric combination vaccine products for sale outside of Europe and
North America. Under the collaboration agreement, we share the research and development expenses, which actually began in the first quarter 2001, with Rhein Biotech and GreenCross Vaccine. The
collaboration agreement also requires capital commitments from Chiron, Rhein Biotech and GreenCross Vaccine (see "Liquidity and Capital ResourcesSources and uses of cash" below).

The
decrease in research and development spending in 2000 as compared with 1999 primarily was due to receipt of approval for sales of Menjugate in March 2000, as
discussed in "Gross profit" above, offset by increased spending due to the furtherance of clinical trials related to our various vaccine programs.

Research
and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related
activities.

Selling, general and administrativeOur vaccines segment recognized selling, general and administrative expenses of
$78.2 million, $76.1 million and $79.5 million in 2001, 2000 and 1999, respectively. The increase in selling, general and administrative expenses in 2001 as compared with 2000
primarily was due to commissions recognized under a co-marketing and co-promotion agreement with Aventis Pasteur MSD related to Menjugate and Fluad.
Under the Aventis Pasteur agreement, Aventis Pasteur distributes, markets and sells (co-markets) Menjugate under its own label in Europe, excluding the United Kingdom and
Ireland. Aventis Pasteur also assists us in marketing and sales efforts (co-promotion) related to Menjugate in the United Kingdom and Ireland. Aventis Pasteur similarly
co-markets and co-promotes Fluad in Europe. Co-promotion commissions to Aventis Pasteur amounted to $6.6 million and $2.0 million in 2001
and 2000, respectively.

The
decrease in selling, general and administrative expenses in 2000 as compared with 1999 was due to (i) a change in the method of allocating certain legal costs to segments, as
discussed previously, offset by an increase in selling, general and administrative expenses due to (ii) the re-launch of our tick-borne encephalitis vaccine product in
the first quarter 2000 and (iii) the worldwide implementation of our integrated information system in April 1999.

Amortization expenseOur vaccines segment recognized amortization expense of $8.3 million, $8.1 million and
$9.6 million in 2001, 2000 and 1999, respectively. In the second quarter 1998, we acquired the remaining 51% interest in Chiron Behring from Hoechst AG and accounted for the acquisition under
the purchase method of accounting. We allocated a portion of the purchase price to acquired intangible assets and goodwill. Acquired intangible assets included the fair value of trademarks, patents
and customer lists, which we are amortizing on a straight-line basis over 6 to 20 years. Acquired intangible assets also included the assembled workforce, which we were amortizing
on a straight-line basis over 20 years. We were amortizing goodwill on a straight-line basis over 20 years. As circumstances dictate, we evaluate the useful life
and value of each intangible asset, which may result in future adjustments to the amortization periods or book values.

As
discussed in "New Accounting Standards" below, we implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. This
statement requires, among other things, that the assembled workforce be reclassified to goodwill and that goodwill (including assembled workforce) no longer be amortized, but instead be tested for
impairment at least annually in accordance with this Statement. The goodwill and assembled workforce amortization expense was $2.4 million, $2.5 million and $2.8 million in 2001,
2000 and 1999, respectively.

35

---

Blood testing

Product salesOur blood testing segment recognized product sales of $68.7 million, $43.1 million and
$25.4 million in 2001, 2000 and 1999, respectively.

Nucleic acid testingUnder a collaboration agreement with Gen-Probe Incorporated, we are jointly participating in
new assay and instrument research and development. Currently, Gen-Probe is the only manufacturer of nucleic acid testing products using transcription-mediated amplification technology.
Worldwide product sales related to tests and instruments were $48.4 million, $22.4 million and $7.0 million in 2001, 2000 and 1999, respectively.

Chiron
sells directly in the U.S., Australia and various European markets.We also have contracts with various agencies and distributors worldwide. In addition, evaluation studies are
being conducted to consider the adoption of nucleic acid testing for blood screening in additional countries. We recognize product revenues based on the details of each contract.

In
the U.S., we recognized revenues from sales of nucleic acid tests under an Investigational New Drug application beginning in the second quarter 1999. In the third quarter 2000, we
assumed primary account responsibility for a key U.S. customer, which resulted in increased product sales. In the third quarter 2001, all of our U.S. customers renewed their agreements, most with
moderate price increases, for nucleic acid testing products. On February 27, 2002, the U.S. Food and Drug Administration approved the Procleix HIV-1/ HCV Assay. We
expect that commercial pricing for sales of the Procleix HIV-1/ HCV Assay to our U.S. customers will result in a significant increase in revenue recognized in 2002 from such
sales.

Outside
the U.S., the French government adopted nucleic acid testing for blood screening effective July 2001. As a result, we began recognizing revenues from the commercial sales
of assays and instruments and the provision of services.

In
Australia, we signed, and began recognizing revenue under, an exclusive contract with the Australian Red Cross Blood Service to provide blood testing products for nucleic acid testing
screening in the fourth quarter 1999.

Ortho-Clinical DiagnosticsUnder the Ortho-Clinical Diagnostics, Inc. contract, we manufacture bulk reagents and
antigens for immunodiagnostic products. We recognized product sales under this contract of $20.3 million, $20.7 million and $18.4 million in 2001, 2000 and 1999, respectively. The
fluctuations between 2001 and 2000, as well as 2000 and 1999, primarily were due to the timing of manufacturing services.

Under
a June 2001 agreement among Chiron, Ortho-Clinical Diagnostics, Inc. and Bayer Corporation, Chiron will manufacture bulk antigens for Ortho-Clinical Diagnostics, Inc. for inclusion
in products to be sold by Bayer.

We
expect competitive pressures related to our blood testing products to continue into the future, primarily as a result of the introduction of competing products into the market, as
listed in Part I, Item 1. "Business-Competition" above.

Equity in earnings of unconsolidated joint businessesOur share of earnings from our joint business with Ortho-Clinical
Diagnostics, Inc. was $84.5 million, $84.2 million and $78.1 million in 2001, 2000 and 1999, respectively. The increase in 2000 as compared with 1999 primarily was due to
increased profitability of Ortho-Clinical Diagnostics' foreign affiliates.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Our blood testing segment recognized total collaborative agreement revenues of $11.2 million, $11.7 million and $9.9 million in 2001,
2000 and 1999, respectively. Under the Ortho-Clinical Diagnostics, Inc. contract, we conduct research and

36

---

development services related to immunodiagnostic products. Our blood testing segment recognized collaborative agreement revenues related to immunodiagnostic products of $11.1 million,
$10.1 million and $8.3 million in 2001, 2000 and 1999, respectively. The fluctuations between 2001 and 2000, and 2000 and 1999, primarily were due to the timing of research services.

The
balance of collaborative agreement revenues recognized in our blood testing segment, not related to the Ortho-Clinical Diagnostics contract, consisted of various other agreements,
which individually were not material.

Collaborative
agreement revenues tend to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones. Due
to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate additional
collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners. We have no assurance that new
relationships will be established or that current collaborative agreement revenues will not decline.

Royalty and license fee revenuesOur blood testing segment earns royalties on third party utilization of our hepatitis C
virus and HIV patents for use in blood screening, as well as third party sales of hepatitis C virus and HIV immunodiagnostic and probe diagnostic products. The blood testing segment recognized royalty
and license fee revenues of $20.6 million in 2001.

F. Hoffmann La-Roche settlementIn October 2000, we entered into three license agreements with F. Hoffmann
La-Roche Limited and several of its affiliated companies related to the settlement of certain litigation in the U.S. and certain other countries for the use of our hepatitis C virus and
HIV intellectual property. Two agreements relate toin vitrodiagnostic products. See "OtherRoyalty and license fee revenues" below. The
third agreement for blood screening was superseded in May 2001 by two new agreements, one for each of hepatitis C virus and HIV. Revenues under these agreements were $18.1 million in
2001. Our blood testing segment did not recognize any royalty and license fee revenues during 2000 under these agreements. Royalties will continue under these new agreements through the lives of the
hepatitis C virus and HIV patents covering F. Hoffmannn La-Roche's nucleic acid testing products. Currently, the applicable issued hepatitis C virus patents begin to expire in 2015 for the
U.S. and in 2008 for Europe. Currently, the applicable issued HIV patent in Europe expires in 2005. If and when a patent is issued under pending U.S. applications, the HIV patent life in the U.S. will
be seventeen years from the date of issuance.

BayerIn June 2001, Chiron and Ortho-Clinical Diagnostics, Inc. entered into an agreement with Bayer
Corporation. Under this agreement, Bayer will manufacture and sell certain of Ortho-Clinical Diagnostics' hepatitis C virus and HIV immunodiagnostic products for use on Bayer's instrument platforms.
Bayer paid us a license fee of $45.3 million, which we deferred (due to our continuing manufacturing obligations) and began recognizing as revenue in the third quarter 2001. We will recognize
the remaining amount ratably through 2010.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our
technologies. We have no assurance that we will be able to do so or that future royalty and license fee revenues will not decline.

Gross profitBlood testing gross profit as a percentage of net product sales was 28%, 30% and 8% in 2001, 2000 and 1999,
respectively. The decrease in blood testing gross profit margins in 2001 as compared with 2000 primarily related to payments to Gen-Probe Incorporated upon resolution of certain
contractual
disputes in the fourth quarter 2001, as discussed in Part I, Item 1. "Legal Proceedings" above. This decrease was offset by proportionately higher sales of nucleic acid testing products in 2001
as compared

37

---

with 2000. In July 2000, we began recognizing nucleic acid testing product sales for one of our key U.S. customers, which previously were recorded as collaborative agreement revenues. In
addition, all of our U.S. customers renewed their agreements during the third quarter 2001, most with moderate price increases, for nucleic acid testing products.

The
increase in blood testing gross profit margins in 2000 as compared with 1999 primarily was related to a favorable mix of blood testing product sales. As discussed above, we began
recognizing nucleic acid testing product sales for one of our key U.S. customers, which previously were recorded as collaborative agreement revenues, in July 2000. Secondly, our remaining U.S.
customers renewed their agreements during the third quarter 2000, which resulted in price increases for nucleic acid testing products. In addition, we recognized nucleic acid testing product sales in
2000 related to Australia.

Blood
testing gross profit percentages may fluctuate significantly in future periods as the blood testing product and customer mixes change.

Research and developmentOur blood testing segment recognized research and development expenses of $17.2 million,
$14.9 million and $10.0 million in 2001, 2000 and 1999, respectively. The increase in research and development spending in 2001 as compared with 2000 was due to an increase in
development costs related to nucleic acid testing technology, as Chiron and Gen-Probe Incorporated completed submission of data to the U.S. Food and Drug Administration for the
Procleix instruments and assays in January 2001 (see "Product sales" above). The increase in research and development spending in 2000 as compared with 1999 was due to an increase
in development costs related to nucleic acid testing technology.

Research
and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related
activities.

Selling, general and administrativeOur blood testing segment recognized selling, general and administrative expenses of
$29.3 million, $21.5 million and $16.6 million in 2001, 2000 and 1999, respectively. The increase in selling, general and administrative expenses in 2001 as compared with 2000
primarily was due to sales and marketing activities associated with the nucleic acid testing business. The increase in selling, general and administrative expenses in 2000 as compared with 1999
primarily was also due to an increase in selling, general and administrative expenses associated with nucleic acid testing technology and, to a lesser extent, our worldwide implementation of an
integrated information system in April 1999, partially offset by a change in the method of allocating certain legal costs to segments, as discussed previously. We expect continued growth in
selling, general and administrative expenses related to nucleic acid testing technology as we expand our sales opportunities for additional nucleic acid testing adoptions in other countries.

Other

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Our other segment recognized collaborative agreement revenues of $9.1 million, $3.0 million and $46.2 million in 2001, 2000 and 1999,
respectively, under an agreement with Novartis AG. Under the December 1995 Limited Liability Company agreement (see Note 8, "Related Party Transactions," in the Notes to Consolidated
Financial Statements), Novartis agreed to provide, at our request, research funding for certain projects. The funded projects consisted of certain adult and pediatric vaccines,
Insulin-like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine kinase. There were two amendments in the past three years. In December 1999, Chiron and
Novartis amended this agreement to increase the maximum amount of funding provided by Novartis from $250.0 million to $265.0 million. Based upon a December 2000 amendment,
Novartis agreed to fund through December 31, 2001, at our request and subject to certain annual and aggregate limits, up to 100% of the development costs incurred between January 1, 1995
and December 31, 2000 on these projects. This agreement expired on December 31, 2001.

38

---

Collaborative
agreement revenues tend to fluctuate based on the amount of research services performed, the status of projects under collaboration and the achievement of milestones. Due
to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate additional
collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners. We have no assurance that new
relationships will be established or that current collaborative agreement revenues will not decline.

Royalty and license fee revenuesOur other segment earns royalties on third party sales of and license fees on several
products. Our other segment recognized royalty and license fee revenues of $101.3 million, $110.6 million and $60.0 million in 2001, 2000 and 1999, respectively.

Hepatitis C Virus and HIVOur other segment earns royalties and license fees related to the use of our hepatitis C virus and
HIV patents by various third parties. Our other segment's royalty and license fee revenues related to the use of these products consisted of the following:

Year Ended December 31,2001

2000

1999(in thousands)Royalty revenues

$
60,651

$
11,119

$
5,088License fee revenues


38,333


73,167


39,167$
98,984

$
84,286

$
44,255


F. Hoffmann La-Roche settlementIn October 2000, we entered into three license agreements with F. Hoffmann
La-Roche Limited related to the settlement of litigation in the U.S. and certain other countries for use of our hepatitis C virus and HIV nucleic acid testing intellectual property for use
in clinical diagnostics.

Under
the hepatitis C virus agreement, we received $85.0 million, of which we recognized $40.0 million in the fourth quarter 2000. We deferred the remaining
$45.0 million, which becomes nonrefundable through 2005. In the first quarter 2001, we began recognizing portions of the $45.0 million based upon the greater of (i) the scheduled
quarterly minimum non-refundable amount or (ii) the actual earned credits as royalties on future sales related to F. Hoffmann La-Roche's use of our hepatitis C virus patent in its in vitrodiagnostic products. The agreement also provides for royalties on future sales related to F. Hoffmann La-Roche's use of our
hepatitis C virus patent in itsin vitrodiagnostic products, which commenced in the first quarter 2001.

Under
the HIV agreement, we received $10.0 million in the fourth quarter 2000, which we deferred, and received $10.0 million in the first quarter 2001. These amounts
included a refundable license fee and royalties for past sales related to F. Hoffmann La-Roche's use of our HIV patent in itsin vitrodiagnostic products in Europe. These amounts became nonrefundable in January 2001 when the European Patent Office Board of Technical Appeals upheld our HIV patent. As a result, we recognized
the entire $20.0 million as revenue in the first quarter 2001. The agreement also provides for royalties on future sales related to F. Hoffmann La-Roche's use of our HIV patent in
itsin vitrodiagnostic products, which also commenced in the first quarter 2001 when the European Patent Office Board of Technical Appeals upheld our
HIV patent. We will recognize additional revenue of $10.0 million under this arrangement when and if patents on HIV are issued to us in the U.S.

Such
royalties will continue through the lives of the hepatitis C virus and HIV patents covering F. Hoffmann La-Roche's nucleic acid testing products. Currently, the
applicable issued hepatitis C virus patents expire in 2015 for the U.S. and in 2008 for Europe. Currently, the applicable issued HIV patent in Europe expires in 2005. If and when a patent is issued
from pending U.S. applications, the HIV patent life in the U.S. will be seventeen years from the date of issuance.

39

---

See
"Blood testingRoyalties and license fee revenues" above for a discussion of the third agreement entered into with F. Hoffmann La-Roche in October 2000
and two additional agreements entered into with F. Hoffmann La-Roche in May 2001, which superseded the October 2000 agreement.

BayerIn connection with the sale of Chiron Diagnostics to Bayer Corporation, we granted Bayer rights under HIV and hepatitis
C virus patents for use in nucleic acid diagnostic tests (excluding blood screening). In exchange for these rights, Bayer paid us a license fee of $100.0 million, which became nonrefundable in
decreasing amounts over a period of three years. We recognized license fee revenues in 2001, 2000, and 1999, which represented the portions of the $100.0 million payment that became
nonrefundable during those periods. We recognized the remaining revenue in the fourth quarter 2001. In addition, the cross-license agreement provides for royalties to us on HIV and hepatitis C virus
products sold by Bayer, which increased in 2001 as compared with 2000, and were consistent in 2000 and 1999.

Organon TeknikaIn January 2001, we granted Organon Teknika BV rights under certain of our HIV patents. The agreement
provides for royalties on future sales by Organon Teknika of assays for the detection of nucleic acid sequences for use inin vitrodiagnostic
(excluding blood screening) products, which commenced in the first quarter 2001.

Abbott LaboratoriesIn 1999, we entered into a cross-license agreement with Abbott Laboratories, Inc., under which we
granted Abbott Laboratories rights under our hepatitis C virus patents. In exchange for these rights, Abbott Laboratories paid us a license fee, which became nonrefundable and was recognized as
revenue in the second quarter 2000. In addition, the cross-license agreement provides for payment of royalties to us on hepatitis C virus products sold by Abbott Laboratories.

The
balance of royalty and license fee revenues for 2001 in the table above consisted of various other agreements, which individually were not material.

F. Hoffmann La-Roche PCR agreementUnder a July 1991 agreement between F. Hoffmann La-Roche
Limited and Cetus Corporation (a company acquired by Chiron), we received royalties on sales of polymerase chain reaction products and services sold by F. Hoffmannn La-Roche and its
licensees. In
2001, 2000 and 1999, we recognized $2.4 million, $26.3 million and $15.7 million, respectively, under this agreement. F. Hoffmannn La-Roche's royalty obligations, with
certain limited exceptions for future products, expired in the fourth quarter 2000. However, we estimated royalties on polymerase chain reaction product sales based on previous period actual sales. In
the following quarter, we recorded an adjustment equal to the difference between those estimated royalty revenues recorded in the previous quarter and the contractual percentage of actual polymerase
chain reaction product sales for that period. As a result, we recorded the adjustment for the final fourth quarter 2000 royalties in the first quarter 2001. In addition, we recorded a similar positive
adjustment of $3.3 million in 2000.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements and the timing of receipt of license fees. Results in any one period are not necessarily
indicative of results to be achieved in the future. In addition, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our
technologies. We have no assurance that we will be able to do so or that future royalty and license fee revenues will not decline.

Research and developmentIn 1999, our other segment recognized research and development expenses of $6.8 million.
Research and development spending in our other segment fluctuates based on the timing of license and collaboration agreements. The research and development spending in 1999 included a
$5.0 million license fee related to our Fibroblast Growth Factor patent and license agreement with Scios, Inc. Under this agreement, in 1999, we also advanced Scios an additional
$7.5 million in exchange for a promissory note, which may be forgiven if certain conditions are met. We may pay an additional $12.0 million in licensing fees if certain development
objectives are met.

40

---

Selling, general and administrativeIn 2001, 2000 and 1999, our other segment recognized selling, general and administrative
expenses of $65.3 million, $72.0 million and $34.8 million, respectively. The decrease in selling, general and administrative expenses in 2001 as compared with 2000 primarily was
due to lower patent litigation costs upon substantial conclusion of the F. Hoffmann La-Roche Limited litigation in October 2000 and lower payroll taxes related to stock option
exercises during a period of lower average Chiron stock prices. In March 2000, we posted an all-time high in our stock price. The fourth quarter 2000 also included costs associated
with the integration of PathoGenesis Corporation. The increase in selling, general and administrative expenses in 2000 as compared with 1999 was due to (i) costs associated with the integration
of PathoGenesis, (ii) increased payroll related expenses and patent litigation costs, (iii) our worldwide implementation of an integrated information system in April 1999 and
(iv) a change in the method of allocating certain legal costs to segments, as discussed previously.

Write-off of purchased in-process technologiesThe write-off of purchased
in-process technologies was $171.6 million in 2000.

On
September 21, 2000, we acquired PathoGenesis Corporation and accounted for the acquisition under the purchase method of accounting. We allocated a portion of the purchase price
to purchased in-process technologies for $171.6 million. We wrote this off entirely in the fourth quarter 2000. The write-off of purchased in-process
technologies represented the fair value at the acquisition date, calculated utilizing the income approach, of the portion of certain in-process research and development projects that were
not reliant upon core technology. Core technology represents technology that has been utilized in approved or commercialized products. We did not include certain research and development projects
deemed too early in terms of completion metrics and any future yet-to-be-defined technologies in the calculation of in-process technologies. We do not
anticipate that there will be any alternative future use for the in-process technologies that were written off. In valuing the purchased in-process technologies, we used
probability-of-success-adjusted cash flows and a 15% discount rate. We assumed cash inflows from any one in-process product to commence between 2002 and 2008. Based
on current information, we believe that the revenue projections underlying the purchase price allocation are substantially accurate. As with all pharmaceutical products, the probability of commercial
success for any one research and development project is highly uncertain.

Amortization expenseOur other segment recognized amortization expense of $38.4 million and $9.6 million in
2001 and 2000, respectively. As discussed above, we acquired PathoGenesis Corporation on September 21, 2000 and accounted for the acquisition under the purchase method of accounting. We
allocated a portion of the purchase price to purchased technologies, acquired intangible assets and goodwill. Purchased technologies represented the fair value of research and development projects,
which we will develop further and support after the acquisition date. We are amortizing purchased technology on a straight-line basis over 15 years. Acquired intangible assets
included the fair value of trademarks and trade names, patents and databases, which we are amortizing on a straight-line basis over 13 to 16 years. Acquired intangible assets also
included the assembled workforce, which we were amortizing on a straight-line basis over 5 years. We were amortizing goodwill on a straight-line basis over
15 years. As circumstances dictate, we evaluate the useful life and value of each intangible asset, which may result in future adjustments to the amortization periods or book values.

As
discussed in "New Accounting Standards" below, we implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. This statement requires, among other things, that the assembled workforce be reclassified to goodwill and that goodwill (including assembled workforce) no longer be amortized, but instead be
tested for impairment at least annually in accordance with this Statement. The goodwill and assembled workforce amortization expense was $14.7 million and $3.6 million in 2001 and 2000,
respectively.

Restructuring and reorganizationWe previously recorded restructuring and reorganization charges related to (i) the integration of
our worldwide vaccines operations, (ii) the closure of our Puerto Rico and

41

---

St. Louis, Missouri facilities and (iii) the ongoing restructuring of our business operations. The integration of our worldwide vaccines operations consisted of termination and other
employee-related costs recognized in connection with the elimination of 28 positions in our Italian manufacturing facility, all of which had terminated as of December 31, 2000, and
facility-related costs. The closure of our Puerto Rico and St. Louis facilities and the ongoing restructuring of our business operations consisted of termination and other employee-related costs
recognized in connection with the elimination of 400
positions in manufacturing, research, development, sales, marketing and other administrative functions, and facility-related costs. Employee termination costs included wage continuation, advance
notice pay and medical and other benefits. Facility-related costs included losses on disposal of property, plant and equipment, lease payments and other related costs.

During
1999, we decided to retain 18 of those 400 positions to support future contract manufacturing activities. Therefore, we adjusted the number of positions for elimination to 382.
Again during 2000, we decided to retain 11 of those 382 positions to support future contract manufacturing activities. Therefore, we adjusted the number of positions for elimination to 371. Included
in the 371 positions were 36 positions at our Amsterdam facility. We transferred these positions to a buyer in January 2000 (see "Gain (loss) on sale of asset" below) in connection with the
December 1999 sale of the Amsterdam facility.

For
the year ended December 31, 2001, we recorded net restructuring and reorganization charges of $0.1 million, which included a charge of $0.3 million and a charge
reversal of $0.2 million. The charge of $0.3 million primarily related to revised estimates of termination and other employee-related costs in connection with the elimination of the 371
positions, of which 360 had terminated as of December 31, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

For
the year ended December 31, 2000, we recorded net restructuring and reorganization charge reversals of $0.4 million, which included a charge reversal of
$0.6 million and a charge of $0.2 million. The charge reversal of $0.6 million primarily related to revised estimates of termination and other employee-related costs recorded in
connection with the retention of 11 of the 382 positions. As described above, we adjusted the number of positions for elimination to 371, of which 356 had terminated as of December 31, 2000.
The charge of $0.2 million primarily related to revised estimates of facility-related costs.

For
the year ended December 31, 1999, we recorded net restructuring and reorganization charges of $0.2 million, which included a charge of $3.9 million and a charge
reversal of $3.7 million. The charge of $3.9 million primarily related to termination and other employee-related costs recognized in connection with the elimination of 28 positions at
our Italian manufacturing facility, of which 24 of these positions had terminated as of December 31, 1999. The charge reversal of $3.7 million related to (i) revised estimates of
facility-related accruals recorded in connection with the closure of the St. Louis facility and (ii) revised estimates of termination and other employee-related costs recorded in connection
with the transfer of 36 positions at our Amsterdam facility to the buyer and the retention of 18 of the 400 positions. As described above, we adjusted the number of positions for elimination to 382,
of which 319 had terminated as of December 31, 1999.

We
expect to substantially settle the restructuring and reorganization accruals within one to six years of accruing the related charges. We expect employee and facility-related cost
savings due to these restructuring activities in cost of sales, research and development expense and selling, general and administrative expense through 2008. We believe that we have begun to achieve
these cost savings.

Other operating expensesIn 1999, we recognized a reduction in other operating expenses of $13.4 million resulting
from a reversal in estimated tax accruals related to certain employee payments recorded in 1995. We entered into tax indemnification agreements with certain officers and accrued an amount based upon
the officers' related notional excise tax obligation. As the statute of limitations expired, based upon the officers' tax return filing dates, we reversed the related excise tax accrual to the extent
that claims were not made against it.

42

---

Gain (loss) on sale of assetsIn January 2001, we sold various assets of our San Diego facility, resulting in a net
gain of $2.4 million. In February 2000, we sold substantially all assets of an Australian subsidiary, resulting in a net loss of $0.2 million. In December 1999, we sold our
manufacturing facility in Amsterdam, resulting in a gain of $0.9 million.

Gain on sale of intangible assetsIn December 1999, we sold certain assets that we had developed or acquired in
connection with the research and development of a Cytomegalovirus vaccine to Aventis Pasteur MSD and recognized a gain of $7.5 million.

Interest expenseIn 2001, 2000 and 1999, we recognized interest expense of $7.5 million, $12.8 million and
$23.9 million, respectively. The decrease in interest expense in 2001 as compared with 2000 primarily was due to the conversions of $253.8 million of the 1.90% convertible debentures to
common stock in October 2000 and $98.4 million of the 5.25% convertible debentures to common stock in May 2000, offset by interest expense recognized on the Liquid Yield Option
Notes that were issued in June 2001. The decrease in interest expense in 2000 as compared with 1999 primarily was due to the convertible debenture conversions discussed previously, as well as
the repayment of the note payable to Novartis AG on January 4, 2000.

Other income, netOther income, net, primarily consisted of interest income on our cash and investment balances and other
non-operating gains and losses. In 2001, 2000 and 1999, we recognized interest income of $51.6 million, $84.5 million and $83.8 million, respectively. The decrease in
interest income in 2001 as compared with 2000 primarily was due to lower average interest rates, partially offset by higher average cash and investment balances following the $401.8 million
received upon issuance of the Liquid Yield Option Notes in June 2001. We do not expect interest income in the following periods to be commensurate with 2000 due to lower interest rates. The
increase in interest income in 2000 as compared with 1999 was due to gains realized on the termination of currency swaps related to our German subsidiary and higher average interest rates.

We
invest in a diversified portfolio of financial investments, including debt and equity securities. The price of these securities is subject to significant volatility. We perform
periodic reviews for temporary or other-than-temporary impairment of our securities and record adjustments to the carrying values of those securities accordingly. Generally, we
believe that an investment is impaired if its market value has been
below its carrying value for each trading day in a six-month period, at which point we write-down the investment. In 2001, 2000 and 1999, we recognized losses attributable to the
other-than-temporary impairment of certain of these debt and equity securities of $5.5 million, $5.0 million and $1.7 million, respectively. Based upon the
six-month review of our equity securities through February 28, 2002, we anticipate that, for the first quarter 2002, we may recognize losses attributable to the
other-than-temporary impairment of certain equity securities of $3.6 million. In 2001, 2000 and 1999, we recognized gains of $8.7 million, $3.2 million and
$3.8 million, respectively, related to the sale of certain equity securities. In 2000, we recognized a net loss of $3.7 million related to the sale of certain debt securities. In
addition, in 1999, we recognized an unrealized gain of $3.4 million related to equity securities classified as trading.

On
December 31, 1998, we completed the sale of our 30% interest in General Injectibles & Vaccines, Inc., a distribution business, to Henry Schein, Inc. and
received payment in full of certain advances we made to General Injectibles & Vaccines. The agreement also provided for us to receive additional payments, calculated as a
pre-determined percentage of Henry Schein's gross profit, through 2003. We received $2.5 million and $2.9 million in 2001 and 2000, respectively.

In
January 2000, we hedged a portion of our exposure to the British pound related to Menjugate sales. We settled this hedging contract upon substantial conclusion of
Menjugate sales in the United Kingdom in the second quarter 2000. This settlement resulted in a gain of approximately $5.4 million.

Income taxesThe reported effective tax rate for 2001 was 31.4% of pretax income from continuing operations, which reflects
the amortization of goodwill and acquired identifiable intangible assets related

43

---

to the PathoGenesis Corporation acquisition. The reported effective tax rate for 2000 was 84.4% of pretax income from continuing operations. The adjusted annual tax rate was 32.0% of pretax income
from continuing operations, when taking into account (i) the write-off of purchased in-process technologies and amortization expense on goodwill and acquired
identifiable intangible assets related to the PathoGenesis acquisition and (ii) $34.0 million of past royalty revenues related to the F. Hoffmann La-Roche Limited settlement.
The decrease in the adjusted annual tax provision in 2001 as compared with 2000 primarily was due to increases in the amount of tax credits utilized in 2001 as compared with 2000, as well as increases
in the tax benefits derived from export sales activities.

Our
reported effective tax rate for 1999 was 18.0% of pretax income from continuing operations. The adjusted annual tax rate was 26.3% of pretax income from continuing operations, when
adjusted for the impact of the reversal of a prior year valuation allowance, which resulted in the recognition of additional domestic deferred tax benefits of $12.9 million. The increase in the
adjusted annual tax provision in 2000 as compared with 1999 primarily was due to an increase in income earned in foreign countries with marginal income tax rates higher than the marginal U.S. income
tax rate, coupled with a decrease in net operating loss carryforwards available to offset such foreign income.

The
effective tax rate may be affected in future periods by changes in estimates with respect to our deferred tax assets and other items affecting the overall tax rate.

Discontinued operationsIn a strategic effort to focus on our core businesses of biopharmaceuticals, vaccines and blood
testing, we completed the sale of Chiron Diagnostics and Chiron Vision in 1998 and 1997, respectively. The "Gain (loss) on disposal of discontinued operations" consisted of the following as of
December 31:

|                                                             |  | 2001 |       | 2000 |   | 1999  
|------------------------------------------------------------ |  | ---- | ----- | ---- | - | ------
|
|Reversal of reserves for retention and severance obligations |  | $    | 1,600 |      | $ |      
|Reversal of reserves for indemnity obligations               |  |      | 1,500 |      |   | 2,190 
|Gain on the sale of real estate assets                       |  |      | 1,644 |      |   |      
|Other                                                        |  |      |      |      |   | (708  
|Income tax benefit (provision)                               |  |      | 534   |      |   | (9,070
|                                                             |  |      |       |      |   |       
|                                                             |  | $    | 5,278 |      | $ | (7,588
|                                                             |  |      |       |      |   |       

Chiron DiagnosticsUnder the terms of the Bayer Corporation agreement, we were responsible for retention and severance
payments to specific U.S. and international employees. Accordingly, we reserved for such retention and severance obligations. In 2001, we reversed approximately $1.6 million reserved for
retention and severance obligations based upon a final reconciliation from Bayer. We recorded this amount as a component of "Gain (loss) on disposal of discontinued operations."

Chiron VisionUnder the terms of the Bausch & Lomb Incorporated agreement related to the sale of Chiron Vision, we
provided customary indemnities. Accordingly, we reserved for such contractual obligations to indemnify Bausch & Lomb against certain potential claims. In 2001, we reversed the remaining
reserves of $1.5 million upon the sale of the remaining real estate assets, as discussed below. In 2000 and 1999, we reversed approximately $2.2 million and $8.3 million,
respectively, of such reserves as such obligations had expired unused. We recorded these amounts as components of "Gain (loss) on disposal of discontinued operations."

We
retained certain Chiron Vision assets, including certain Chiron Vision real estate assets with a carrying value of $25.1 million, upon the completion of the sale. In
July 1999, we sold a portion of the real estate assets and recognized a net gain on the sale of these assets of $1.9 million. In April 2001, we sold the remaining real estate
assets and recognized a net gain on the sale of these assets of $1.6 million. We recorded these amounts as components of "Gain (loss) on disposal of discontinued operations."

44

---

Income taxesIn connection with the sale of Chiron Diagnostics and Chiron Vision, we recorded cumulative net deferred tax
assets of $23.7 million and $26.5 million in 2001 and 2000, respectively, principally attributable to the timing of the deduction of certain expenses associated with these sales. We also
recorded corresponding valuation allowances of $23.7 million and $26.5 million in 2001 and 2000, respectively, to offset these deferred tax assets, as we believe that it is more likely
than not that the deferred tax assets to which the valuation allowance relates will not be realized. We will report the future recognition of these deferred tax assets as a component of "Gain (loss)
on disposal of discontinued operations."

"Gain
(loss) on disposal of discontinued operations" included an income tax benefit (provision) of $0.5 million, ($9.1) million and $20.4 million in 2001, 2000 and 1999,
respectively. The tax benefit in 2001 related to the reversal of reserves and valuation allowances against deferred tax assets that were set up at the time of the sale, as discussed above. The tax
provision in 2000 resulted from the 1999 estimated tax provision to tax return true-up adjustment on the Chiron Diagnostics final purchase price adjustment. The tax benefit in 1999
included the utilization of additional foreign sales corporation benefits and foreign tax credits resulting from the 1998 estimated tax provision to tax return true-up adjustments for
Chiron Diagnostics and Chiron Vision.

New Accounting Standards

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (which we will refer to as "SFAS" in this
section) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in that it excludes goodwill from its impairment scope and allows for different approaches in cash flow
estimation. However, SFAS 144
retains the fundamental provisions of SFAS 121 for recognition and measurement of the impairment of (a) long-lived assets to be held and used and
(b) long-lived assets to be disposed of other than by sale. SFAS 144 also supercedes the business segment concept in Accounting Principles Board Opinion No. 30,
"Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in that
it permits presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS 144 retains the requirement of Accounting
Principles Board Opinion No. 30 to report discontinued operations separately from continuing operations. We adopted the provisions of SFAS 144 effective January 1, 2002. We
believe that the implementation of the impairment provisions of this standard will not have a material effect on our results of operations and financial position, since the impairment assessment under
SFAS 144 is largely unchanged from SFAS 121. The provisions of this standard for assets held for sale or other disposal generally are required to be applied prospectively. Therefore, we
cannot determine the potential effects that adoption of SFAS 144 as it relates to assets held for sale or other disposal will have on our financial statements.

In
July 2001, the Financial Accounting Standards Board issued SFAS 141, "Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS 141 also specifies criteria that
intangible assets acquired in a purchase business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be
accounted for separately. SFAS 142 requires that the assembled workforce be reclassified to goodwill and that goodwill (including assembled workforce) and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with SFAS 142. SFAS 142 also requires that intangible assets with definite
useful lives be amortized over their respective useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which is superceded by SFAS 144 as discussed above.

45

---

We
adopted the provisions of SFAS 141 immediately, and SFAS 142 effective January 1, 2002.

SFAS 141
required, upon adoption of SFAS 142, that we evaluate our existing intangible assets and goodwill that we acquired in a purchase business combination prior to
June 30, 2001, and make any necessary reclassifications to conform with the new criteria in SFAS 141. As a result, we reclassified assembled workforce with a net carrying value of
$7.8 million to goodwill on January 1, 2002.

Upon
adoption of SFAS 142, we also began reassessing the useful lives and residual values of all intangible assets (excluding goodwill and assembled workforce) acquired in
purchase business combinations, and are required to make any necessary amortization period adjustments by the end of the first quarter 2002. In addition, if an intangible asset is identified as having
an indefinite useful life, we must test the intangible asset for impairment in accordance with SFAS 142 by March 31, 2002. We will measure any impairment loss as of January 1,
2002 and recognize it as the cumulative effect of a
change in accounting principle in the first quarter 2002. Based upon our review to date, we do not anticipate any adjustments to amortization periods.

In
connection with the transitional goodwill impairment evaluation, SFAS 142 adoption requires us to assess whether there is an indication that goodwill is impaired as of
January 1, 2002. To accomplish this, we identified our reporting units as of January 1, 2002. We are in the process of determining the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. We have up to six months from January 1, 2002 to
determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in
accordance with SFAS 141, to its carrying amount, both of which would be measured as of January 1, 2002. This second step must be completed as soon as possible, but no later than
December 31, 2002. We will recognize any transitional impairment loss as the cumulative effect of a change in accounting principle.

In
addition, we must perform an impairment test at least annually. Any impairment loss from the annual test will be recognized as part of operations.

At
December 31, 2001, we had unamortized goodwill (including assembled workforce) of $232.6 million. Amortization expense related to goodwill (including assembled
workforce) was $17.1 million for the year ended December 31, 2001. Based upon our review to date, we do not anticipate any transitional impairment losses.

In
June 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires liability recognition for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We must adopt the provisions of SFAS 143 effective
January 1, 2003, with earlier application encouraged. We are currently analyzing the effect, if any, the adoption of this standard will have on our financial statements.

We
understand that the Financial Accounting Standards Board is considering new rules on the accounting for certain off-balance sheet lease financing. Such rules may require that, among
other things, certain off-balance sheet lease financing be recorded on the balance sheet. The Financial Accounting Standards Board expects to issue the new rules in April 2002. As new information is
released, we will continue to monitor the impact of these rules on our June 1996 lease agreement (see "Liquidity and Capital ResourcesCommitments" below).

46

---

Liquidity and Capital Resources

Our capital requirements have generally been funded from operations, cash and investments on hand, debt borrowings and issuance of common stock. Our cash and
investments in marketable debt securities, which totaled $1,302.0 million at December 31, 2001, are invested in a diversified portfolio of financial instruments, including money market
instruments, corporate notes and bonds, government or government agency securities and other debt securities issued by financial institutions and other issuers with strong credit ratings. By policy,
the amount of credit exposure to any one institution is limited. Investments are generally not collateralized and primarily mature within three years.

Sources and Uses of CashWe had cash and cash equivalents of $320.7 million and $167.0 million at
December 31, 2001 and 2000, respectively.

Operating activitiesIn 2001, net cash provided by operating activities was $262.0 million as compared with
$373.4 million in 2000. The decrease in cash provided by operating activities largely was due to (i) higher tax payments, (ii) the timing of royalty and license fee payments under
the F. Hoffmann La-Roche Limited settlement agreements (see "Blood testingRoyalty and license fee revenues" and "OtherRoyalty and license fee revenues" above) and
(iii) $13.9 million of cash received upon the settlement of a cross currency interest rate swap in 2000. We made $134.8 million ($49.6 million domestic and
$85.2 million foreign) in tax payments in 2001 as compared with $9.9 million in 2000. Domestic tax payments in 2001 included approximately $39.8 million related to the filing of
our fiscal year 2000 tax return in September 2001. Foreign tax payments in 2001 primarily related to tax payments made by our Italian subsidiary. Our Italian subsidiary posted profits in both
2000 and 2001, and is taxed at a substantially higher tax rate than our domestic and other foreign subsidiaries. As a result, our Italian subsidiary made significant tax payments in 2001. The decrease
in cash provided by operating activities was offset partially by a $45.3 million license fee payment received from Bayer Corporation in June 2001, as discussed in "Blood
testingRoyalty and license fee revenues" above.

Unutilized
net operating loss carryforwards and federal business credits attributed to the acquisition of PathoGenesis Corporation amounted to approximately $30.4 million and
$6.0 million, respectively, and are available to offset future domestic taxable income through 2007. As a result, we do not expect domestic tax payments in following years to be commensurate
with those in 2000.

We
anticipate that research and development expenditures in 2002 will increase due to the research and development activities related to Proleukin® for HIV, as well as
advances in research and
development platforms acquired from PathoGenesis in September 2000. Net cash from operating activities will fund these research and development activities.

Investing activitiesIn 2001, net cash used in investing activities consisted of purchases of investments in marketable debt
securities of $987.3 million, capital expenditures of $64.9 million, purchases of equity securities and interests in affiliated companies of $14.9 million, cash paid for
acquisition costs of PathoGenesis Corporation of $9.9 million and other uses of cash of $5.5 million. Cash used in investing activities was offset by proceeds from the sale and maturity
of investments in marketable debt securities of $681.6 million, proceeds from the sale of assets of $8.2 million, proceeds from the sale of equity securities and interests in affiliated
companies of $15.1 million and payments received on notes receivable of $6.4 million.

In
February 2001, our Board of Directors approved a $235.0 million capital expansion project, which includes the construction of a parking structure and a research and
development facility (including a supporting central utility facility) in Emeryville, California. Related to the parking structure, we had committed to $17.9 million in design and construction
services, under which we had incurred costs of $8.4 million, as of December 31, 2001. Related to the research and development facility, we are evaluating various financing alternatives
to fund this expansion. We expect to begin construction on the research and development facility in the second half of 2002. See also discussion under "Commitments" below.

47

---

Based
on current estimates provided in the April 2001 agreement with Rhein Biotech N.V. and GreenCross Vaccine Corporation (see "Results of
OperationsVaccinesResearch and Development" above), we committed approximately 24.4 million Euro ($21.5 million at December 31, 2001), primarily for the
expansion of our Italian manufacturing facilities. These expenditures began in the fourth quarter 2001 and are expected to continue through 2008. We currently are evaluating various financing
alternatives to fund this expansion.

The
purchases of equity securities and interests in affiliated companies consisted of a $5.3 million capital contribution under a 2001 limited partnership agreement, a
$6.6 million capital contribution under a 2000 limited partnership agreement and a $3.0 million capital contribution under a joint venture agreement. Under the 2001 limited partnership
agreement, we will pay $15.0 million over ten years, of which $5.3 million was paid through December 31, 2001, for a 6.35% ownership percentage. Under the 2000 limited partnership
agreement, we will pay $25.0 million over five years, of which $13.5 million was paid through December 31, 2001, for a 23.19% ownership percentage. We account for both the 2001
and 2000 limited partnership investments under the equity method of accounting. Under the joint venture agreement, we invested in a Singapore-based joint venture, S*BIO Pte Ltd, to research and
develop therapeutic, diagnostic and vaccine products (see also "Results of OperationsBiopharmaceuticalsCollaborative agreements revenues" above). Since inception we have
invested $8.0 million, which we have written off entirely due to the early stage of S*BIO's research and development activities, for a 19.9% ownership interest. We account for the investment on
the cost method. Based upon the current agreement, we are not obligated to make any further investments in S*BIO.

In
April 2001, we sold the remaining Chiron Vision real estate assets for $3.3 million in cash. In January 2001, we sold various assets of our San Diego facility for
$4.9 million in cash.

The
$6.4 million of payments received on notes receivable related to amounts collected under an April 1999 biopharmaceutical license agreement and a February 2000
agreement to sell substantially all assets of our Australian subsidiary to Mimotopes.

In
2000, net cash used in investing activities consisted of purchases of investments in marketable debt securities of $3.6 billion, cash paid to purchase PathoGenesis of
$720.7 million, capital expenditures of $54.4 million and purchases of equity securities and interests in affiliated companies of $27.4 million. Cash used in investing activities
was offset by proceeds from the sale and maturity of investments in marketable debt securities of $4.1 billion, proceeds from the sale of assets of $1.0 million, proceeds from the sale
of equity securities and interests in affiliated companies of $5.0 million, payments received on a note receivable of $3.2 million and other sources of cash of $58.5 million. In
2000, we paid approximately $720.7 million to purchase the outstanding shares of common stock of PathoGenesis at $38.50 per share. The purchases of equity securities and interests in affiliated
companies primarily consisted of a $5.0 million capital contribution under the joint venture agreement with S*BIO (which, as discussed above, we wrote off entirely due to the early stage of
S*BIO's research and development activities), a $6.9 million capital contribution under the 2000 limited partnership agreement and a $13.9 million payment to purchase common stock upon
the exercise of warrants.

Financing activitiesIn 2001, net cash provided by financing activities consisted of $401.8 million in proceeds from
the issuance of the Liquid Yield Option Notes, $65.7 million in proceeds from the reissuance of treasury stock (primarily related to stock option exercises and employee stock purchases) and
$8.2 million in proceeds from put options. Cash provided by financing activities was offset by $9.9 million for the payment of issuance costs on the Liquid Yield Option Notes,
$201.0 million for the acquisition of treasury stock, $1.4 million for the repayment of debt and $0.6 million for the repayment of short-term borrowings.

We
issued zero coupon Liquid Yield Option Notes in June 2001 for proceeds of $401.8 million. The Liquid Yield Option Notes mature on June 12, 2031. At the option of
the holder, we may be required to redeem all or a portion of the Liquid Yield Option Notes on June 12, 2004 and 2006, and every five years

48

---

thereafter. In addition, upon a change in control of Chiron occurring on or before June 12, 2006, each holder may require us to purchase all or a portion of such holder's Liquid Yield Option
Notes for cash at a price equal to 100% of the issue price for such Liquid Yield Option Notes plus any accrued original issue discount and contingent additional principal (and accrued original issue
discount thereon) to the date of purchase.

Our
Board of Directors authorized the repurchase of our common stock on the open market to offset the dilution associated with the operation of our stock option and employee stock
purchase plans and the granting of share rights. In 2001, our Board of Directors approved a total 10.0 million share increase. The Board has authorized such repurchases through
December 31, 2002. As of December 31, 2001, we may repurchase up to an additional 6.4 million shares of our common stock.

In
January 2001, we initiated a put option program to complement our ongoing stock repurchase program. Under this program, we enter into contracts with third parties to sell put
options on Chiron stock, entitling the holders to sell us a specified number of shares at a specified price on a specified date. For the year ended December 31, 2001, we collected premiums of
$8.2 million and, for contracts that expired, purchased 0.4 million shares in connection with the put option program. As of December 31, 2001, we have an outstanding contract with
a third party to sell put options on Chiron stock, entitling the holder to sell us 0.3 million shares. The option expires in March 2002 and has an exercise price of $45.88 per share. The
contract provides that if the price of Chiron's stock is at or below $10.00 before the contract expires, the third party can exercise the option.

In
2000, net cash used in financing activities consisted of $314.4 million for the acquisition of treasury stock, $71.1 million for the repayment of debt, including the
note owed to Novartis AG, and $18.9 million related to short-term borrowings. Cash used in financing activities was offset by $74.7 million in proceeds from the reissuance of
treasury stock and the issuance of common stock, primarily related to stock option exercises and employee stock purchases.

On
April 4, 2000, our Board of Directors authorized management to call for redemption the outstanding $100.0 million 5.25% convertible subordinated debentures. In 2000,
debentures with a face value of $98.4 million were converted into 3.2 million shares of our common stock, at a conversion price of $30.83 per share. The remaining unconverted debentures
were redeemed in cash.

On
August 11, 2000, our Board of Directors authorized management to call for redemption the outstanding $253.9 million 1.90% convertible subordinated debentures, including
$10.1 million held by Novartis. In 2000, debentures with a face value of $253.8 million were converted into 8.8 million shares of our common stock, at a conversion price of $28.91
per share. The remaining unconverted debentures were redeemed in cash.

We
are currently evaluating a number of business development opportunities. To the extent that we are successful in reaching agreements with third parties, these transactions may involve
selling a significant portion of our current investment portfolio.

49

---

Commitments

Our
commitments as of December 31, 2001 were as follows:

|                                         |  | Total |         | Due in
2002 |   | Due in
2003 |  | Due in
2004 |         | Due in
2005 |   | Due in
2006 |  | Due
Thereafter
|---------------------------------------- |  | ----- | ------- | ----------- | - | ----------- |  | ----------- | ------- | ----------- | - | ----------- |  | --------------
|
|Operating leases(1)                      |  | $     | 165,442 |             | $ | 29,180      |  | $           | 26,191  |             | $ | 20,691      |  | $             
|Research and development facility(2)     |  |       | 172,573 |             |   |            |  |             | 172,573 |             |   |            |  |               
|Capital Expansion Project(3)             |  |       | 9,529   |             |   | 9,529       |  |             |        |             |   |            |  |               
|Technology services agreement(4)         |  |       | 92,768  |             |   | 14,936      |  |             | 14,416  |             |   | 14,328      |  |               
|Rhein Biotech(5)                         |  |       | 21,526  |             |   | 15,526      |  |             |        |             |   |            |  |               
|Purchase and capital commitments(6)      |  |       | 4,309   |             |   | 4,309       |  |             |        |             |   |            |  |               
|Letter of credit(7)                      |  |       | 4,511   |             |   | 4,511       |  |             |        |             |   |            |  |               
|Research and development arrangements(8) |  |       | 17,935  |             |   | 14,070      |  |             | 2,605   |             |   | 730         |  |               
|Insurance-related items(9)               |  |       | 13,831  |             |   | 13,831      |  |             |        |             |   |            |  |               
|Defined-benefit pension plan(10)         |  |       | 8,984   |             |   |            |  |             | 8,984   |             |   |            |  |               
|                                         |  |       |         |             |   |             |  |             |         |             |   |             |  |               
|Total                                    |  | $     | 511,408 |             | $ | 105,892     |  | $           | 224,769 |             | $ | 35,749      |  | $             
|                                         |  |       |         |             |   |             |  |             |         |             |   |             |  |               

---



50

---



Borrowing Arrangements

Under
a revolving, committed, uncollateralized credit agreement with a major financial institution, we can borrow up to $100.0 million in the U.S. This credit facility is
guaranteed by Novartis AG under a November 1994 Investment Agreement, provides various interest rate options and matures in February 2003. There were no borrowings outstanding under this
credit facility at December 31, 2001 and 2000. In December 1999, Chiron and Novartis amended the November 1994 Investment Agreement to reduce the maximum amount of our obligations
that Novartis would guarantee from $725.0 million to $702.5 million.

We
also have various credit facilities available outside the U.S. Borrowings under these facilities totaled $0.5 million and $1.2 million at December 31, 2001 and
2000, respectively. One facility is maintained for all of our European subsidiaries and allows for total borrowings of $50.0 million. There were no outstanding borrowings under this facility at
December 31, 2001 and 2000. Our Italian subsidiary also has various facilities, related to its receivables, which allow for total borrowings of 10.9 million Euro ($9.6 million at
December 31, 2001). There were no outstanding borrowings under this facility at December 31, 2001. At December 31, 2000, $0.1 million were outstanding under this facility.
A third facility is maintained for our 51%-owned Indian subsidiary and allows for total borrowings of 200 million Indian Rupee ($4.1 million at December 31, 2001). At
December 31, 2001 and 2000, $0.5 million and $1.1 million, respectively, were outstanding under this facility. Outstanding borrowings under the Indian credit facility were
collateralized by machinery and equipment with a net book value of $3.6 million and trade receivables and inventory with a total net book value of $3.9 million at December 31,
2001.

51

---

Market Risk Management

Our
cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, the fair value of equity securities held and our stock price. We
attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. These activities are discussed in further detail in Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk."

Euro Conversion

On January 1, 1999, eleven European Union member countries established fixed conversion rates between their existing legacy currencies and one common
currency, the Euro. Beginning on January 1, 2002, the legacy currencies were replaced with the Euro. We had completed system upgrades to assist in our Euro-readiness effort. The
cost of the upgrades was not material to our results of operations and financial position. The Euro did not have a material effect on our product pricing and gross profit percentages.

Factors That May Affect Future Results

As a global pharmaceutical company, we are engaged in a rapidly evolving and often unpredictable business. The forward-looking statements contained in this
10-K and in other periodic reports, press releases and other statements issued by us from time to time reflect our current beliefs and expectations concerning objectives, plans,
strategies, future performance and other future events. The following discussion highlights some of the factors, many of which are beyond our control, which could cause actual results to differ.

Promising Technologies Ultimately May Not Prove Successful

We focus our research and development activities on areas in which we have particular strengths and on technologies that appear promising. These technologies
often are on the "cutting edge" of modern science. As a result, the outcome of any research or development program is highly uncertain. Only a very small fraction of these programs ultimately result
in commercial products or even product candidates. Product candidates that initially appear promising often fail to yield successful products. In many cases, preclinical or clinical studies will show
that a product candidate is not efficacious (that is, it lacks the intended therapeutic or prophylactic effect), or that it raises safety concerns or has other side effects which outweigh the intended
benefit. Success in preclinical or early clinical trials (which generally focus on safety issues) may not translate into success in large-scale clinical trials (which are designed to show efficacy),
often for reasons that are not fully understood. Further, success in clinical trials will likely lead to increased investment, adversely affecting short-term profitability, to bring such
products to market. And even after a product is approved and launched, general usage or
post-marketing studies may identify safety or other previously unknown problems with the product which may result in regulatory approvals being suspended, limited to narrow indications or
revoked, or which may otherwise prevent successful commercialization.

Regulatory Approvals

We must obtain and maintain regulatory approval in order to market most of our products. Generally, these approvals are on a
product-by-product and country-by-country basis. In the case of therapeutic products, a separate approval is required for each therapeutic indication.
See Part I, Item 1. "Business-Government Regulation" above. Product candidates that appear promising based on early, and even large-scale, clinical trials may not receive regulatory approval.
The results of clinical trials often are susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies.

52

---

Manufacturing

Most of our products are biologics. Manufacturing biologic products is complex. Unlike chemical pharmaceuticals, a biologic product generally cannot be
sufficiently characterized (in terms of its physical and chemical properties) to rely on assaying of the finished product alone to ensure that the product will perform in the intended manner.
Accordingly, it is essential to be able to both validate and control the manufacturing process, that is, to show that the process works and that the product is made strictly and consistently in
compliance with that process. Slight deviations anywhere in the manufacturing process, including quality control, labeling and packaging, may result in unacceptable changes in the products that may
result in lot failures or product recalls. Manufacturing processes which are used to produce the (smaller) quantities of material needed for research and development purposes may not be successfully
scaled up to allow production of commercial quantities at reasonable cost or at all. All of these difficulties are compounded when dealing with novel biologic products that require novel manufacturing
processes. Accordingly, manufacturing is subject to extensive government regulation. Even minor changes in the manufacturing process require regulatory approval, which, in turn, may require further
clinical studies.

Specific
to our product, TOBI®, we rely on others to supply raw materials and to manufacture TOBI® according to regulatory requirements. We believe either one of
our two suppliers of bulk powdered tobramycin will be able to supply sufficient quantities to meet our current needs and we have a supply agreement in place for a minimum term of 5 years with
one of the suppliers. We also have an agreement in place for the formulation of TOBI® for a minimum term of 10 years.    There can be no assurance that we will be able
to obtain future supplies of bulk tobramycin on favorable terms, that contract manufacturers will be able to provide sufficient quantities of TOBI® or that the products supplied will meet
specifications.

In
addition, any prolonged interruption in our operations or in our contractors' manufacturing facilities could result in cancellations of shipments. A number of factors could cause
interruptions, including equipment malfunctions or failures, damage to a facility due to natural disasters or suspension of power supplied to these facilities arising out of regional power shortages.
Our difficulties or delays or those of our contractors' manufacturing of existing or new products could increase costs and cause loss of revenue or market share.

Raw Materials for Manufacturing

We use raw materials and other supplies that generally are available from multiple commercial sources. Certain manufacturing processes, however, use materials
that are available from sole sources or that are in short supply or difficult for the supplier to produce and certify in accordance with our specifications. Some of our biopharmaceutical products are
biologics. From time to time, concerns are raised with respect to potential contamination of biological materials that are supplied to us. These concerns can further tighten market conditions for
materials that may be in short supply or available from limited sources. Moreover, regulatory approvals to market our products may be conditioned upon obtaining certain materials from specified
sources. Our ability to substitute material from an alternate source may be delayed pending regulatory approval of such alternate source. Although we monitor the ability of certain suppliers to meet
our needs and the market conditions for these materials, there is a risk that material shortages could impact production.

Patents Held By Third Parties May Delay or Prevent Commercialization

Third parties, including competitors, have patents and patent applications in the U.S. and other significant markets that may be useful or necessary for the
manufacture, use or sale of certain products and products in development by us and our corporate partners. It is likely that third parties will obtain these patents in the future. Certain of these
patents may be broad enough to prevent or delay us and our corporate partners from manufacturing or marketing products important to our current and future business. We cannot accurately predict the
scope, validity and enforceability of these patents, if granted,

53

---

the extent to which we may wish or need to obtain licenses to these patents, and the cost and availability of these licenses. If we do not obtain these licenses, products may be withdrawn from the
market or delays could be encountered in market introduction while an attempt is made to design around these patents. Alternatively, we could find that the development, manufacture or sale of such
products is foreclosed. We could also incur substantial costs in licensing or challenging the validity and scope of these patents.

Product Acceptance

We may experience difficulties in launching new products, many of which are novel products based on technologies that are unfamiliar to the healthcare community.
We have no assurance that healthcare providers and patients will accept such products. In addition, government agencies, as well as private organizations involved in healthcare, from time to time
publish guidelines or recommendations to healthcare providers and patients. Such guidelines or recommendations can be very influential and may adversely affect the usage of our products directly (for
example, by recommending a decreased dosage of our product in conjunction with a concomitant therapy) or indirectly (for example, by recommending a competitive product over our product).

Competition

We operate in a highly competitive environment, and the competition is expected to increase. Competitors include large pharmaceutical, chemical and blood testing
companies, and biotechnology companies. Some of these competitors, particularly large pharmaceutical and blood testing companies, have greater resources than ours. Accordingly, even if we are
successful in launching a product, we may find that a competitive product dominates the market for any number of reasons, including:



The
technologies applied by our competitors and us are rapidly evolving, and new developments frequently result in price competition and product obsolescence.

Chiron's Patents May Not Prevent Competition or Generate Revenues

We seek to obtain patents on our inventions. Without the protection of patents, competitors may be able to use our inventions to manufacture and market competing
products without being required to undertake the lengthy and expensive development efforts made by us and without having to pay royalties or otherwise compensate us for the use of the invention.

We
have no assurance that patents and patent applications owned or licensed to us will provide substantial protection. Important legal questions remain to be resolved as to the extent
and scope of available patent protection for biotechnology products and processes in the U.S. and other important markets. We do not know how many of our pending patent applications will be granted,
or the effective coverage of those that are granted. In the U.S. and other important markets, the issuance of a patent is neither conclusive as to its validity nor the enforceable scope of its claims.
We have engaged in significant litigation to determine the scope and validity of certain of our patents and expect to continue to do so. An adverse outcome of litigation could result in the reduction
or loss of royalty revenues.

Even
if we are successful in obtaining and defending patents, there can be no assurance that these patents will provide substantial protection. The length of time necessary to resolve
patent litigation successfully may allow infringers to gain significant market advantage. Third parties may be able to design around the patents and develop competitive products that do not use the
inventions covered by our patents. Many countries, including certain countries in Europe, have compulsory licensing laws under

54

---

which a patent owner may be compelled to grant licenses to third parties (for example, the third party's product is needed to meet a threat to public health or safety in that country, or the patent
owner has failed to "work" the invention in that country, or the third party has patented improvements). In addition, most countries limit the enforceability of patents against government agencies or
government contractors. In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement, which could materially diminish the value of the patent.

Availability of Reimbursement; Government and Other Pressures on Pricing

In the U.S. and other significant markets, sales of our products may be affected by the availability of reimbursement from the government or other third parties,
such as insurance companies. It is difficult to predict the reimbursement status of newly approved, novel biotechnology products, and current reimbursement policies for existing products may change.
In certain foreign markets, governments have issued regulations relating to the pricing and profitability of pharmaceutical companies. There have been proposals in the U.S. (at both the federal and
state level) to implement such controls. The growth of managed care in the U.S. also has placed pressure on the pricing of healthcare products. These pressures can be expected to continue.

Costs Associated with Expanding the Business

We expect to grow our business in areas in which we can be most competitive, either through in-licensing, collaborations or acquisitions of products
or companies. In connection with these efforts, we may incur significant charges, costs and expenses which could impact our profitability, including impairment losses, restructuring charges, the
write-off of purchased in-process technologies, transaction-related expenses, costs associated with integrating new businesses and the cost of amortizing goodwill
and other intangibles. Some transactions may require the consent of our shareholders or a third party, or the approval by various regulatory authorities. We have no assurance that such
in-licensing, collaborations or acquisitions will be successful.

Other New Products and Sources of Revenue

Many products in our current pipeline are in relatively early stages of research or development. Our ability to grow earnings in the near- to
medium-term may depend, in part, on our ability to initiate and maintain other revenue generating relationships with third parties, such as licenses to certain of our technologies, and on
our ability to identify and successfully acquire rights to later-stage products from third parties. We have no assurance that we will establish such other sources of revenue.

Interest Rate and Foreign Currency Exchange Rate Fluctuations

We have significant cash balances and investments. Our financial results, therefore, are sensitive to interest rate fluctuations. In addition, we sell products in
many countries throughout the world, and our financial results could be significantly affected by fluctuations in foreign currency exchange rates or by weak economic conditions in foreign markets.

Corporate Partners

An important part of our business strategy depends upon collaborations with third parties, including research collaborations and joint efforts to develop and
commercialize new products. As circumstances change, Chiron and our corporate partners may develop conflicting priorities or other conflicts of interest. We may experience significant delays and incur
significant expenses in resolving these conflicts and may not be able to resolve these matters on acceptable terms. Even without conflicts of interest, we may disagree with our corporate partners as
to how best to realize the value associated with a current product or a product in development. In some cases, the corporate partner may have responsibility for formulating

55

---

and implementing key strategic or operational plans. In addition, merger and acquisition activity within the pharmaceutical and biotechnology industries may affect our corporate partners, causing
them to reprioritize their efforts related to the research collaborations and other joint efforts with us. Decisions by corporate partners on key clinical, regulatory, marketing (including pricing),
inventory management and other issues may prevent successful commercialization of the product or otherwise impact our profitability.

Stock Price Volatility

The price of our stock, like that of other pharmaceutical companies, is subject to significant volatility. Any number of events, both internal and external to us,
may affect our stock price. These include, without limitation,



In
connection with our research and development collaborations, from time to time we may invest in equity securities of our corporate partners. The price of these securities also is
subject to significant volatility and may be affected by, among other things, the types of events that affect our stock. Changes in the market price of these securities may impact our profitability.

Income Taxes

We are taxable principally in the U.S., Germany, Italy, The Netherlands and the United Kingdom. All of these jurisdictions have in the past and may in the future
make changes to their corporate tax rates and other tax laws, which could increase our future tax provision. We have negotiated a number of rulings regarding income and other taxes that are subject to
periodic review and renewal. If such rulings are not renewed or are substantially modified, income taxes payable in particular jurisdictions could increase. While we believe that all material tax
liabilities are reflected properly in our balance sheet, we are presently under audit in several jurisdictions, and we have no assurance that we will prevail in all cases in the event the taxing
authorities disagree with our interpretations of the tax law. In addition, we have assumed liabilities for all income taxes incurred prior to the sales of our former subsidiaries, Chiron Vision
(subject to certain limitations) and Chiron Diagnostics. Future levels of research and development spending, capital investment and export sales will impact our entitlement to related tax credits and
benefits which have the effect of lowering our effective tax rate.

56

---



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency RiskA significant portion of our operations consists of manufacturing and sales activities in western
European countries. As a result, our financial results may be affected by changes in the foreign currency exchange rates of those countries. Our primary exposure to foreign exchange rates is
associated with the value of the Euro. An increase in the value of the U.S. Dollar vis-à-vis the Euro will result in a lower value of our non-U.S.
Dollar based revenues. To manage foreign currency exchange risks, we enter into forward foreign currency contracts and purchase foreign currency option contracts. We do not use any of these derivative
instruments for trading or speculative purposes. The total notional principal amount of these derivative financial instruments at December 31, 2001 and 2000 was $94.8 million and
$48.8 million, respectively.

We
use forward foreign currency contracts to hedge the gains and losses generated by the remeasurement of certain assets and liabilities denominated in nonfunctional currencies.
Typically, these contracts have maturities of three months or less. At December 31, 2001, these exposures amounted to $75.1 million and were partially offset by forward foreign currency
contracts with a notional principal amount of $61.3 million (fair value of $58.7 million). The notional principal amount of the forward foreign currency contracts was
$48.8 million (fair value of $49.2 million) at December 31, 2000. Based on exposures at December 31, 2001, a 10% adverse movement against our portfolio of transaction
exposures and hedge contracts would result in a loss of approximately $1.3 million. A 10% movement in the value of the dollar versus our portfolio of transaction exposures has not occurred in
the last 12 quarters. Foreign currency transaction gains from continuing operations, including the impact of hedging, were $1.9 million and $5.5 million in 2001 and 2000, respectively,
but were not significant in 1999. In 2000, we hedged a portion of our exposure to the British pound related to Menjugate sales. We settled this forward foreign currency contract upon
substantial conclusion of Menjugate sales in the United Kingdom in the second quarter 2000. The settlement resulted in a gain of approximately $5.4 million, which we recorded in
"Other income, net" in the Consolidated Statements of Operations.

We
may selectively hedge anticipated currency exposures by purchasing foreign currency option contracts. Our primary anticipated exposures are related to foreign revenues received from
selling products in western European countries. To limit hedging costs, we generally purchase out-of-the-money foreign currency option contracts. At
December 31, 2001, exposures associated with certain Euro-denominated revenues amounted to $41.8 million and were partially offset by foreign currency option contracts with a
notional principal amount of $33.5 million (fair value of $0.8 million). Based on exposures at December 31, 2001, a 10% adverse movement against our portfolio of anticipated
transaction exposures and hedge contracts would result in a loss of approximately $2.8 million. A 10%
movement in the value of the dollar versus our portfolio of anticipated transaction exposures has not occurred in the last 12 quarters. We had no foreign currency option contracts outstanding at
December 31, 2000.

Interest Rate RiskWe have exposure to changes in interest rates in both our investment portfolio and certain floating rate
liabilities and lease commitments with interest rates tied to the London interbank offered rate. We maintain investment portfolio holdings of various issuers, types and maturities. Changes in interest
rates do not affect interest expense incurred on our Liquid Yield Option Notes because the Liquid Yield Option Notes bear interest at fixed rates.

Our
investment portfolio amounted to approximately $1,302.0 million at December 31, 2001. As of that date, we also had $172.6 million of floating rate obligations
tied to the London interbank offered rate. We have a "natural hedge" against this exposure as a result of our portfolio holdings in floating rate fixed income securities tied to the London interbank
offered rate. The analysis below focuses on the impact of changes in interest rates to us and is based on a net portfolio balance of $1,129.4 million.

The
analysis assumes an immediate parallel increase or decrease in interest rates of 150-basis points and examines the impact to us over the next twelve months. An immediate
increase in interest rates of 150-basis points results in higher interest income over the 12-month period, partially offset by an

57

---

immediate decline in the market value of securities held. The net impact of this scenario is an estimated increase in reported income of $12.3 million over the 12-month period.
Similarly, a 150-basis point decrease results in a decrease in reported income of $12.3 million. The impact on reported earnings would be greater given that unrealized changes in
the value of the portfolio are reported in comprehensive income. We currently do not hedge these exposures.

A
150-basis point movement in the Federal Funds rate has occurred in 3 of the last 10 years, a 100-basis point movement has occurred in 5 of the last
10 years, and a 50-basis point movement has occurred in 7 of the last 10 years.

Equity Securities RiskWe have exposure to equity price risk because of our investments in equity securities. Typically, we
obtain these securities through our collaboration agreements with other pharmaceutical and biotechnology partners. We classify a majority of these securities as
available-for-sale and, consequently, record them on the balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. We
periodically review the carrying values of these securities. We recognize other-than-temporary losses against earnings in the same period the loss was deemed to have occurred.
Changes in share prices affect the value of our equity portfolio. To reduce this risk, we hedged a portion of our exposure through forward sales contracts. The forward sales contracts substantially
offset the long position and, in effect, neutralize the impact of market valuation shifts on the hedged securities. The notional principal amount of our forward sales contracts at December 31,
2001 was $85.8 million (fair value of $93.9 million). The notional principal amount of our forward sales contracts at December 31, 2000 was $36.2 million (fair value of
$31.5 million). In the
future, we may use additional hedging strategies in order to mitigate the potential adverse impact from changes in the market value of stock prices. We have no assurance that
other-than-temporary losses will not have a material adverse impact on our future results of operations. We recorded charges of $1.1 million and $1.7 million in
2001 and 1999, to write down certain available-for-sale equity securities for which we deemed the decline in fair value to be other-than-temporary. We
recorded no charges in 2000. At December 31, 2001, if the market price of our equity investments, including warrants and preferred stock, decreased by 10%, the market value of the equity
portfolio would decrease by $3.4 million.

Counterparty RiskWe manage the risk of counterparty default on our debt securities and derivative financial instruments
through the use of credit standards, counterparty diversification and monitoring of counterparty financial condition. We execute debt securities and derivative financial instruments with financial
institutions and other issuers with strong credit ratings, which minimizes risk of loss due to nonpayment or deterioration in credit rating. In 2001, we recorded a charge of $1.5 million to
write-down debt securities with a face value of $5.0 million due to the decline in the credit rating of the issuer. On March 1, 2002, the issuer paid us principal plus
interest. We have not experienced any other losses due to counterparty default.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We incorporate the information required for this item by reference to the financial statements listed in Item 14(a) of Part IV of this 10-K.

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

KPMG LLP served as our independent auditors. On December 6, 2001, we determined that KPMG LLP's appointment as independent auditors would cease following
the completion of the audit of our financial statements for the fiscal year ended December 31, 2001. We engaged Ernst & Young LLP to serve as independent auditors effective for the
fiscal year commencing January 1, 2002. Our audit committee approved the decision to change auditors.

58

---

In
connection with the audits of the two fiscal years ended December 31, 2001 and the subsequent interim period through March 5, 2002, there were no disagreements with KPMG
LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements (if not resolved to KPMG LLP's satisfaction) would have
caused KPMG LLP to refer to such matters in their reports.

The
audit reports of KPMG LLP on our consolidated financial statements and consolidated financial statement schedule as of and for the fiscal years ended December 31, 2001 and
2000 did not contain any adverse opinion or disclaimer of opinion, nor were those opinions qualified or modified as to uncertainty, audit scope or accounting principles. A letter from KPMG LLP is
attached as Exhibit 16.

During
our two most recent fiscal years ended December 31, 2001 and the subsequent interim period through March 5, 2002, we did not consult with Ernst & Young LLP
regarding any of the matters or events set forth in Item 304 (a) (2) (i) and (ii) of Regulation S-K, except as follows:

We
engaged Ernst & Young LLP in July 2001 to assist us in the identification of the accounting, tax and economic impacts of a proposed leasing transaction, and to provide
overall transaction coordination services. KPMG LLP also was consulted on application of accounting principles regarding this proposed leasing transaction.

59

---

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We incorporate the information required for this item by reference to our definitive Proxy Statement for our 2002 Annual Meeting. We will file our Proxy Statement
with the Securities and Exchange Commission within 120 days of December 31, 2001. For information on directors, see the sections entitled "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. For information on our executive officers, refer to the section entitled "Executive Officers of the Registrant"
which appears at the end of Part I of this 10-K.

ITEM 11. EXECUTIVE COMPENSATION

We incorporate the information required for this item by reference to our Proxy Statement. See the section entitled "Compensation of Directors and Executive
Officers" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

We incorporate the information required for this item by reference to our Proxy Statement. See the sections entitled "Certain Beneficial Owners" and "Security
Ownership of Directors and Executive Officers" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We incorporate the information required for this item by reference to our Proxy Statement. See the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.

Except
for the information incorporated by the references in Items 10, 11, 12 and 13 of this 10-K, our definitive Proxy Statement is not deemed filed as part of this
10-K.

60

---



PART IV

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

(a)
1. Index to Consolidated Financial Statements

|                                                                                                                   |  | Page
Number
|------------------------------------------------------------------------------------------------------------------ |  | -----------
|Independent Auditors' Report                                                                                       |  | F-1        
|Consolidated Balance Sheets at December 31, 2001 and 2000                                                          |  | F-2  F-3  
|Consolidated Statements of Operations for each of the three years ended December 31, 2001, 2000 and 1999           |  | F-4  F-5  
|Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2001, 2000 and 1999 |  | F-6        
|Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2001, 2000 and 1999 |  | F-7  F-8  
|Consolidated Statements of Cash Flows for each of the three years ended December 31, 2001, 2000 and 1999           |  | F-9        
|Notes to Consolidated Financial Statements                                                                         |  | F-10  F-64

2.
Index to Financial Statement Schedules

|                                                                                                                                                                                                        |  | Page
Number
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|II    Valuation and Qualifying Accounts and Reserves                                                                                                                                                    |  | F-65       
|We omitted all other schedules because those schedules are not applicable, not required or because the required information is included in the consolidated financial statements or accompanying notes.

On
December 13, 2001, we filed a Current Report on Form 8-K, reporting under Item 4 the change in our independent auditors. On December 6, 2001, we
determined that KPMG LLP's appointment as independent auditors would cease following the completion of the audit of our financial statements for the fiscal year ended December 31, 2001. We
engaged Ernst &Young LLP to serve as independent auditors effective for the fiscal year commencing January 1, 2002.

On
January 10, 2002, we filed a Current Report on Form 8-K, reporting under Item 5 that on January 7, 2002, we announced the execution of an Agreement
and Plan of Merger dated January 6, 2002, among Chiron, Matrix Pharmaceutical, Inc., a Delaware corporation, and Manon Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Chiron. Pursuant to the Agreement, we agreed, subject to customary conditions, to make a tender offer to purchase any or all of the outstanding shares of common stock (par value $0.01
per share) of Matrix Pharmaceutical at a purchase price of $2.21 per share in cash. The Agreement further provides for the tender offer to be followed by a subsequent merger of Manon Acquisition Corp.
with and into Matrix Pharmaceutical, after which Matrix Pharmaceutical will be a wholly-owned subsidiary of Chiron.

61

---

|Exhibit
Number |  | Exhibit                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01           |  | Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on August 17, 1987, incorporated by reference to Exhibit 3.01 of Chiron's report on Form 10-K
for fiscal year 1996.                                                                                        
|3.02           |  | Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on December 12, 1991, incorporated by reference to Exhibit 3.02 of Chiron's report on Form 10-K
for fiscal year 1996.                                                          
|3.03           |  | Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04 of Chiron's report on Form 10-Q for
the period ended June 30, 1996.                                                 
|3.04           |  | Bylaws of Chiron, as amended and restated, incorporated by reference to Exhibit 3.04 to Chiron's report on Form 10-K for fiscal year 2000.                                                                                                                                                                                 
|4.01           |  | Indenture between Chiron and State Street Bank and Trust Company, dated as of June 12, 2001, incorporated by reference to Exhibit 4.01 of Chiron's report on Form 10-Q for the period ended June 30, 2001.                                                                                                                 
|4.02           |  | Registration Rights Agreement between Chiron and Merrill Lynch & Co., Inc., and Merrill Lynch, Pierce, Fenner & Smith, Incorporated, incorporated by reference to Exhibit 4.02 of Chiron's report on Form 10-Q for the period ended June
30, 2001.                                                                         
|4.03           |  | Form of Liquid Yield Option Note due 2031 (Zero CouponSenior) (included as exhibits A-1 and A-2 to the Indenture filed as Exhibit 4.01 to Chiron's report on Form 10-Q for the period ended June 30, 2001), incorporated by
reference to Exhibit 4.03 of Chiron's report on Form 10-Q for the period ended June 30, 2001.
|4.04           |  | Reserved                                                                                                                                                                                                                                                                                                                   
|10.001         |  | Purchase Agreement between BNP Leasing Corporation and Chiron, dated June 28, 1996, incorporated by reference to Exhibit 10.90 of Chiron's report on Form 10-Q for the period ended June 30, 1996.                                                                                                                         
|10.002         |  | Lease Agreement between BNP Leasing Corporation and Chiron, dated June 28, 1996, incorporated by reference to Exhibit 10.91 of Chiron's report on Form 10-Q for the period ended June 30, 1996.                                                                                                                            
|10.003         |  | Ground Lease between BNP Leasing Corporation and Chiron, dated June 28, 1996, incorporated by reference to Exhibit 10.92 of Chiron's report on Form 10-Q for the period ended June 30, 1996.                                                                                                                               
|10.004         |  | through 10.099 Reserved                                                                                                                                                                                                                                                                                                    
|10.101         |  | Revolving Credit Agreement, dated as of February 27, 1998, between Chiron and Bank of America National Trust and Savings Association, incorporated by reference to Exhibit 10.101 of Chiron's report on Form 10-K for fiscal year
1997.                                                                                    
|10.102         |  | Reserved                                                                                                                                                                                                                                                                                                                   
|10.103         |  | Reserved                                                                                                                                                                                                                                                                                                                   
|               |  |                                                                                                                                                                                                                                                                                                                            

62

---

|10.104 |  | Stock Purchase and Warrant Agreement dated May 9, 1989, between Cetus Corporation and Hoffmann-La Roche Inc. (initially filed as Exhibit 10.36 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by
reference to Exhibit 10.104 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.105 |  | Letter Agreement, dated as of December 12, 1991, relating to Stock Purchase and Warrant Agreement between Chiron and Hoffmann-La Roche Inc., incorporated by reference to Exhibit 10.51 of Chiron's report on Form 10-K for fiscal year
1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.106 |  | through 10.199 Reserved                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.201 |  | Agreement between Chiron and Ortho Diagnostic Systems, Inc., a New Jersey corporation, dated August 17, 1989, and Amendment to Collaboration Agreement between Ortho Diagnostic Systems, Inc. and Chiron, dated December 22, 1989 (with certain
confidential information deleted) (initially filed as Exhibit 10.29 to Chiron's report on Form 10-K for fiscal year 1989, and refiled as Exhibit 10.14 of Chiron's report on Form 10-Q for the period ended September 30, 1994),
incorporated by reference to Exhibit 10.201 of Chiron's report on Form 10-Q for the period ended March 31, 1999.                                                                                                                                                                                                                       
|10.202 |  | License and Supply Agreement between Ortho Diagnostic Systems, Inc., a New Jersey corporation, Chiron and Abbott Laboratories, an Illinois corporation, dated August 17, 1989 (with certain confidential information deleted) (initially filed as
Exhibit 10.31 to Chiron's report on Form 10-K for fiscal year 1989, and refiled as Exhibit 10.15 of Chiron's report on Form 10-Q for the quarter ended June 30, 1994), incorporated by reference to Exhibit 10.202 of Chiron's
report on Form 10-Q for the period ended March 31, 1999.                                                                                                                                                                                                                                                                               
|10.203 |  | Regulatory Filing, Development and Supply Agreement between Chiron, Cetus Oncology Corporation, a wholly-owned subsidiary of Chiron, and Schering AG, a German company, dated as of May 10, 1993 (initially filed as Exhibit 10.50 to Chiron's report
on Form 10-Q for period ended September 30, 1993), incorporated by reference to Exhibit 10.203 of Chiron's report on Form 10-K for fiscal year 1998. (We have omitted certain information from the Agreement and filed it separately with
the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential portions of material have been omitted and
filed separately with the Securities and Exchange Commission.")
|10.204 |  | Letter Agreement dated December 30, 1993 by and between Chiron and Schering AG, a German company (initially filed as Exhibit 10.51 to Chiron's report on Form 10-K for fiscal year 1993), incorporated by reference to Exhibit 10.204 of
Chiron's report on Form 10-K for fiscal year 1998. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2.
We have identified the omitted confidential information by the following statement: "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission.")                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

63

---

|10.205 |  | Amendment Agreement (HDS Fees and Deeply Discounted Vials) dated as of September 23, 1997 between Chiron and Schering Aktiengesellschaft, incorporated by reference to Exhibit 10.205 of Chiron's report on Form 10-K for fiscal year 1997. (We
have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by
the following statement: "Confidential Treatment Requested.")                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.206 |  | Agreement between Chiron and Cephalon, Inc. dated as of January 7, 1994, and Letter Agreements between Chiron and Cephalon dated January 13, 1995 and May 23, 1995 (initially filed as Exhibit 10.85 to Chiron's report on Form 10-K for fiscal
year 1995), incorporated by reference to Exhibit 10.206 of Chiron's report on Form 10-Q for period ended March 31, 1999. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange
Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
|10.207 |  | Letter Agreement dated as of December 4, 1997, between Chiron and Ortho Pharmaceutical Corporation and Ortho Biotech, Inc., incorporated by reference to Exhibit 10.207 of Chiron's report on Form 10-K for fiscal year 1997. (We have omitted
certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following
statement: "Confidential Treatment Requested.")                                                                                                                                           
|10.208 |  | Contract Manufacturing Agreement dated as of March 17, 2000, between Chiron S.p.A. and SynCo Bio Partners B.V., incorporated by reference to Exhibit 10.208 of Chiron's report on Form 10-Q for the period ended June 30, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.209 |  | Second Amendment Agreement dated as of June 15, 2001, between Chiron and Schering Aktiengesellschaft, incorporated by reference to Exhibit 10.209 of Chiron's report on Form 10-Q for the period ended June 30, 2001. (We have omitted certain
information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following
statement: "Confidential Treatment Requested.")                                                                                                                                                   
|10.210 |  | Contract Manufacturing Agreement dated as of July 26, 2001, between Chiron S.p.A. and SynCo Bio Partners B.V., incorporated by reference to Exhibit 10.210 of Chiron's report on Form 10-Q for the period ended September 30, 2001. (We have omitted
certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following
statement: "Confidential Treatment Requested.")                                                                                                                                     
|10.211 |  | Through 10.299 Reserved                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.301 |  | Settlement Agreement on Purified IL-2, made as of April 14, 1995, by and between Cetus Oncology Corporation, dba Chiron Therapeutics, a Delaware corporation, and Takeda Chemical Industries, Ltd., a Japanese corporation, incorporated by reference to
Exhibit 10.74 of Chiron's report on Form 10-Q for the period ended July 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

64

---

|10.302 |  | Agreement, effective as of December 21, 1988, by and between Hoffmann- La Roche Inc., a New Jersey corporation, and Cetus Corporation, incorporated by reference to Exhibit 10.70 of Chiron's report on Form 10-Q for the period ended April 2,
1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)                                                                                                                                                                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.303 |  | Agreement, effective as of December 21, 1988, by and among F. Hoffmann- La Roche Ltd., a Swiss corporation, Cetus Corporation, and EuroCetus International, B.V., a Netherlands Antilles corporation, incorporated by reference to Exhibit 10.71 of
Chiron's report on Form 10-Q for the period ended April 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)                                                                                                                                
|10.304 |  | License Agreement made and entered into December 1, 1987, by and between Sloan Kettering Institute for Cancer Research, a not-for-profit New York corporation, and Cetus Corporation, incorporated by reference to Exhibit 10.75 of Chiron's report
on Form 10-Q for the period ended July 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)                                                                                                                                                 
|10.305 |  | Cross-License Agreement dated as of November 30, 1998, between Chiron and Chiron Diagnostics Corporation, incorporated by reference to Exhibit 10.311 of Chiron's current report on Form 8-K dated November 30, 1998. (We have omitted certain
information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following
statement: "Confidential Treatment Requested.")                                   
|10.306 |  | HCV Probe License and Option Agreement dated September 26, 1999, between Abbott Laboratories, an Illinois corporation, and Chiron, incorporated by reference to Exhibit 10.306 of Chiron's report on Form 10-Q for the period ended September 30,
 1999. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential
information by the following statement: "Confidential Treatment Requested.")
|10.307 |  | HCV Probe License Agreement dated October 10, 2000, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.307 of Chiron's report on Form 10-Q for the period ended September 30,
2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential
information by the following statement: "Confidential Treatment Requested.")   
|10.308 |  | HIV Probe License Agreement dated October 10, 2000, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.308 of Chiron's report on Form 10-Q for the period ended September 30,
2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential
information by the following statement: "Confidential Treatment Requested.")   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

65

---

|10.309 |  | Blood Screening HCV/HIV Probe License Agreement dated October 10, 2000, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.309 of Chiron's report on Form 10-Q for the period
ended September 30, 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted
confidential information by the following statement: "Confidential Treatment Requested.")                                                                                                                                                                        
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.310 |  | License Agreement dated January 1, 1994, between Children's Hospital and Medical Center and PathoGenesis Corporation, initially filed as Exhibit 10.13 to PathoGenesis Corporation's Registration Statement on Form S-1 Registration No.
33-97070. (PathoGenesis Corporation omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to a request by PathoGenesis Corporation for confidential treatment under Rule 24b-2.
Brackets denote such omissions.)                                                                                                                                                                                                                                            
|10.311 |  | Agreement with Gen-Probe Incorporated dated June 11, 1998, incorporated by reference to Exhibit 10.311 of Chiron's Form 10-K for fiscal year 2000. (We have omitted certain information from the Agreement and filed it separately with the
Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.") (We have omitted certain
information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement: "Provision Assigned.")                
|10.312 |  | Addendum to Agreement with Gen-Probe Incorporated dated June 11, 1998, incorporated by reference to Exhibit 10.312 of Chiron's Form 10-K for fiscal year 2000. (We have omitted certain information from the Agreement and filed it separately
with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.") (We have omitted
certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement: "Provision
Assigned.")    
|10.313 |  | Amendment to Agreement with Gen-Probe Incorporated dated December 7, 1999, incorporated by reference to Exhibit 10.313 of Chiron's Form 10-K for fiscal year 2000. (We have omitted certain information from the Agreement and filed it
separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.") (We
have omitted certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement:
"Provision Assigned.")
|10.314 |  | Amendment No. 2 to Agreement with Gen-Probe Incorporated dated February 1, 2000. (We have omitted certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution
of Agreement. We have identified the omitted information by the following statement: "Provision Assigned.")                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

66

---

|10.315 |  | Blood Screening HCV Probe License Agreement dated effective as of January 1, 2001, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.315 of Chiron's report on Form 10-Q for
the period ended June 30, 2001. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the
omitted confidential information by the following statement: "Confidential Treatment Requested.")
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.316 |  | Blood Screening HIV Probe License Agreement dated effective as of January 1, 2001, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.315 of Chiron's report on Form 10-Q for
the period ended June 30, 2001. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the
omitted confidential information by the following statement: "Confidential Treatment Requested.")
|10.317 |  | Through 10.399 Reserved                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.401 |  | Stock Purchase Agreement, dated as of October 21, 1997, between Bausch & Lomb Incorporated and Chiron, incorporated by reference to Exhibit 99.1 of Chiron's current report on Form 8-K dated January 12, 1998.                                                                                                                                                                                                                                                                                                                                                                                          
|10.402 |  | Stock Purchase Agreement, dated as of September 17, 1998, among Bayer Corporation, Chiron and Chiron Diagnostics Corporation, and Exhibits thereto, incorporated by reference to Exhibit 10.402 of Chiron's report on Form 10-Q for the period
ended September 27, 1998. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted
confidential information by the following statement: "Confidential Treatment Requested.")       
|10.403 |  | Asset Transfer Agreement dated November 30, 1998, among Chiron, Chiron Diagnostics Corporation and Bayer Corporation, incorporated by reference to Exhibit 10.403 of Chiron's current report on Form 8-K dated November 30, 1998.                                                                                                                                                                                                                                                                                                                                                                        
|10.404 |  | Agreement and Plan of Merger, dated as of January 6, 2002, among Chiron, Manon Acquisition Corp. and Matrix Pharmaceutical, Inc., incorporated by reference to Exhibit (d)(1) of Chiron's Schedule TO-T No. 00542277, filed with the Securities
and Exchange Commission on January 14, 2002.                                                                                                                                                                                                                                                                                                             
|10.405 |  | Through 10.499 Reserved                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.501 |  | Chiron 1991 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 10.501 of Chiron's report on Form 10-Q for the period ended March 31, 2001.*                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.502 |  | Form of Stock Option Agreement, and Addendum to Stock Option Agreement (Executives), Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.503 |  | Form of Stock Option Agreement, Chiron 1991 Stock Option Plan, as amended, for Non-Employee Directors of Chiron, incorporated by reference to Exhibit 10.511 of Chiron's report on Form 10-Q for the period ended September 27,
1998.*                                                                                                                                                                                                                                                                                                                                                                   
|10.504 |  | Form of Automatic Share Right Agreement for Executive Officers, Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

67

---

|10.505 |  | Forms of Option Agreements, Cetus Corporation Amended and Restated Common Stock Option Plan, incorporated by reference to Exhibit 10.27 of Chiron's report on Form 10-Q for the period ended March 30, 1997.*                                                                                                                                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.506 |  | Forms of Supplemental Letter concerning the assumption of Cetus Corporation options by Chiron, incorporated by reference to Exhibit 10.27 of Chiron's report on Form 10-K for fiscal year 1996.*                                                                                                                                                                                                                                                                           
|10.507 |  | Form of Option Agreement (with Purchase Agreements attached thereto) between Cetus Corporation and each former limited partner of Cetus Healthcare Limited Partnership, a California limited partnership (initially filed as Exhibit 10.31 of
Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.507 of Chiron's report on Form 10-Q for the period ended June 30, 1999.*                                      
|10.508 |  | Form of Option Agreement (with forms of Purchase Agreements attached thereto), dated December 30, 1986, between Cetus Corporation and each former limited partner of Cetus Healthcare Limited Partnership II, a California limited partnership
(initially filed as Exhibit 10.32 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.508 of Chiron's report on Form 10-Q for the period ended June 30,
1999.*
|10.509 |  | Description of Chiron Corporation's 2001 Executive Officers Variable Compensation Program.*                                                                                                                                                                                                                                                                                                                                                                                
|10.510 |  | Form of Performance Unit Agreement, Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.94 of Chiron's report on Form 10-K for fiscal year 1996.*                                                                                                                                                                                                                                                                                           
|10.511 |  | Audit Committee Charter, incorporated by reference to Exhibit 10.511 of Chiron's report on Form 10-Q for the period ended June 30, 2000.                                                                                                                                                                                                                                                                                                                                   
|10.512 |  | Change-in-Control Severance Plan, incorporated by reference to Exhibit 10.512 to Chiron's report on Form 10-Q for the period ended March 31, 2001.*                                                                                                                                                                                                                                                                                                                        
|10.513 |  | Form of Performance Stock Option Agreement for Executive Officers, Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                                                             
|10.514 |  | Form of Amendment Letter to Share Rights Letter Agreement for Executive Officers, Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                                              
|10.515 |  | Form of Amendment Letter to Stock Option Agreement (Special Executive Form) for Executive Officers, Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                            
|10.516 |  | Through 10.599 Reserved.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.601 |  | Indemnification Agreement between Chiron and Dr. William J. Rutter, dated as of February 12, 1987 (which form of agreement is used for each member of Chiron's Board of Directors) (initially filed as Exhibit 10.21 of Chiron's report on
Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.601 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                                             
|10.602 |  | Supplemental Benefits Agreement, dated July 21, 1989, between Chiron and Dr. William J. Rutter (initially filed as Exhibit 10.27 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference
to Exhibit 10.602 of Chiron's report on Form 10-Q for the period ended June 30, 1999.*                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

68

---

|10.603 |  | Letter Agreement dated September 26, 1990 between Chiron and William G. Green (initially filed as Exhibit 10.41 of Chiron's report on Form 10-K for fiscal year 1992), incorporated by reference to Exhibit 10.603 of Chiron's report on
Form 10-K for fiscal year 1998.*                                                                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.604 |  | Letter Agreements dated September 11, 1992, July 15, 1994 and September 14, 1994 between Chiron and Lewis T. Williams (initially filed as Exhibit 10.54 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated
by reference to Exhibit 10.604 of Chiron's report on Form 10-Q for the period ended June 30, 1999.*
|10.605 |  | Letter Agreement dated January 27, 1998, between Chiron and Lewis T. Williams, incorporated by reference to Exhibit 10.605 of Chiron's report on Form 10-K for fiscal year 1997.*                                                                                                                                                                 
|10.606 |  | Letter Agreement dated December 18, 2001, between Chiron and Lewis T. Williams.*                                                                                                                                                                                                                                                                  
|10.607 |  | Through 10.610 Reserved                                                                                                                                                                                                                                                                                                                           
|10.611 |  | Letter Agreement dated March 18, 1998 between Chiron and Séan P. Lance, incorporated by reference to Exhibit 10.611 of Chiron's report on Form 10-K for fiscal year 1997.*                                                                                                                                                                        
|10.612 |  | Amended and Restated Promissory Note dated as of August 7, 1998, executed by Séan P. Lance for the benefit of Chiron, incorporated by reference to Exhibit 10.612 of Chiron's report on Form 10-K for fiscal year 1998.*                                                                                                                          
|10.613 |  | Letter Agreement dated March 19, 1998 between Chiron and James R. Sulat, incorporated by reference to Exhibit 10.612 of Chiron's report on Form 10-K for fiscal year 1997.*                                                                                                                                                                       
|10.614 |  | Letter Agreement dated February 20, 2001 between Chiron and Lewis T. Williams, incorporated by reference to Exhibit 10.614 of Chiron's report on Form 10-K for fiscal year 2000.*                                                                                                                                                                 
|10.615 |  | Consulting Agreement dated February 25, 2000, between Chiron and Dr. Edward E. Penhoet, incorporated by reference to Exhibit 10.615 of Chiron's report on Form 10-K for fiscal year 1999.*                                                                                                                                                        
|10.616 |  | Consulting Agreement dated February 25, 2000, between Chiron and Dr. William J. Rutter, incorporated by reference to Exhibit 10.616 of Chiron's report on Form 10-K for fiscal year 1999.*                                                                                                                                                        
|10.617 |  | Letter Agreement dated May 28, 1999 between Chiron and Peder K. Jensen, as supplemented by Promissory Notes dated as of September 21, 1999, executed by Peder K. Jensen and Isabel J. Jensen, for the benefit of Chiron, incorporated by reference to
Exhibit 10.617 of Chiron's report on Form 10-Q for the period ended June 30, 2000.*         
|10.618 |  | Amendment dated February 14, 2001 to Consulting Agreement dated February 25, 2000, between Chiron and Dr. William J. Rutter, incorporated by reference to Exhibit 10.618 of Chiron's report on Form 10-K for fiscal year 2000.*                                                                                                                   
|10.619 |  | Amendment dated March 1, 2002 to Consulting Agreement dated February 25, 2000, between Chiron and Dr. William J. Rutter.*                                                                                                                                                                                                                         
|10.620 |  | Through 10.699 Reserved                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                   

69

---

|10.701 |  | Investment Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.54 of Chiron's current report on Form 8-K dated
November 20, 1994), incorporated by reference to Exhibit 10.701 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                          
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.702 |  | Governance Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation and Chiron Corporation (initially filed as Exhibit 10.55 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by
reference to Exhibit 10.702 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                                                          
|10.703 |  | Subscription Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.56 of Chiron's current report on Form 8-K dated
November 20, 1994), incorporated by reference to Exhibit 10.703 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                        
|10.704 |  | Cooperation and Collaboration Agreement dated as of November 20, 1994, between Ciba-Geigy Limited and Chiron Corporation (initially filed as Exhibit 10.57 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference
to Exhibit 10.704 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                                                            
|10.705 |  | Registration Rights Agreement dated as of November 20, 1994 between Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.58 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by
reference to Exhibit 10.705 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                                                           
|10.706 |  | Market Price Option Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.59 of Chiron's current report on Form 8-K
dated November 20, 1994), incorporated by reference to Exhibit 10.706 of Chiron's report on Form 10-Q for the period ended June 30, 1999.                                 
|10.707 |  | Amendment dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.60 of Chiron's current report on Form 8-K dated January 4, 1995),
incorporated by reference to Exhibit 10.707 of Chiron's report on Form 10-Q for the period ended September 30, 1999.                                                    
|10.708 |  | Supplemental Agreement dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.61 of Chiron's current report on Form 8-K dated
January 4, 1995), incorporated by reference to Exhibit 10.708 of Chiron's report on Form 10-Q for the period ended September 30, 1999.                                       
|10.709 |  | Amendment with Respect to Employee Stock Option Arrangements dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.62 of Chiron's
current report on Form 8-K dated January 4, 1995), incorporated by reference to Exhibit 10.709 of Chiron's report on Form 10-Q for the period ended September 30, 1999.*
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                        

70

---

|10.710 |  | Agreement, dated November 27, 1996, between Ciba-Geigy Limited and Chiron, incorporated by reference to Exhibit 10.92 of Chiron's current report on Form 8-K filed with the Commission on December 17, 1996.                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.711 |  | Amendment dated March 26, 1997 to Agreement dated November 27, 1996, between Novartis Pharma AG and Chiron, incorporated by reference to Exhibit 10.44 of Chiron's report on Form 10-Q for the period ended March 30, 1997.                                                                                                                                                                                                                                                                                                                                                                                                  
|10.712 |  | Letter Agreement dated December 19, 1997, between Novartis Pharma AG and Chiron, incorporated by reference to Exhibit 10.712 of Chiron's report on Form 10-K for fiscal year 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.713 |  | Letter Agreement dated December 24, 1997, between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.713 of Chiron's report on Form 10-K for fiscal year 1997. (We have omitted certain information from the Agreement and
filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment
Requested.")                                                                                                               
|10.714 |  | Letter Agreement, dated May 6, 1996, as to consent to assignment of contracts to Novartis Limited, among the Registrant, Ciba-Geigy Limited, Ciba-Geigy Corporation and Ciba Biotech Partnership, Inc., incorporated by reference to Exhibit 10.43 of
Chiron's report on Form 10-K for fiscal year 1996.                                                                                                                                                                                                                                                                                                                     
|10.715 |  | Letter Agreement, dated December 19, 1996, regarding compensation paid by Chiron for director services performed by employees of Ciba-Geigy Limited, incorporated by reference to Exhibit 10.44 of Chiron's report on Form 10-K for fiscal year
1996.*                                                                                                                                                                                                                                                                                                                                                                       
|10.716 |  | Letter Agreement dated September 30, 1999, between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.716 of Chiron's report on Form 10-Q for the period ended September 30, 1999. (We have omitted certain information
from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement:
"Confidential Treatment Requested.")                                                                                           
|10.717 |  | Chiron Funding L.L.C. Limited Liability Company Agreement, entered into and effective as of December 28, 1995, among Chiron, Chiron Biocine Company and Biocine S.p.A. and Ciba-Geigy Corporation, incorporated by reference to Exhibit 10.80 of
Chiron's report on Form 10-K for fiscal year 1995. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2.
We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
|10.718 |  | Agreement between Ciba-Geigy Limited and Chiron made November 15, 1995, incorporated by reference to Exhibit 10.81 of Chiron's report on Form 10-K for fiscal year 1995. (We have omitted certain information from the Agreement and filed it
separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

71

---

|10.719 |  | Reimbursement Agreement dated as of March 24, 1995, between Ciba-Geigy Limited, a Swiss corporation, and Chiron, incorporated by reference to Exhibit 10.76 of Chiron's report on Form 10-Q for the period ended July 2, 1995. 
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.720 |  | Reimbursement Agreement, dated as of June 28, 1996, between Ciba-Geigy Limited, a Swiss corporation, and Chiron, incorporated by reference to Exhibit 10.94 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
|10.721 |  | Reimbursement Agreement, dated as of July 12, 1996, between Ciba-Geigy Limited, a Swiss corporation, and Chiron, incorporated by reference to Exhibit 10.93 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
|10.722 |  | Letter Agreement dated December 31, 1999 between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.44 of Chiron's report on Form 10-K for fiscal year 1999.*                                            
|10.723 |  | Letter Agreement dated December 7, 2000, between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.723 of Chiron's report on Form 10-K for fiscal year 2000.                                            
|10.724 |  | Through 10.799 Reserved                                                                                                                                                                                                        
|10.801 |  | Through 10.899 Reserved                                                                                                                                                                                                        
|16     |  | Letter of KPMG LLP to the Registrant regarding change in certifying accountant dated March 5, 2002.                                                                                                                            
|21     |  | List of Chiron's Subsidiaries.                                                                                                                                                                                                 
|23.1   |  | Consent of KPMG LLP, Independent Auditors.                                                                                                                                                                                     
|24     |  | Power of Attorney. We incorporate the Power of Attorney on pages 73 and 74 by reference.                                                                                                                                       

---

72

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                    |  | CHIRON CORPORATION
|------------------- |  | ------------------
|Date: March 5, 2002 |  | By:               

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

That the undersigned officers and directors of Chiron Corporation, a Delaware corporation, do hereby constitute and appoint Seán P. Lance and James
R. Sulat, and each of them, the lawful attorney and agent or attorneys and agents, with full power and authority to do any and all acts and things and to execute any and all instruments which said
attorneys and agents, and any one of them, determine may be necessary or advisable or required to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in connection with this Form 10-K Report. Without limiting the generality of the foregoing power and
authority, the powers granted include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Form 10-K report
or
amendments or supplements thereto, and each of the undersigned hereby ratifies and confirms all that said attorneys and agents or either of them, shall do or cause to be done by virtue hereof. This
Power of Attorney may be signed in several counterparts.

IN
WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his name.

Pursuant
to the requirements of the Securities Exchange Act of 1934, the 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/SÉAN P. LANCESéan P. Lance                       |  | Chief Executive Officer and President; Chairman of the Board; Director (Principal Executive Officer) |  | March 5, 2002
|/s/JAMES R. SULATJames R. Sulat                     |  | Vice President; Chief Financial Officer (Principal Financial Officer)                                |  | March 5, 2002
|/s/DAVID V. SMITHDavid V. Smith                     |  | Vice President, Finance and Principal Accounting Officer                                             |  | March 5, 2002
|/s/WILLIAM J. RUTTER, PH.D.William J. Rutter, Ph.D. |  | Director                                                                                             |  | March 5, 2002
|                                                    |  |                                                                                                      |  |              

73

---

|/s/RAYMUND BREU, PH.D.Raymund Breu, Ph.D.               |  | Director |  | March 5, 2002
|------------------------------------------------------- |  | -------- |  | -------------
|/s/VAUGHN D. BRYSONVaughn D. Bryson                     |  | Director |  | March 5, 2002
|/s/LEWIS W. COLEMANLewis W. Coleman                     |  | Director |  | March 5, 2002
|/s/PIERRE E. DOUAZEPierre E. Douaze                     |  | Director |  | March 5, 2002
|/s/PAUL L. HERRLING, PH.D.Paul L. Herrling, Ph.D.       |  | Director |  | March 5, 2002
|/s/EDWARD E. PENHOET, PH.D.Edward E. Penhoet, Ph.D.     |  | Director |  | March 5, 2002
|/s/JACK W. SCHULERJack W. Schuler                       |  | Director |  | March 5, 2002
|/s/PIETER J. STRIJKERT, PH.D.Pieter J. Strijkert, Ph.D. |  | Director |  | March 5, 2002

74

---

INDEPENDENT AUDITORS' REPORT

The
Board of Directors and Stockholders
Chiron Corporation:

We
have audited the accompanying consolidated balance sheets of Chiron Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule
based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chiron Corporation and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/
KPMG LLP

San
Francisco, California
January 28, 2002

F-1

---



CHIRON CORPORATION  CONSOLIDATED BALANCE SHEETS  (In thousands, except share data)

ASSETS

|                                                                                                |                                                                                | December 31,                                               |                                      
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------------------- | -------------------------------------
|
|Current assets:                                                                                 |                                                                                |                                                            |                                      
|                                                                                                | Cash and cash equivalents                                                      |                                                            | $                                    
|                                                                                                | Short-term investments in marketable debt securities                           |                                                            |                                      
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            | Total cash and short-term investments
|                                                                                                | Accounts receivable, net of allowances of $18,772 in 2001 and $14,576 in 2000: |                                                            |                                      
|                                                                                                |                                                                                | Unrelated parties                                          |                                      
|                                                                                                |                                                                                | Related parties                                            |                                      
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            | 225,229                              
|                                                                                                | Current portion of notes receivable                                            |                                                            |                                      
|                                                                                                | Inventories                                                                    |                                                            |                                      
|                                                                                                | Current net deferred income tax asset                                          |                                                            |                                      
|                                                                                                | Derivative financial instruments                                               |                                                            |                                      
|                                                                                                | Other current assets:                                                          |                                                            |                                      
|                                                                                                |                                                                                | Unrelated parties                                          |                                      
|                                                                                                |                                                                                | Related parties                                            |                                      
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            | 35,349                               
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            | Total current assets                 
|Noncurrent investments in marketable debt securities                                            |                                                                                |                                                            | 524,858                              
|Property, plant, equipment and leasehold improvements, at cost:                                 |                                                                                |                                                            |                                      
|                                                                                                | Land and buildings                                                             |                                                            |                                      
|                                                                                                | Laboratory, production and office equipment                                    |                                                            |                                      
|                                                                                                | Leasehold improvements                                                         |                                                            |                                      
|                                                                                                | Construction-in-progress                                                       |                                                            |                                      
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            | 621,945                              
|                                                                                                | Less accumulated depreciation and amortization                                 |                                                            |                                      
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                | Property, plant, equipment and leasehold improvements, net |                                      
|Purchased technologies, net of accumulated amortization of $51,887 in 2001 and $29,941 in 2000  |                                                                                |                                                            | 279,298                              
|Goodwill, net of accumulated amortization of $27,373 in 2001 and $3,515 in 2000                 |                                                                                |                                                            | 224,742                              
|Other intangible assets, net of accumulated amortization of $81,554 in 2001 and $69,519 in 2000 |                                                                                |                                                            | 155,086                              
|Investments in equity securities and affiliated companies                                       |                                                                                |                                                            | 146,984                              
|Noncurrent notes receivable                                                                     |                                                                                |                                                            | 9,706                                
|Other noncurrent assets:                                                                        |                                                                                |                                                            |                                      
|                                                                                                | Unrelated parties                                                              |                                                            |                                      
|                                                                                                | Related parties                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                |                                                            | 30,700                               
|                                                                                                |                                                                                |                                                            |                                      
|                                                                                                |                                                                                | $                                                          | 2,873,452                            
|                                                                                                |                                                                                |                                                            |                                      

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-2

---

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                             |                                                                                                        | December 31,      |                           
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------- | --------------------------
|
|Current liabilities:                         |                                                                                                        |                   |                           
|                                             | Accounts payable:                                                                                      |                   |                           
|                                             |                                                                                                        | Unrelated parties |                           
|                                             |                                                                                                        | Related parties   |                           
|                                             |                                                                                                        |                   |                           
|                                             |                                                                                                        |                   | 56,773                    
|                                             | Accrued compensation and related expenses                                                              |                   |                           
|                                             | Derivative financial instruments                                                                       |                   |                           
|                                             | Short-term borrowings                                                                                  |                   |                           
|                                             | Current portion of long-term debt                                                                      |                   |                           
|                                             | Current portion of unearned revenue                                                                    |                   |                           
|                                             | Income taxes payable                                                                                   |                   |                           
|                                             | Other current liabilities:                                                                             |                   |                           
|                                             |                                                                                                        | Unrelated parties |                           
|                                             |                                                                                                        | Related parties   |                           
|                                             |                                                                                                        |                   |                           
|                                             |                                                                                                        |                   | 111,766                   
|                                             |                                                                                                        |                   |                           
|                                             |                                                                                                        |                   | Total current liabilities 
|Long-term debt                               |                                                                                                        |                   | 408,917                   
|Noncurrent derivative financial instruments  |                                                                                                        |                   | 7,646                     
|Noncurrent net deferred income tax liability |                                                                                                        |                   | 58,944                    
|Noncurrent unearned revenue                  |                                                                                                        |                   | 74,371                    
|Other noncurrent liabilities                 |                                                                                                        |                   | 42,652                    
|Minority interest                            |                                                                                                        |                   | 3,894                     
|                                             |                                                                                                        |                   |                           
|                                             |                                                                                                        |                   | Total liabilities         
|                                             |                                                                                                        |                   |                           
|Commitments and contingencies (Note 12)      |                                                                                                        |                   |                           
|Put options                                  |                                                                                                        |                   | 13,764                    
|Stockholders' equity:                        |                                                                                                        |                   |                           
|                                             | Preferred stock, $0.01 par value; 5,000,000 shares authorized; none outstanding                        |                   |                           
|                                             | Common stock, $0.01 par value; 499,500,000 shares authorized; 191,682,000 outstanding in 2001 and 2000 |                   |                           
|                                             | Restricted common stock, $0.01 par value; 500,000 shares authorized; none outstanding                  |                   |                           
|                                             | Additional paid-in capital                                                                             |                   |                           
|                                             | Deferred stock compensation                                                                            |                   |                           
|                                             | Accumulated deficit                                                                                    |                   |                           
|                                             | Accumulated other comprehensive income (loss)                                                          |                   |                           
|                                             | Treasury stock, at cost (2,341,000 shares in 2001 and 2,183,000 shares in 2000)                        |                   |                           
|                                             |                                                                                                        |                   |                           
|                                             |                                                                                                        |                   | Total stockholders' equity
|                                             |                                                                                                        |                   |                           
|                                             |                                                                                                        | $                 | 2,873,452                 
|                                             |                                                                                                        |                   |                           

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-3

---



CHIRON CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share data)

|                       |                                                                      | Year Ended December 31,
|---------------------- | -------------------------------------------------------------------- | -----------------------
|
|Revenues:              |                                                                      |                        
|                       | Product sales, net:                                                  |                        
|                       |                                                                      | Unrelated parties      
|                       |                                                                      | Related parties        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       | Equity in earnings of unconsolidated joint businesses                |                        
|                       | Collaborative agreement revenues:                                    |                        
|                       |                                                                      | Unrelated parties      
|                       |                                                                      | Related parties        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       | Royalty and license fee revenues                                     |                        
|                       | Other revenues                                                       |                        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       |                                                                      |                        
|Operating expenses:    |                                                                      |                        
|                       | Cost of sales:                                                       |                        
|                       |                                                                      | Unrelated parties      
|                       |                                                                      | Related parties        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       | Research and development:                                            |                        
|                       |                                                                      | Unrelated parties      
|                       |                                                                      | Related parties        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       | Selling, general and administrative:                                 |                        
|                       |                                                                      | Unrelated parties      
|                       |                                                                      | Related parties        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       | Write-off of purchased in-process technologies                       |                        
|                       | Amortization expense                                                 |                        
|                       | Restructuring and reorganization charges (charge reversals) (Note 6) |                        
|                       | Other operating expenses                                             |                        
|                       |                                                                      |                        
|                       |                                                                      |                        
|                       |                                                                      |                        
|Income from operations |                                                                      |                        

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-4

---

CHIRON CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)  (In thousands, except per share data)

|                                                            |                                   | Year Ended December 31, |        
|----------------------------------------------------------- | --------------------------------- | ----------------------- | -------
|
|Income from operations                                      |                                   | $                       | 200,111
|Gain (loss) on sale of assets                               |                                   |                         | 2,426  
|Gain on sale of intangible assets                           |                                   |                         |       
|Interest expense:                                           |                                   |                         |        
|                                                            | Unrelated parties                 |                         |        
|                                                            | Related parties                   |                         |        
|                                                            |                                   |                         |        
|                                                            |                                   |                         | (7,507 
|Other income, net:                                          |                                   |                         |        
|                                                            | Unrelated parties                 |                         |        
|                                                            | Related parties                   |                         |        
|                                                            |                                   |                         |        
|                                                            |                                   |                         | 60,914 
|Minority interest                                           |                                   |                         | (1,194 
|                                                            |                                   |                         |        
|Income from continuing operations before income taxes       |                                   |                         | 254,750
|Provision for income taxes                                  |                                   |                         | 79,992 
|                                                            |                                   |                         |        
|Income from continuing operations                           |                                   |                         | 174,758
|                                                            |                                   |                         |        
|Gain (loss) on disposal of discontinued operations (Note 4) |                                   |                         | 5,278  
|                                                            |                                   |                         |        
|Net income                                                  |                                   | $                       | 180,036
|                                                            |                                   |                         |        
|Basic earnings per share (Note 2):                          |                                   |                         |        
|                                                            | Income from continuing operations |                         | $      
|                                                            |                                   |                         |        
|                                                            | Net income                        |                         | $      
|                                                            |                                   |                         |        
|Diluted earnings per share (Note 2):                        |                                   |                         |        
|                                                            | Income from continuing operations |                         | $      
|                                                            |                                   |                         |        
|                                                            | Net income                        |                         | $      
|                                                            |                                   |                         |        

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-5

---



CHIRON CORPORATION  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (In thousands)

|                                                                                                                               |                                                                                                                                                                         | Year Ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------
|
|Net income                                                                                                                     |                                                                                                                                                                         | $                       | 180,036
|Other comprehensive income (loss):                                                                                             |                                                                                                                                                                         |                         |        
|                                                                                                                               | Change in foreign currency translation adjustment during the period, net of tax benefit of $5,510 and $1,715 in 2001 and 2000, respectively                             |                         |        
|Unrealized gains (losses) from investments:                                                                                    |                                                                                                                                                                         |                         |        
|                                                                                                                               | Net unrealized holding gains (losses) arising during the period, net of tax benefit (provision) of $7,045, $(31,849) and $(11,517) in 2001, 2000 and 1999, respectively |                         |        
|                                                                                                                               | Reclassification adjustment for net gains included in net income, net of tax provision of $3,239, $594 and $62 in 2001, 2000 and 1999, respectively                     |                         |        
|                                                                                                                               |                                                                                                                                                                         |                         |        
|                                                                                                                               | Net unrealized gains (losses) from investments                                                                                                                          |                         |        
|                                                                                                                               |                                                                                                                                                                         |                         |        
|Minimum pension liability adjustment, net of tax benefit (provision) of $(73), $7 and $55 in 2001, 2000 and 1999, respectively |                                                                                                                                                                         |                         | (261   
|                                                                                                                               |                                                                                                                                                                         |                         |        
|Other comprehensive income (loss)                                                                                              |                                                                                                                                                                         |                         | (38,783
|                                                                                                                               |                                                                                                                                                                         |                         |        
|Comprehensive income                                                                                                           |                                                                                                                                                                         | $                       | 141,253
|                                                                                                                               |                                                                                                                                                                         |                         |        

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-6

---



CHIRON CORPORATION  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  (In thousands)

|                                                          |  | Common Stock |  |   |       |  |   |           |  | Accumulated
Other
Comprehensive
Income (Loss) |         | Treasury Stock |   |          |  
|--------------------------------------------------------- |  | ------------ |  | - | ----- |  | - | --------- |  | --------------------------------------------- | ------- | -------------- | - | -------- | -
|
|
|Balances at December 31, 1998                             |  | 179,925      |  | $ | 1,799 |  | $ | 1,993,916 |  | $                                             | (9,403  | )              | $ | (437,873 | )
|Repurchase of treasury stock                              |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Exercise of stock options                                 |  | 1,742        |  |   | 18    |  |   | 28,975    |  |                                               |        |                |   | (38,868  | )
|Tax benefits from employee stock plans                    |  |             |  |   |      |  |   | 42,803    |  |                                               |        |                |   |         |  
|Employee stock purchase plan                              |  | 196          |  |   | 2     |  |   | 3,498     |  |                                               |        |                |   | (1,640   | )
|Deferred stock compensation                               |  |             |  |   |      |  |   | 6,695     |  |                                               | (6,695  | )              |   |         |  
|Amortization of deferred stock compensation               |  |             |  |   |      |  |   |          |  |                                               | 1,990   |                |   |         |  
|Foreign currency translation adjustment                   |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Net unrealized gain from investments                      |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Minimum pension liability adjustment                      |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Elimination of one-month lag in reporting of Chiron S.p.A |  |             |  |   |      |  |   |          |  |                                               |        |                |   | (5,233   | )
|Net income                                                |  |             |  |   |      |  |   |          |  |                                               |        |                |   | 160,577  |  
|                                                          |  |              |  |   |       |  |   |           |  |                                               |         |                |   |          |  
|Balances at December 31, 1999                             |  | 181,863      |  | $ | 1,819 |  | $ | 2,075,887 |  | $                                             | (14,108 | )              | $ | (323,037 | )
|Repurchase of treasury stock                              |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Exercise of stock options                                 |  | 155          |  |   | 2     |  |   | 2,994     |  |                                               |        |                |   | (88,598  | )
|Tax benefits from employee stock plans                    |  |             |  |   |      |  |   | 37,865    |  |                                               |        |                |   |         |  
|Employee stock purchase plan                              |  | 49           |  |   |      |  |   | 1,903     |  |                                               |        |                |   | (4,640   | )
|Conversion of PathoGenesis Corporation stock options      |  |             |  |   |      |  |   | 3,371     |  |                                               |        |                |   |         |  
|Conversion of convertible debentures                      |  | 9,615        |  |   | 96    |  |   | 281,288   |  |                                               |        |                |   | (31,206  | )
|Deferred stock compensation                               |  |             |  |   |      |  |   | 14,724    |  |                                               | (14,724 | )              |   |         |  
|Amortization of deferred stock compensation               |  |             |  |   |      |  |   |          |  |                                               | 5,846   |                |   |         |  
|Foreign currency translation adjustment                   |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Net unrealized gain from investments                      |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Minimum pension liability adjustment                      |  |             |  |   |      |  |   |          |  |                                               |        |                |   |         |  
|Net income                                                |  |             |  |   |      |  |   |          |  |                                               |        |                |   | 8,514    |  
|                                                          |  |              |  |   |       |  |   |           |  |                                               |         |                |   |          |  
|Balances at December 31, 2000                             |  | 191,682      |  | $ | 1,917 |  | $ | 2,418,032 |  | $                                             | (22,986 | )              | $ | (438,967 | )

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-7

---

CHIRON CORPORATION  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)  (In thousands)

|                                            |  | Common Stock |  |   |       |  |   |           |   | Accumulated
Other
Comprehensive
Income (Loss) |         | Treasury Stock |   |          |  
|------------------------------------------- |  | ------------ |  | - | ----- |  | - | --------- | - | --------------------------------------------- | ------- | -------------- | - | -------- | -
|
|
|Balances at December 31, 2000               |  | 191,682      |  | $ | 1,917 |  | $ | 2,418,032 |   | $                                             | (22,986 | )              | $ | (438,967 | )
|Repurchase of treasury stock                |  |             |  |   |      |  |   |          |   |                                               |        |                |   |         |  
|Exercise of stock options                   |  |             |  |   |      |  |   | (583      | ) |                                               |        |                |   | (81,344  | )
|Exercise of stock warrant                   |  |             |  |   |      |  |   |          |   |                                               |        |                |   | (18,513  | )
|Exercise of put options                     |  |             |  |   |      |  |   | (1,548    | ) |                                               |        |                |   |         |  
|Premiums from put options                   |  |             |  |   |      |  |   | 9,320     |   |                                               |        |                |   |         |  
|Temporary equity related to put options     |  |             |  |   |      |  |   | (13,764   | ) |                                               |        |                |   |         |  
|Tax benefits from employee stock plans      |  |             |  |   |      |  |   | 25,893    |   |                                               |        |                |   |         |  
|Employee stock purchase plan                |  |             |  |   |      |  |   |          |   |                                               |        |                |   | (2,209   | )
|Deferred stock compensation                 |  |             |  |   |      |  |   | 3,931     |   |                                               | (3,931  | )              |   |         |  
|Amortization of deferred stock compensation |  |             |  |   |      |  |   |          |   |                                               | 9,411   |                |   |         |  
|Foreign currency translation adjustment     |  |             |  |   |      |  |   |          |   |                                               |        |                |   |         |  
|Net unrealized loss from investments        |  |             |  |   |      |  |   |          |   |                                               |        |                |   |         |  
|Minimum pension liability adjustment        |  |             |  |   |      |  |   |          |   |                                               |        |                |   |         |  
|Net income                                  |  |             |  |   |      |  |   |          |   |                                               |        |                |   | 180,036  |  
|                                            |  |              |  |   |       |  |   |           |   |                                               |         |                |   |          |  
|Balances at December 31, 2001               |  | 191,682      |  | $ | 1,917 |  | $ | 2,441,281 |   | $                                             | (17,506 | )              | $ | (360,997 | )
|                                            |  |              |  |   |       |  |   |           |   |                                               |         |                |   |          |  

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-8

---



CHIRON CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)

|                                                                |                                                                                   | Year Ended December 31, |                                                                   
|--------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------------------
|
|Cash flows from operating activities:                           |                                                                                   |                         |                                                                   
|                                                                | Net income                                                                        |                         | $                                                                 
|                                                                | Adjustments to reconcile net income to net cash provided by operating activities: |                         |                                                                   
|                                                                |                                                                                   |                         | Depreciation and amortization                                     
|                                                                |                                                                                   |                         | Amortization of marketable debt securities                        
|                                                                |                                                                                   |                         | Amortization of deferred stock compensation                       
|                                                                |                                                                                   |                         | Write-off of purchased in-process technologies                    
|                                                                |                                                                                   |                         | (Gain) loss on sale of assets                                     
|                                                                |                                                                                   |                         | Gain on sale of intangible assets                                 
|                                                                |                                                                                   |                         | (Gain) loss on disposal of discontinued operations                
|                                                                |                                                                                   |                         | Net (gain) loss on sale of marketable debt securities             
|                                                                |                                                                                   |                         | Net gain on sale of equity securities                             
|                                                                |                                                                                   |                         | Gain on sale of interests in affiliated companies                 
|                                                                |                                                                                   |                         | Unrealized gain on trading securities                             
|                                                                |                                                                                   |                         | Write-off of property, plant, equipment and leasehold improvements
|                                                                |                                                                                   |                         | Other than temporary loss on investments                          
|                                                                |                                                                                   |                         | Equity in loss of equity method investments                       
|                                                                |                                                                                   |                         | Minority interest                                                 
|                                                                |                                                                                   |                         | Changes in reserves                                               
|                                                                |                                                                                   |                         | Changes in estimated liabilities                                  
|                                                                |                                                                                   |                         | Deferred income taxes                                             
|                                                                |                                                                                   |                         | Other, net                                                        
|Changes, excluding effect of acquisitions and dispositions, to: |                                                                                   |                         |                                                                   
|                                                                |                                                                                   |                         | Accounts receivable                                               
|                                                                |                                                                                   |                         | Inventories                                                       
|                                                                |                                                                                   |                         | Other current assets                                              
|                                                                |                                                                                   |                         | Derivative financial instruments                                  
|                                                                |                                                                                   |                         | Other noncurrent assets                                           
|                                                                |                                                                                   |                         | Accounts payable and accrued expenses                             
|                                                                |                                                                                   |                         | Current portion of unearned revenue                               
|                                                                |                                                                                   |                         | Other current liabilities                                         
|                                                                |                                                                                   |                         | Other noncurrent liabilities                                      
|                                                                |                                                                                   |                         | Proceeds from sale of equity securities                           
|                                                                |                                                                                   |                         |                                                                   
|                                                                |                                                                                   |                         |                                                                   
|                                                                |                                                                                   |                         |                                                                   
|Cash flows from investing activities:                           |                                                                                   |                         |                                                                   
|                                                                | Purchases of investments in marketable debt securities                            |                         |                                                                   
|                                                                | Proceeds from sale and maturity of investments in marketable debt securities      |                         |                                                                   
|                                                                | Payments on notes receivable                                                      |                         |                                                                   
|                                                                | Capital expenditures                                                              |                         |                                                                   
|                                                                | Proceeds from sales of assets                                                     |                         |                                                                   
|                                                                | Purchases of equity securities and interests in affiliated companies              |                         |                                                                   
|                                                                | Proceeds from sale of equity securities and interests in affiliated companies     |                         |                                                                   
|                                                                | Cash paid to purchase businesses, net of cash acquired                            |                         |                                                                   
|                                                                | Proceeds from disposal of discontinued operations                                 |                         |                                                                   
|                                                                | Increase (decrease) in other assets                                               |                         |                                                                   
|                                                                |                                                                                   |                         |                                                                   
|                                                                |                                                                                   |                         | Net cash used in investing activities                             
|                                                                |                                                                                   |                         |                                                                   
|Cash flows from financing activities:                           |                                                                                   |                         |                                                                   
|                                                                | Net repayment of short-term borrowings                                            |                         |                                                                   
|                                                                | Repayment of debt and capital leases                                              |                         |                                                                   
|                                                                | Proceeds from issuance of Liquid Yield Option Notes                               |                         |                                                                   
|                                                                | Payment of issuance costs on Liquid Yield Option Notes                            |                         |                                                                   
|                                                                | Proceeds from issuance of debt                                                    |                         |                                                                   
|                                                                | Payments to acquire treasury stock                                                |                         |                                                                   
|                                                                | Proceeds from reissuance of treasury stock                                        |                         |                                                                   
|                                                                | Proceeds from issuance of common stock                                            |                         |                                                                   
|                                                                | Proceeds from put options                                                         |                         |                                                                   
|                                                                |                                                                                   |                         |                                                                   
|                                                                |                                                                                   |                         | Net cash provided by (used in) financing activities               
|                                                                |                                                                                   |                         |                                                                   
|                                                                |                                                                                   |                         | Net increase (decrease) in cash and cash equivalents              
|Cash and cash equivalents at beginning of the year              |                                                                                   |                         | 166,990                                                           
|                                                                |                                                                                   |                         |                                                                   
|Cash and cash equivalents at end of the year                    |                                                                                   | $                       | 320,673                                                           
|                                                                |                                                                                   |                         |                                                                   

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-9

---



CHIRON CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2001

Note 1The Company and Summary of Significant Accounting Policies

The Company and Basis of Presentation

Chiron Corporation is a global pharmaceutical company that develops, manufactures and markets therapeutic products for the prevention and treatment of infectious
disease utilizing innovations in biology and chemistry. Chiron participates in three global healthcare markets: (i) biopharmaceuticals, with an emphasis on the treatment of cancer and
infectious disease; (ii) adult and pediatric vaccines; and (iii) blood testing. Chiron is applying a broad and integrated scientific approach to the development of innovative products
for preventing and treating cancer and infectious disease. This approach is supported by research strengths in therapeutic proteins, small molecules and vaccines.

On
December 29, 1997, Chiron completed the sale of its ophthalmics business, Chiron Vision, to Bausch & Lomb Incorporated, and on November 30, 1998, Chiron completed
the sale of itsin vitrodiagnostics business, Chiron Diagnostics, to Bayer Corporation. As a result of these transactions, Chiron's Consolidated
Statements of Operations reflect the reversal of retention and severance obligations, the expiration of certain contractual obligations and the final sale of the remaining real estate assets in the
gain (loss) on discontinued operations (see Note 4).

Prior
to fiscal year 1999, the results of Chiron S.p.A., Chiron's Italian subsidiary, were reported on a one-month lag. In the first quarter of 1999, the results of Chiron
S.p.A. were brought current. As a result, during fiscal year 1999, Chiron recorded a loss of $5.2 million for the month of December 1998 as a component of "Accumulated deficit" in the
Consolidated Balance Sheets.

On
September 21, 2000, Chiron acquired PathoGenesis Corporation. Chiron included PathoGenesis' operating results, including the seven business days from September 21 to 30,
2000, in its consolidated operating results beginning on October 1, 2000. PathoGenesis' operating results for the seven business days in September 2000 were not significant to Chiron's
consolidated operating results (see Note 5).

Principles of Consolidation

The consolidated financial statements include the accounts of Chiron and its majority-owned subsidiaries. For consolidated majority-owned subsidiaries in which
Chiron owns less than 100%, Chiron records minority interest in the consolidated financial statements to account for the ownership interest of the minority owner. Investments in joint ventures,
limited partnerships and interests in which Chiron has an equity interest of 50% or less are accounted for using either the equity or cost method. All significant intercompany accounts and
transactions have been eliminated in consolidation.

F-10

---

Chiron's
most significant consolidated majority-owned subsidiaries and respective ownership percentages are as follows:

Name

Percentage
OwnershipPathoGenesis Corporation

100%31 Corsa Verwaltungsgesellschaft mbH

100%Chiron Behring GmbH & Co.

100%Chiron S.p.A.

100%Chiron B.V.

100%Chiron Iberia SL

100%Chiron U.K. Ltd

100%Chiron GmbH

100%Chiron France S.a.r.l.

100%Chiron Italia S.r.l.

100%Chiron Blood Testing S.a.r.l.

100%Chiron Behring Vaccines Private Limited

51%


In
2001, Chiron became a limited partner of Forward Venture IV, L.P. Chiron will pay $15.0 million over ten years, of which $5.3 million was paid through
December 31, 2001, for a 6.35% ownership percentage. In 2000, Chiron became a limited partner of Burrill Biotechnology Capital Fund, L.P. Chiron will pay $25.0 million over five years,
of which $13.5 million was paid through December 31, 2001, for a 23.19% ownership percentage. Chiron accounts for both investments under the equity method of accounting pursuant to
Emerging Issues Task Force Topic No. D-46 "Accounting for Limited Partnership Investments."

In
2000, Chiron began consolidating, and recording minority interest related to, its 51% owned joint venture, Chiron Behring Vaccines Limited.

Use of Estimates and Reclassifications

The preparation of financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to investments;
inventories; derivatives; intangible assets; product discounts, rebates and returns; bad debts; collaborative, royalty and license arrangements; restructuring; pension and other
post-retirement benefits; income taxes; and litigation and other contingencies. Chiron bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from those estimates under different assumptions or conditions.

Chiron,
prior to filing its financial statements on Form 10-K, publicly releases an unaudited condensed balance sheet and statement of operations. Between the date of
Chiron's earnings release and the filing of Form 10-K, reclassifications may be required. These reclassifications, when made, have no effect on income from continuing operations,
net income or earnings per share.

F-11

---

Certain
previously reported amounts have been reclassified to conform with the current period presentation.

Related
to the acquisition of PathoGenesis Corporation on September 21, 2000, Chiron allocated the purchase price based on the estimated fair values of the assets acquired and
liabilities assumed. Throughout 2001, Chiron recorded purchase price adjustments resulting from (i) a final reconciliation of PathoGenesis registered shares of common stock, (ii) the
true-up of severance, employee relocation, leasing and legal costs to amounts actually paid and (iii) the related deferred tax effects, the total of which resulted in a
$3.8 million increase to the purchase price and a $2.2 million increase to goodwill. For each of the quarters and for the year ended December 31, 2001, this adjustment had no
material impact on amortization expense or earnings per share.

Cash Equivalents, Investments in Marketable Debt Securities and Investments in Equity Securities

All highly liquid investments with a maturity of three months or less from the date of purchase are considered to be cash equivalents. Cash equivalents and
short-term investments in marketable debt securities consist principally of money market instruments, including corporate notes and bonds, commercial paper and government agency
securities. Noncurrent investments in marketable debt securities consist principally of corporate notes and bonds and government agency securities. The cost
of securities sold is based on the specific identification method for debt securities and on the average cost method for equity securities.

In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," Chiron has classified its investments
in certain debt and equity securities as available-for-sale. Chiron has in the past, and may in the future, classify certain equity securities as trading.
Available-for-sale securities are recorded at fair value based upon year-end quoted market prices. Unrealized gains and losses, deemed as temporary in nature, are
reported as a separate component of comprehensive income or loss. Trading securities, if any, are recorded at fair value based upon year-end quoted market prices. Unrealized gains and
losses on trading securities are included in results of operations.

Chiron
periodically reviews its debt and equity securities by comparing the market value to the carrying value of the security. Impairment, if any, is based on the excess of the carrying
value over the market value. If impairment is considered other-than-temporary, the security's cost is written down to market value through earnings. Generally Chiron believes
that an investment is impaired if its market value has been below its carrying value for each trading day in a six-month period.

F-12

---

Inventories

Inventories are stated at the lower of cost or market using the moving weighted-average cost method. Inventories consisted of the following at December 31:

2001

2000(In thousands)Finished goods

$
26,683

$
25,590Work-in-process


60,512


57,754Raw materials


24,162


25,369$
111,357

$
108,713


Derivative Financial Instruments

Effective January 1, 2001, Chiron implemented Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by Statement of Financial Accounting Standards No. 138, which establishes accounting and reporting standards for derivatives and hedging activities. All
derivatives must be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are accounted for depending upon the exposure being hedged and whether the derivatives qualify
and are designated for hedge accounting. The effect of the adoption did not have a material impact on Chiron's results of operations or consolidated financial position in 2001.

Chiron
uses various derivatives, such as foreign currency option contracts and forward foreign currency contracts, to reduce foreign exchange risks. Chiron also uses forward sales
contracts to reduce equity securities risk. Derivatives are not used for trading or speculative purposes. Chiron's control environment includes policies and procedures for risk assessment and the
approval, reporting and monitoring of foreign currency hedging activities. Counterparties to Chiron's hedging agreements are major financial institutions. These hedging agreements are generally not
collateralized. Chiron manages the risk of counterparty default on its derivatives through the use of credit standards, counterparty diversification and monitoring of counterparty financial
conditions. Chiron has not experienced any losses due to counterparty default.



A significant portion of Chiron's operations consists of manufacturing and sales activities in western European countries. As a result, Chiron's financial results
may be affected by changes in the foreign currency exchange rates of those related countries.

Chiron
may selectively hedge anticipated currency exposures by purchasing foreign currency option contracts, which are designated as cash flow hedges under Statement of Financial
Accounting Standards No. 133 and typically expire within twelve months. Changes in the fair value of foreign currency option contracts are recorded in comprehensive income and are recognized in
earnings when the forecasted transaction occurs. When foreign currency option contracts expire, any amounts recorded in comprehensive income are reclassified to earnings.

F-13

---

Chiron
also uses forward foreign currency contracts to hedge the gains and losses generated by the remeasurement of certain assets and liabilities denominated in foreign currencies.
These derivatives are not designated as hedges under Statement of Financial Accounting Standards No. 133. Changes in the fair value of forward foreign currency contracts are recognized
currently in earnings. Typically, changes in the fair value of forward foreign currency contracts are offset largely by changes upon remeasurement of the underlying assets and liabilities. Typically,
these contracts have maturities of three months or less.



Chiron has exposure to equity price risk because of its investments in equity securities. Typically, these securities are obtained through collaboration
agreements with other pharmaceutical and biotechnology partners. Changes in share prices affect the value of Chiron's equity portfolio.

Chiron
selectively enters into forward sales contracts, which are designated as fair value hedges under Statement of Financial Accounting Standards No. 133 and typically expire
within two to four years. At the inception of the hedge, the difference between the cost and the fair value of the equity security remains in comprehensive income. Subsequent changes in the fair value
of the forward sales contracts and the underlying equity security are recognized in earnings. When forward sales contracts mature and the underlying equity security is sold, any amounts recorded in
comprehensive income related to the underlying equity security are reclassified to earnings.

For
foreign currency option contracts and forward sales contracts, Chiron assumes no ineffectiveness because the critical terms of the derivative instrument and of the underlying
exposure are the same. Chiron expects that changes in the fair value of the underlying exposure will be offset completely by changes in the fair value of the derivative instrument, both at inception
and on an ongoing basis. The critical terms are reviewed quarterly. All time value changes are deemed ineffective and are recognized immediately in earnings. Hedge ineffectiveness, determined in
accordance with Statement of Financial Accounting Standards No. 133, was not material for the year ended December 31, 2001. No cash flow or fair value hedges were derecognized or
discontinued for the year ended December 31, 2001.

Property, Plant, Equipment and Leasehold Improvements

Property, plant, equipment and leasehold improvements are recorded at cost less accumulated depreciation. Depreciation on property, plant and equipment, including
assets held under capital leases, is computed using the straight-line method over the estimated useful lives of the assets, ranging from 3
to 10 years for equipment and 15 to 40 years for buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset's useful life or
remaining lease term.

Intangible and Other Long-Lived Assets

Intangible assets consist principally of purchased technologies and patents and are amortized on a straight-line basis over their estimated useful
lives, ranging from 3 to 17 years. Chiron periodically reviews the useful lives of its intangible and long-lived assets, which may result in future adjustments to the amortization
periods. Intangible assets included goodwill which was being amortized on a straight-line basis over 15 years and assembled workforce which was being amortized on a
straight-line basis over 5 to 20 years. Amortization expense for the years ended December 31, 2001, 2000 and 1999 was $58.5 million,

F-14

---

$27.4 million and $17.3 million, respectively. Amortization of purchased technologies and goodwill was included primarily in "Amortization expense" and amortization of patents was
included primarily in "Research and development" in the Consolidated Statements of Operations.

Chiron
periodically evaluated the recoverability of goodwill. Impairment, if any, was based on the excess of the carrying value over the fair value, calculated based upon the projected
undiscounted net cash flows associated with such goodwill.

In
July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS 141 specifies criteria that intangible assets acquired in a purchase business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 requires, among other things, that the assembled workforce
be reclassified to goodwill and that goodwill (including assembled workforce) and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with SFAS No. 142. Chiron adopted the provisions of SFAS 141 immediately, and SFAS 142 effective January 1, 2002.

SFAS 141
required, upon adoption of SFAS 142, Chiron to evaluate existing intangible assets and goodwill that were acquired in a purchase business combination prior to
June 30, 2001, and make any necessary reclassifications to conform with the new criteria in SFAS 141. As a result, Chiron reclassified assembled workforce with a net carrying value of
$7.8 million to goodwill on January 1, 2002.

Upon
adoption of SFAS 142, Chiron also began reassessing the useful lives and residual values of all intangible assets (excluding goodwill and assembled workforce) acquired in
purchase business combinations, and is required to make any necessary amortization period adjustments by the end of the first quarter 2002. In addition, if an intangible asset is identified as having
an indefinite useful life, Chiron must test the intangible asset for impairment in accordance with SFAS 142 by March 31, 2002.
Chiron will measure any impairment loss as of January 1, 2002 and recognize it as the cumulative effect of a change in accounting principle in the first quarter 2002. Based upon the review to
date, Chiron does not anticipate any adjustments to amortization periods.

In
connection with the transitional goodwill impairment evaluation, SFAS 142 adoption requires Chiron to assess whether there is an indication that goodwill is impaired as of
January 1, 2002. To accomplish this, Chiron identified its reporting units as of January 1, 2002. Chiron is in the process of determining the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. Chiron has up to six months from January 1,
2002 to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and Chiron must perform the second step of the transitional impairment test. In the second step, Chiron must compare the implied fair value of
the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of January 1, 2002. This second step must be completed as soon as possible, but no
later than December 31, 2002. Chiron will recognize any transitional impairment loss as the cumulative effect of a change in accounting principle.

F-15

---

In
addition, Chiron must perform an impairment test at least annually. Any impairment loss from the annual test will be recognized as part of operations.

At
December 31, 2001, Chiron had unamortized goodwill (including assembled workforce) of $232.6 million. Amortization expense related to goodwill (including assembled
workforce) was $17.1 million for the year ended December 31, 2001. Based upon the review to date, Chiron does not anticipate any transitional impairment losses.

In
June 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires liability recognition for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Chiron must adopt the provisions of SFAS 143 effective
January 1, 2003, with earlier application encouraged. Chiron is currently analyzing the effect, if any, the adoption of this standard will have on the financial statements.

Under
SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," Chiron evaluated the recoverability of its
intangible and long-lived assets (excluding goodwill), as circumstances dictated. Impairment, if any, was based on the excess of the carrying value of such assets over their respective
fair values, calculated based upon the projected discounted net cash flows associated with such assets. In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, in that it excludes goodwill from its impairment scope and allows for
different approaches in
cash flow estimation. However, SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and measurement of the impairment of (a) long-lived assets to be
held and used and (b) long-lived assets to be disposed of other than by sale. SFAS 144 also supercedes the business segment concept in Accounting Principles Board Opinion
No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," in that it permits presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS 144 retains the
requirement of Accounting Principles Board Opinion No. 30 to report discontinued operations separately from continuing operations. Chiron adopted the provisions of SFAS 144 effective
January 1, 2002. Chiron believes that the implementation of the impairment provisions of this standard will not have a material effect on our results of operations and financial position, since
the impairment assessment under SFAS 144 is largely unchanged from SFAS 121. The provisions of this standard for assets held for sale or other disposal generally are required to be
applied prospectively. Therefore, Chiron cannot determine the potential effects that adoption of SFAS 144 as it relates to assets held for sale or other disposal will have on the financial
statements.

Put Options

Chiron utilizes put options to facilitate the repurchase of common stock. The put option contracts provide that Chiron, at its option, can settle with physical
delivery or net shares equal to the difference between the exercise price and the value of the option as determined by the contract. Accordingly, these contracts are initially measured at fair value
and reported in stockholders' equity as additional paid-in-capital. Subsequent changes in fair value are not recognized. If these instruments are settled through the payment or
receipt of cash, additional paid-in-capital is adjusted.

F-16

---

Comprehensive Income

Chiron has displayed the detailed changes in the components of comprehensive income in the Consolidated Statements of Comprehensive Income. Accumulated other
comprehensive income (loss) balances by component were as follows (in thousands):

|                                   |               | Foreign
Currency
Translation
Adjustment |         | Net Unrealized
Gains (Losses)
from
Investments |   | Minimum
Pension
Liability
Adjustment |         | Accumulated
Other
Comprehensive
Income (Loss) |       
|---------------------------------- | ------------- | --------------------------------------- | ------- | ---------------------------------------------- | - | ------------------------------------ | ------- | --------------------------------------------- | ------
|Balance, net, at December 31, 1998 |               | $                                       | (1,794  | )                                              | $ | 4,771                                |         | $                                             | (716  
|                                   | Period change |                                         |         | (28,779                                        | ) |                                      | 18,688  |                                               |       
|                                   |               |                                         |         |                                                |   |                                      |         |                                               |       
|Balance, net, at December 31, 1999 |               |                                         | (30,573 | )                                              |   | 23,459                               |         |                                               | (990  
|                                   | Period change |                                         |         | (23,219                                        | ) |                                      | 48,887  |                                               |       
|                                   |               |                                         |         |                                                |   |                                      |         |                                               |       
|Balance, net, at December 31, 2000 |               |                                         | (53,792 | )                                              |   | 72,346                               |         |                                               | (1,057
|                                   | Period change |                                         |         | (23,425                                        | ) |                                      | (15,097 | )                                             |       
|                                   |               |                                         |         |                                                |   |                                      |         |                                               |       
|Balance, net, at December 31, 2001 |               | $                                       | (77,217 | )                                              | $ | 57,249                               |         | $                                             | (1,318
|                                   |               |                                         |         |                                                |   |                                      |         |                                               |       

In
the first and second quarters of 2001, the foreign currency translation component of comprehensive income included the tax effects of the non-permanently reinvested 2000
earnings in Chiron's German and Italian vaccines business in accordance with the investment and tax policy adopted in 2000. During the first and second quarters of 2001, the undistributed 2001
earnings in Chiron's German and Italian vaccines business were expected to be reinvested permanently and, as a result, no tax effect was provided on the foreign currency translation component of
comprehensive income. Beginning in the third quarter of 2001, tax effects of the decision not to permanently reinvest the 2001 earnings in Chiron's German and Italian vaccines business were recorded.
For all other foreign jurisdictions, the undistributed earnings of Chiron's foreign investments are expected to be reinvested permanently.

In
2000, the foreign currency translation component of comprehensive income included the tax effects of the non-permanently reinvested earnings in Chiron's German and Italian
vaccines business in accordance with the investment and tax policy adopted for that year only. For all other foreign jurisdictions, the undistributed earnings of Chiron's foreign investments are
expected to be reinvested permanently. In 1999, no tax effect was provided on the foreign currency translation component as the undistributed earnings of Chiron's foreign investments were expected to
be reinvested permanently.

Treasury Stock

Treasury stock is stated at cost. Gains on reissuance of treasury stock are credited to "Additional paid-in capital." Losses on reissuance of treasury
stock are charged to "Additional paid-in capital" to the extent of available net gains on reissuance of treasury stock. Otherwise, losses are charged to "Accumulated Deficit." For the
years ended December 31, 2001 and 2000, Chiron charged losses of $102.1 million and $124.4 million, respectively, to "Accumulated deficit" in the Consolidated Balance Sheets.

F-17

---

Revenue Recognition

"Product sales, net" primarily consist of revenues recognized upon shipment of products to customers. For nucleic acid testing product sales, Chiron recognizes
revenues based upon the details of each contract, from cost recovery pricing for investigational new drug applications to contracted price per donation. For sales of Betaseron®, Chiron
recognizes revenues upon shipment to its marketing partner and additional revenues upon the marketing partner's subsequent sale of Betaseron® to patients. Provisions for discounts and
rebates to customers, and returns and other adjustments are provided for in the same period the related product sales are recorded based upon analyses of historical discounts, rebates and returns.

"Equity
in earnings of unconsolidated joint businesses" represents Chiron's share of the operating results generated by its commercial unincorporated joint businesses. "Collaborative
agreement revenues" are earned and recognized based upon work performed or upon the attainment of specified milestones. Under contracts where Chiron recognizes revenue based upon work performed, the
related research and development activities amounted to $9.1 million, $6.0 million and $49.7 million in 2001, 2000 and 1999, respectively. "Royalty and license fee revenues"
consist of product royalty payments and fees under license agreements and are recognized when earned. Up-front refundable fees are deferred and recognized as revenues upon the later of
when they become nonrefundable or when performance obligations are completed. Up-front nonrefundable fees where Chiron has no continuing performance obligations are recognized as revenues
when receivable. In situations where continuing performance obligations exist, up-front nonrefundable fees are deferred and amortized over the performance period. Milestones, if any,
related to scientific achievement are recognized in income when the milestone is accomplished. "Other revenues" primarily consist of fees for sales and marketing services performed, commission fees
and grants from government agencies are recognized when earned.

Contract Manufacturing Revenues and Expenses

During production pre-planning activities, contract manufacturing revenues are recognized upon completion of the specified contract milestones and
recorded in "Other revenues" in the Consolidated Statements of Operations. During production pre-planning activities, contract manufacturing expenses are deferred as incurred, then
expensed upon completion of the specified contract milestones and recorded in "Other operating expenses" in the Consolidated Statements of Operations. When production is complete, contract
manufacturing revenues and expenses are recognized upon shipment of products to customers and recorded in "Other revenues" and "Other operating expenses," respectively, in the Consolidated Statements
of Operations.

F-18

---

Note 1The Company and Summary of Significant Accounting Policies

Shipping and Handling Fees and Costs

Shipping and handling fees billed to customers for product shipments are recorded in "Product sales, net" in the Consolidated Statements of Operations. Shipping
and handling costs incurred for inventory purchases are recorded in "Cost of sales" in the Consolidated Statements of Operations.

Research and Development Expense and Write-Off of Purchased In-Process Technologies

In accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," research and development costs are
charged to expense when incurred. Research and development includes costs such as clinical trial expenses, contracted research and license agreement fees, supplies and materials, salaries and employee
benefits, equipment depreciation and allocations of various corporate costs. Purchased in-process technologies represent the value assigned or paid for acquired research and development
for which there is no alternative future use as of the date of acquisition. In accordance with Statement of Financial Accounting Standards No. 2, as clarified by Financial Accounting Standards
Board Interpretation No. 4, amounts assigned to purchased in-process technologies meeting the above stated criteria are charged to expense as part of the allocation of the purchase
price of the business combination.

Advertising Expenses

Chiron expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenses for the years ended December 31, 2001, 2000 and
1999 were $17.9 million, $11.4 million and $10.0 million, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A
valuation allowance has been established against the recorded deferred income tax assets to the extent that management believes it more likely than not that a portion of the deferred
income tax assets are not realizable.

Stock-Based Compensation

Chiron measures compensation expense for its stock-based employee compensation plans using the intrinsic method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations, including Financial Accounting Standards Board Interpretation 44 "Accounting for Certain Transactions Involving
Stock Compensation." Compensation expense is based on the difference, if any, between the fair value of Chiron's common stock and the exercise price of the option or share right on the measurement
date, which is typically the date of grant. This amount is recorded as "Deferred stock compensation" in the Consolidated Balance Sheets and

F-19

---

amortized as a charge to operations over the vesting period of the applicable options or share rights. Compensation expense is included primarily in "Selling, general and administrative" in the
Consolidated Statements of Operations. In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," Chiron has provided, in Note 13,
the pro forma disclosures of the effect on net income and earnings per share as if Statement of Financial Accounting Standards No. 123 had been applied in measuring compensation expense for all
periods presented.

Foreign Currency Translation

The financial statements of Chiron's foreign subsidiaries and equity investments are generally measured using the local currency. Accordingly, the assets and
liabilities of Chiron's foreign subsidiaries and equity investments are translated into U.S. dollars using the exchange rates in effect at the end of the period. Revenues and expenses are translated
using the average exchange rates for the period. Adjustments resulting from currency translations are included in comprehensive income. Gains and losses resulting from currency transactions are
recognized in current operations.

Concentration of Risk

Financial instruments, which potentially expose Chiron to concentrations of credit risk, consist primarily of cash, investments (such as debt securities) and
trade accounts receivable. Chiron invests cash, which is not required for immediate operating needs, in a diversified portfolio of financial instruments issued by financial institutions and other
issuers with strong credit ratings.

By
policy, the amount of credit exposure to any one institution or issuer is limited. These investments are generally not collateralized and primarily mature within three years. In 2001,
Chiron recorded a charge of $1.5 million to write-down debt securities with a face value of $5.0 million due to the decline in the credit rating of the issuer. On March
1, 2002, the issuer paid Chiron the full principal plus interest. Chiron has not experienced any other losses due to counterparty default.

Chiron
has not experienced any significant credit losses from its accounts receivable from joint business partners or collaborative research agreements, and none are currently expected.
Other accounts receivable arise from product sales to customers. Chiron performs ongoing credit evaluations of these customers and generally does not require collateral. Chiron maintains reserves for
potential trade receivable credit losses, and such losses have been within management's expectations.

Chiron
purchases bulk powdered tobramycin, the primary basic raw material in TOBI®, from two of the principal worldwide suppliers of the drug. Chiron anticipates that either
one of these suppliers alone will be able to supply sufficient quantities to meet current needs; however, there can be no assurance that these suppliers will be able to meet future demand in a timely
and cost-effective manner. As a result, Chiron's operations could be adversely affected by an interruption or reduction in the supply of bulk powdered tobramycin.

Chiron
has entered into contracts with third parties for the production and packaging of TOBI®. Over time, Chiron can use alternative production and packaging sources.
However, if the contracted third parties become unable to produce or package sufficient quantities of TOBI® due to work stoppages or other factors, Chiron's operations could be disrupted
until alternative sources are secured.

F-20

---

Note 2Earnings Per Share

Basic earnings per share is based upon the weighted-average number of common shares outstanding. Diluted earnings per share is based upon the weighted-average
number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares could result from (i) the assumed exercise of outstanding stock options, warrants and
equivalents, which are included under the treasury-stock method; (ii) performance units (see Note 13) to the extent that dilutive shares are assumed issuable; (iii) the assumed
exercise of outstanding put options (see Note 13), which are included under the reverse treasury-stock method; and (iv) convertible notes and debentures, which are included under the
if-converted method (see Note 11). Due to rounding, quarterly amounts may not sum fully to yearly amounts.

The
following table sets forth the computation for basic and diluted earnings per share on income from continuing operations for the years ended December 31:

|                           |                                                                                              | 2001                          |      | 2000    |       | 1999
|-------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------- | ---- | ------- | ----- | ----
|
|Income (Numerator):        |                                                                                              |                               |      |         |       |     
|                           | Income from continuing operations available to common stockholders                           |                               | $    | 174,758 |       | $   
|                           | Plus: Interest on 1.90% convertible debentures, net of taxes                                 |                               |      |        |       |     
|                           |                                                                                              |                               |      |         |       |     
|                           | Income from continuing operations available to common stockholders, plus assumed conversions |                               | $    | 174,758 |       | $   
|                           |                                                                                              |                               |      |         |       |     
|Shares (Denominator):      |                                                                                              |                               |      |         |       |     
|                           | Weighted-average common shares outstanding                                                   |                               |      | 189,553 |       |     
|                           | Effect of dilutive securities:                                                               |                               |      |         |       |     
|                           |                                                                                              | Stock options and equivalents |      |         | 5,023 |     
|                           |                                                                                              | Warrants                      |      |         | 242   |     
|                           |                                                                                              | Put options                   |      |         | 17    |     
|                           |                                                                                              | 1.90% convertible debentures  |      |         |      |     
|                           |                                                                                              |                               |      |         |       |     
|                           | Weighted-average common shares outstanding, plus assumed conversions                         |                               |      | 194,835 |       |     
|                           |                                                                                              |                               |      |         |       |     
|Basic earnings per share   |                                                                                              | $                             | 0.92 |         | $     | 0.09
|                           |                                                                                              |                               |      |         |       |     
|Diluted earnings per share |                                                                                              | $                             | 0.90 |         | $     | 0.08
|                           |                                                                                              |                               |      |         |       |     

F-21

---

The
following table sets forth the computation for basic and diluted earnings per share on net income for the years ended December 31:

|                           |                                                                       | 2001                          |      | 2000    |       | 1999
|-------------------------- | --------------------------------------------------------------------- | ----------------------------- | ---- | ------- | ----- | ----
|
|Income (Numerator):        |                                                                       |                               |      |         |       |     
|                           | Net income available to common stockholders                           |                               | $    | 180,036 |       | $   
|                           | Plus: Interest on 1.90% convertible debentures, net of taxes          |                               |      |        |       |     
|                           |                                                                       |                               |      |         |       |     
|                           | Net income available to common stockholders, plus assumed conversions |                               | $    | 180,036 |       | $   
|                           |                                                                       |                               |      |         |       |     
|Shares (Denominator):      |                                                                       |                               |      |         |       |     
|                           | Weighted-average common shares outstanding                            |                               |      | 189,553 |       |     
|                           | Effect of dilutive securities:                                        |                               |      |         |       |     
|                           |                                                                       | Stock options and equivalents |      |         | 5,023 |     
|                           |                                                                       | Warrants                      |      |         | 242   |     
|                           |                                                                       | Put options                   |      |         | 17    |     
|                           |                                                                       | 1.90% convertible debentures  |      |         |      |     
|                           |                                                                       |                               |      |         |       |     
|                           | Weighted-average common shares outstanding, plus assumed conversions  |                               |      | 194,835 |       |     
|                           |                                                                       |                               |      |         |       |     
|Basic earnings per share   |                                                                       | $                             | 0.95 |         | $     | 0.05
|                           |                                                                       |                               |      |         |       |     
|Diluted earnings per share |                                                                       | $                             | 0.92 |         | $     | 0.04
|                           |                                                                       |                               |      |         |       |     

Options
to purchase 7.4 million shares, 2.3 million shares and 6.0 million shares with exercise prices greater than the average market prices of common stock were
outstanding during the years ended December 31, 2001, 2000 and 1999, respectively. These options were excluded from the respective computations of diluted earnings per share, as their inclusion
would be antidilutive.

Also
excluded from the computations of diluted earnings per share for the year ended December 31, 2001 were 5.2 million shares of common stock issuable upon conversion of
the Liquid Yield Option Notes (see Note 11), as their inclusion would be antidilutive.

As
a result of the acquisition of Cetus on December 12, 1991, a warrant to purchase 0.6 million shares of Chiron common stock with an exercise price of $13.125 per share
was outstanding. On July 31, 2001, the holder elected a cashless exercise of the warrant, based upon Chiron's closing stock price on August 3, 2001, for which Chiron issued approximately
0.4 million shares of its common stock.

Also
excluded from the computations of diluted earnings per share were 6.9 million shares and 9.8 million shares for the years ended December 31, 2000 and 1999,
respectively, of common stock issuable upon
conversion of Chiron's convertible subordinated debentures (see Note 11), as their inclusion would be antidilutive. As of December 31, 2000, substantially all of the 1.90% and 5.25%
convertible debentures were converted into 12.0 million shares of common stock.

F-22

---

Note 3Supplemental Cash Flow Information

|                                            |                                                       | 2001                                                                        |                 | 2000   |   | 1999 
|------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------------------------------- | --------------- | ------ | - | -----
|
|Interest paid                               |                                                       | $                                                                           | 749             |        | $ | 2,898
|                                            |                                                       |                                                                             |                 |        |   |      
|Income taxes paid                           |                                                       | $                                                                           | 134,827         |        | $ | 9,852
|                                            |                                                       |                                                                             |                 |        |   |      
|Noncash investing and financing activities: |                                                       |                                                                             |                 |        |   |      
|                                            | Acquisitions:                                         |                                                                             |                 |        |   |      
|                                            |                                                       | Cash acquired                                                               |                 | $      |  |      
|                                            |                                                       | Fair value of all other assets acquired                                     |                 |        |  |      
|                                            |                                                       | Liabilities assumed                                                         |                 |        |  |      
|                                            |                                                       | Income taxes payable                                                        |                 |        |  |      
|                                            |                                                       | Net deferred tax liability                                                  |                 |        |  |      
|                                            |                                                       | Fair value, less intrinsic value for unvested portion, of options exchanged |                 |        |  |      
|                                            |                                                       | Acquisition costs not yet paid as of December 31, 2000                      |                 |        |  |      
|                                            |                                                       |                                                                             |                 |        |   |      
|                                            |                                                       |                                                                             | Total cash paid |        | $ |     
|                                            |                                                       |                                                                             |                 |        |   |      
|                                            | Conversion of subordinated debentures to common stock |                                                                             | $               |       |   | $    
|                                            |                                                       |                                                                             |                 |        |   |      
|                                            | Exercise of common stock warrant                      |                                                                             | $               | 18,513 |   | $    
|                                            |                                                       |                                                                             |                 |        |   |      

Note 4Discontinued Operations

In a strategic effort to focus on its core businesses of Biopharmaceuticals, Vaccines and Blood Testing, Chiron completed the sale of Chiron Diagnostics and
Chiron Vision in 1998 and 1997, respectively. Basic earnings (loss) per share from discontinued operations was $0.03, $(0.04) and $0.18 for the years ended December 31, 2001, 2000 and 1999,
respectively. Diluted earnings (loss) per share from discontinued operations was $0.02, $(0.04) and $0.17 for the years ended December 31, 2001, 2000 and 1999, respectively.

The
"Gain (loss) on disposal of discontinued operations" consisted of the following as of December 31:

2001

2000

1999(In thousands)Reversal of reserves for retention and severance obligations

$
1,600

$


$
Reversal of reserves for indemnity obligations


1,500


2,190


8,305Gain on the sale of real estate assets


1,644





1,873Other





(708
)

1,563Income tax benefit (provision)


534


(9,070
)

20,432$
5,278

$
(7,588
)
$
32,173


F-23

---

Chiron Diagnostics

On November 30, 1998, Chiron completed the sale of itsin vitrodiagnostics business to Bayer Corporation
for $1,013.8 million in cash, subject to certain post-closing adjustments. The sale was completed under the terms of a stock purchase agreement, dated September 17, 1998,
between Chiron and Bayer. Under the terms of this agreement, Chiron was responsible for retention and severance payments to specific U.S. and international employees and, accordingly, reserved for
such retention and severance obligations. In the third quarter of 2001, Chiron reversed approximately $1.6 million reserved for retention and severance obligations based upon a final
reconciliation from Bayer. This amount was recorded as a component of "Gain (loss) on disposal of discontinued operations." Chiron has also provided other customary indemnities under the terms of this
agreement.

In
connection with the sale of Chiron Diagnostics, Chiron granted to Bayer rights under HIV and hepatitis C virus patents for use in nucleic acid diagnostic tests (excluding blood
screening). In exchange for these rights, Bayer paid Chiron a license fee of $100.0 million, which became nonrefundable in decreasing amounts through 2001. In 2001, 2000 and 1999, Chiron
recognized license fee revenues of $18.3 million, $29.2 million and $39.2 million, respectively, which represented the portions of the $100.0 million payment that became
nonrefundable during those periods. Chiron recognized the remaining revenue in the fourth quarter of 2001. The revenues were recorded as a component of "Royalty and license fee revenues" in the
Consolidated Statements of Operations.

As
a result of the sale of Chiron Diagnostics, Chiron assigned certain technology rights, which it had utilized in its blood testing and diagnostics businesses, to Bayer. The assigned
rights, which had been capitalized as intangible assets and had a net book value of $9.5 million at the time of assignment, were expensed against the gain on the sale of Chiron Diagnostics in
1998. Under the terms of the agreement, Chiron and Bayer agreed to share certain future milestone payments related to these technologies rights. Accordingly, Chiron made a milestone payment of
$8.5 million in December 1999. Since Chiron received regulatory approval in France for, and began selling, the transcription-mediated amplification combination hepatitis C virus
/HIV-1 test in September 1999, Chiron ascertained that there was future value in these technology rights and, therefore, capitalized the related milestone payment of
$8.5 million, to be amortized over 5 years. For each of the years ended December 31, 2001 and 2000, Chiron recognized amortization expense of $1.7 million related to this
intangible asset.

Chiron Vision

On December 29, 1997, Chiron completed the sale of all of the outstanding capital stock of Chiron Vision to Bausch & Lomb Incorporated for
approximately $300.0 million in cash, subject to certain post-closing adjustments. The sale was completed under the terms of a stock purchase agreement, dated as of
October 21, 1997, between Chiron and Bausch & Lomb. Chiron retained Chiron Vision's cash and cash equivalents totaling $2.7 million, certain Chiron Vision real estate assets with
a carrying value of $25.1 million and Chiron Vision's future noncancelable operating lease costs totaling $1.1 million upon the completion of the sale. Under the terms of the
Bausch & Lomb agreement, Chiron provided customary indemnities and, accordingly, reserved for such contractual obligations to indemnify Bausch & Lomb against certain potential claims. In
the second quarter of 2001, Chiron reversed the remaining reserves of $1.5 million upon the sale of the remaining real estate assets, as discussed below. In 2000 and 1999, Chiron reversed
approximately $2.2 million and $8.3 million, respectively, of such reserves as such obligations had

F-24

---

expired unused. Both amounts were recorded as components of "Gain (loss) on disposal of discontinued operations."

For
a period of three years following the completion of the sale, Chiron Vision had the right to use a portion of the real estate assets, which were occupied at closing, on a
rent-free basis. As of December 31, 2000 and 1999, the real estate assets of $1.9 million, which represented all of the remaining net assets of Chiron's discontinued
operations, were recorded as "Other current assets" in the Consolidated Balance Sheets. In July 1999, Chiron recognized a net gain of $1.9 million upon the sale of a portion of these
real estate assets. In April 2001, Chiron sold the remaining real estate assets and recognized a net gain on the sale of these assets of $1.6 million. These gains were recorded as
components of "Gain (loss) on disposal of discontinued operations."

Income Taxes

In connection with the sale of Chiron Diagnostics and Chiron Vision, Chiron recorded cumulative net deferred tax assets of $23.7 million and
$26.5 million in 2001 and 2000, respectively, principally attributable to the timing of the deduction of certain expenses associated with these sales. Chiron also recorded corresponding
valuation allowances of $23.7 million and $26.5 million in 2001 and 2000, respectively, to offset these deferred tax assets, as management believes that it is more likely than not that
the deferred tax assets to which the valuation allowance relates will not be realized. The future recognition of these deferred tax assets will be reported as a component of "Gain (loss) on disposal
of discontinued operations."

"Gain
(loss) on disposal of discontinued operations" included an income tax benefit (provision) of $0.5 million, $(9.1) million and $20.4 million in 2001, 2000 and 1999,
respectively. The tax benefit in 2001 related to the reversal of reserves and valuation allowances against deferred tax assets that were set up at the time of the sale, as discussed above. The tax
provision in 2000 resulted from the 1999 estimated tax provision to tax return true-up adjustment on the Chiron Diagnostics final purchase price adjustment. The tax benefit in 1999
included the utilization of additional foreign sales corporation benefits and foreign tax credits resulting from the 1998 estimated tax provision to tax return true-up adjustments for
Chiron Diagnostics and Chiron Vision.

Note 5Acquisition of PathoGenesis Corporation

On September 21, 2000, Chiron acquired PathoGenesis Corporation, a company that developed and marketed drugs to treat infectious diseases, particularly
serious lung infections. The acquisition was accounted for under the purchase method of accounting and included the purchase of substantially all of the outstanding shares of common stock of
PathoGenesis at $38.50 per share. As discussed in Note 1, throughout 2001, Chiron recorded purchase price adjustments resulting from (i) a final reconciliation of PathoGenesis registered
shares of common stock, (ii) the true-up of severance, employee relocation, leasing and legal costs to amounts actually paid and (iii) the related deferred tax effects, the
total of which

F-25

---

resulted in a $3.8 million increase to the purchase price and a $2.2 million increase to goodwill. The revised components and allocation of the purchase price consisted of the following
(in thousands):

Consideration and acquisition costs:Cash paid for common stock

$
643,026Cash paid for options on common stock


66,216Acquisition costs paid as of December 31, 2001


23,141Acquisition costs not yet paid as of December 31, 2001


1,917Fair value, less intrinsic value for unvested portion, of options exchanged


3,371Total purchase price

$
737,671Allocation of purchase price:Assets acquired

$
94,784Write-off of purchased in-process technologies


171,600Purchased technologies


300,600Goodwill


214,211Other acquired intangible assets


53,900Liabilities assumed


(23,609
)Income taxes payable


(2,800
)Net deferred tax liability


(71,015
)Total purchase price

$
737,671


Outstanding
options on PathoGenesis' stock were either redeemed in cash or converted into options on Chiron's stock. The difference between the fair value of all options and the
intrinsic value associated with the unvested portion of those options was included as part of the purchase price.

Acquisition
costs included contractual severance and involuntary termination costs, as well as other direct acquisition costs. Approximately $16.4 million represented severance
payments, assumed by Chiron, to executives as dictated by their employment agreements.

Chiron
allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. A portion of the purchase price was allocated to purchased
in-process technologies and was written off entirely in the fourth quarter of 2000. The write-off of purchased in-process technologies represented the fair value at
the acquisition date, calculated utilizing the income approach, of the portion of certain in-process research and development projects that were not reliant upon core technology. Core
technology represents technology that has been utilized in approved or commercialized products. Certain research and development projects deemed too early in terms of completion metrics and any future
yet-to-be-defined technologies were not included in the calculation of in-process technologies. Chiron does not anticipate that there will be any
alternative future use for the in-process technologies that were written off. In valuing the purchased in-process technologies, Chiron used
probability-of-success-adjusted cash flows and a 15% discount rate. Cash inflows from any one in-process product were assumed to commence between 2002 and 2008.
Based on current information, Chiron believes that the revenue projections underlying the purchase price allocation are substantially accurate. As with all pharmaceutical products, the probability of
commercial success for any one research and development project is highly uncertain.

F-26

---

Purchased
technologies represented the fair value of research and development projects, which will be developed further and supported after the acquisition date, and are being amortized
on a straight-line basis over 15 years. Acquired intangible assets included the fair value of trademarks and trade names,
patents and databases, which are being amortized on a straight-line basis over 13 to 16 years. Acquired intangible assets also included the assembled workforce, which was being
amortized on a straight-line basis over 5 years. Goodwill resulting from the PathoGenesis acquisition was being amortized on a straight-line basis over 15 years.
Since Chiron elected to treat the acquisition as taxable in California, Chiron recorded current taxes payable of $2.8 million. The net deferred tax liability primarily related to the difference
between the carrying amounts and tax bases of the purchased technology and acquired intangible assets, offset by future utilization of net operating loss and tax credit carryforwards. Upon
acquisition, Chiron acquired federal net operating loss carryforwards and federal business credits of approximately $116.6 million and $6.5 million, respectively, attributed to
PathoGenesis.

Chiron
included PathoGenesis' operating results, including the last seven business days from September 21 to 30, 2000, in its consolidated operating results beginning on
October 1, 2000. PathoGenesis' operating results for the last seven business days in September 2000 were not significant to Chiron's consolidated operating results for the fourth quarter
of 2000.

The
following unaudited pro forma information presents the results of continuing operations of Chiron and PathoGenesis for the years ended December 31, 2000 and 1999 as if
Chiron's acquisition of PathoGenesis had been consummated as of January 1, 2000 and 1999, respectively. The pro forma information is presented in accordance with Accounting Principles Board
Opinions No. 16, "Business Combinations," and 17, "Intangible Assets," and does not purport to be indicative of what would have occurred had the acquisition been made as of this date or of
results that may occur in the future. The pro forma results exclude nonrecurring charges, such as the write-off of purchased in-process technologies, which resulted directly
from the transaction. The unaudited pro forma information is as follows (in thousands, except per share data):

Year Ended December 31,2000

1999(Unaudited)Total revenues

$
1,030,338

$
823,490Income from continuing operations

$
140,641

$
81,690Pro forma income per share from continuing operations:Basic

$
0.77

$
0.45Diluted

$
0.74

$
0.44


On
January 1, 2002, Chiron implemented Statement of Financial Accounting Standards (referred to as SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS 142
requires, among other things, that the assembled workforce be reclassified to goodwill and that goodwill (including assembled workforce) and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance with SFAS 142. The pro forma amounts above include amortization expense on the goodwill and assembled workforce
related to the PathoGenesis acquisition of $14.7 million for the year ended December 31, 2000.

F-27

---

Note 6Restructuring and Reorganization

Chiron previously recorded restructuring and reorganization charges related to (i) the integration of its worldwide vaccines operations, (ii) the
closure of its Puerto Rico and St. Louis, Missouri facilities and (iii) the ongoing restructuring of its business operations. The integration of its worldwide vaccines operations
consisted of termination and other employee-related costs recognized in connection with the elimination of 28 positions, all of which had terminated as of December 31, 2000, in Chiron's
Italian manufacturing facility and facility-related costs. The closure of its Puerto Rico and St. Louis facilities and the ongoing restructuring of its business operations consisted of
termination and other employee-related costs recognized in connection with the elimination of 400 positions in manufacturing, research, development, sales, marketing and other administrative
functions, and facility-related costs. Employee termination costs included wage continuation, advance notice pay and medical and other benefits. Facility-related costs included losses on disposal of
property, plant and equipment, lease payments and other related costs.

During
1999, Chiron decided to retain 18 of those 400 positions to support future contract manufacturing activities. Therefore, Chiron adjusted the number of positions for
elimination to 382. Again during 2000, Chiron decided to retain 11 of those 382 positions to support future contract manufacturing activities. Therefore, Chiron adjusted the number of positions
for elimination to 371. Included in the 371 positions were 36 positions at Chiron's Amsterdam facility. These positions were transferred to the buyer in January 2000 (see
Note 8) in connection with the December 1999 sale of the Amsterdam facility.

For
the year ended December 31, 2001, Chiron recorded net restructuring and reorganization charges of $0.1 million, which included a charge of $0.3 million and a
charge reversal of $0.2 million. The charge of $0.3 million primarily related to revised estimates of termination and other employee-related costs recognized in connection with the
elimination of 371 positions, of which 360 had terminated as of December 31, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

For
the year ended December 31, 2000, Chiron recorded net restructuring and reorganization charge reversals of $0.4 million, which included a charge reversal of
$0.6 million and a charge of $0.2 million. The charge reversal of $0.6 million primarily related to revised estimates of termination and other employee-related costs recognized in
connection with the retention of 11 of 382 positions. As described above, Chiron adjusted the number of positions for elimination to 371, of which 356 had terminated as of December 31,
2000. The charge of $0.2 million related to revised estimates of facility-related costs.

For
the year ended December 31, 1999, Chiron recorded net restructuring and reorganization charges of $0.2 million, which included a charge of $3.9 million and a
charge reversal of $3.7 million. The charge of $3.9 million primarily related to termination and other employee-related costs recognized in connection with the elimination of
28 positions at Chiron's Italian manufacturing facility, of which 24 of these positions had terminated as of December 31, 1999. The charge reversal of $3.7 million related to
(i) revised estimates of facility-related accruals recorded in connection with the closure of the St. Louis facility and (ii) revised estimates of termination and other employee-related
costs recorded in connection with the transfer of 36 positions at Chiron's Amsterdam facility to the buyer and the retention of 18 of the 400 positions. As described above, Chiron adjusted the
number of positions for elimination to 382, of which 319 had terminated as of December 31, 1999.

Included
in "Gain (loss) on disposal of discontinued operations" in the Consolidated Statements of Operations were net restructuring and reorganization charge reversals of
$0.3 million in 2000. This amount

F-28

---

related to the restructuring of Chiron'sin vitrodiagnostics business operations and primarily consisted of employee termination costs related to the
termination of 331 employees, all of which were terminated as of December 31, 1998. Chiron retained responsibility for $4.5 million of restructuring accruals upon the completion
of the sale of Chiron Diagnostics to Bayer. The restructuring accruals were fully utilized as of December 31, 2000.

Chiron
expects to substantially settle the restructuring and reorganization accruals within one to six years of accruing the related charges. As of December 31, 2001,
$0.2 million and $0.5 million were included in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Consolidated Balance Sheets. As of December 31,
2000, $1.7 million and $1.0 million were included in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Consolidated Balance Sheets.

The
activity in accrued restructuring and reorganization for the years ended December 31, 2001, 2000 and 1999 is summarized as follows (in thousands):

|                             |  | Accrual at
December 31,
2000 |       | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge
Reversal |  | Amount Utilized
Through
December 31, 2001 |      | Amount to
be Utilized
in Future
Periods
|---------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | --------------------------------------------- |  | ----------------------------------------- | ---- | ---------------------------------------
|Employee-related costs       |  | $                            | 1,816 |                                      | $ | 250                                           |  | $                                         |     |                                        
|Other facility-related costs |  |                              | 839   |                                      |   |                                              |  |                                           | (186 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                           |      |                                        
|                             |  | $                            | 2,655 |                                      | $ | 250                                           |  | $                                         | (186 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                           |      |                                        

|                             |  | Accrual at
December 31,
1999 |       | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge
Reversal |  | Amount Utilized
Through
December 31,
2000 |      | Amount to
be Utilized
in Future
Periods
|---------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | --------------------------------------------- |  | ----------------------------------------- | ---- | ---------------------------------------
|Employee-related costs       |  | $                            | 3,772 |                                      | $ |                                              |  | $                                         | (607 | )                                      
|Other facility-related costs |  |                              | 1,631 |                                      |   | 160                                           |  |                                           |     |                                        
|                             |  |                              |       |                                      |   |                                               |  |                                           |      |                                        
|                             |  |                              | 5,403 |                                      |   | 160                                           |  |                                           | (607 | )                                      
|Discontinued operations      |  |                              | 285   |                                      |   | 49                                            |  |                                           | (334 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                           |      |                                        
|                             |  | $                            | 5,688 |                                      | $ | 209                                           |  | $                                         | (941 | )                                      
|                             |  |                              |       |                                      |   |                                               |  |                                           |      |                                        

|                             |  | Accrual at
December 31,
1998 |        | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge
Reversal |  | Amount Utilized
Through
December 31,
1999 |        | Amount to
be Utilized
in Future
Periods
|---------------------------- |  | ---------------------------- | ------ | ------------------------------------ | - | --------------------------------------------- |  | ----------------------------------------- | ------ | ---------------------------------------
|Employee-related costs       |  | $                            | 15,390 |                                      | $ | 2,826                                         |  | $                                         | (2,697 | )                                      
|Other facility-related costs |  |                              | 3,931  |                                      |   | 1,099                                         |  |                                           | (1,031 | )                                      
|                             |  |                              |        |                                      |   |                                               |  |                                           |        |                                        
|                             |  |                              | 19,321 |                                      |   | 3,925                                         |  |                                           | (3,728 | )                                      
|Discontinued operations      |  |                              | 4,475  |                                      |   |                                              |  |                                           |       |                                        
|                             |  |                              |        |                                      |   |                                               |  |                                           |        |                                        
|                             |  | $                            | 23,796 |                                      | $ | 3,925                                         |  | $                                         | (3,728 | )                                      
|                             |  |                              |        |                                      |   |                                               |  |                                           |        |                                        

F-29

---

Note 7Research and Development Arrangements

Chiron participates in a number of research and development arrangements with other pharmaceutical and biotechnology companies to develop and market certain
technologies and products. Chiron and its collaborative partners generally contribute certain technologies and research efforts and commit, subject to certain limitations and cancellation clauses, to
share costs related to certain research and development activities, including those related to clinical trials. Chiron may also be required to make payments to certain collaborative partners upon
their achievement of specified milestones. Aggregate annual noncancelable funding commitments under collaborative arrangements are as follows: 2002$14.1 million;
2003$2.6 million; 2004$0.7 million; and 2005$0.5 million.

Occasionally,
Chiron invests in equity securities of its corporate partners. The price of these securities is subject to significant volatility. Chiron performs periodic reviews for
temporary or other than temporary impairment of its securities and records adjustments to the carrying values of those securities accordingly. In 2001, 2000 and 1999, Chiron recognized losses
attributable to the other-than-temporary impairment of certain of these equity securities of $4.0 million, $5.0 million and $1.7 million, respectively.

In
July 2001, Chiron granted Bristol-Myers Squibb Company rights under certain of its hepatitis C virus patents. The license fee is due in four installments with the first
payment of $1.0 million received in July 2001. The remaining installments are non-interest bearing and payable on July 10, 2002, July 10, 2003 and
July 10, 2004. In connection with this agreement, Chiron recorded $0.7 million as "Current portion of notes receivable" and $1.0 million as "Noncurrent notes receivable" at
December 31, 2001 in the Consolidated Balance Sheets.

In
April 2001, Chiron, Rhein Biotech N.V. and GreenCross Vaccine Corporation entered into a collaboration to research and develop certain pediatric combination vaccine
products for sale outside of Europe and North America. The collaboration agreement requires capital commitments from Chiron, Rhein Biotech and GreenCross Vaccine. Based on current estimates, Chiron's
commitment is approximately 24.4 million Euro ($21.5 million at December 31, 2001), primarily for the expansion of Chiron's Italian manufacturing facilities, which began in the
fourth quarter of 2001 and is expected to continue through 2008 (see Note 12).

In
June 2000, Chiron invested in a Singapore-based venture, S*BIO Pte Ltd, to research and develop therapeutic, diagnostic, vaccine and antibody products. Chiron also
granted S*BIO certain rights to its gene expression and combinatorial chemistry technology. Under this arrangement, Chiron will receive approximately $22.0 million over two years for technology
transfer. Chiron recognized collaborative agreement revenues of $12.1 million and $2.8 million in 2001 and 2000, respectively, under this arrangement. Since inception, Chiron has
invested $8.0 million, which was written off entirely due to the early stage of S*BIO's research and development activities, for a 19.9% ownership interest. Chiron accounts for the investment
on the cost method. Based upon the current agreement, Chiron is not obligated to make any further investments in S*BIO.

On
November 1, 1999, Chiron entered into a patent and license agreement with Scios, Inc. Under this agreement, Chiron paid $5.0 million of license fees, which were
recorded as "Research and development" in the Consolidated Statements of Operations for the year ended December 31, 1999, and advanced $7.5 million in return for a promissory note, which
was recorded as "Noncurrent notes receivable" in the Consolidated Balance Sheets as of both December 31, 2001 and 2000. The note bears interest at the prime rate (4.8% at December 31,
2001 and 9.5% at December 31, 2000), is due with accrued interest on

F-30

---

December 31, 2006 and will be forgiven (principal and accrued interest) if the U.S. Food and Drug Administration approves any product covered by the patent and license agreement for marketing
in the U.S. prior to December 31, 2006. Chiron may pay additional milestone payments if certain development objectives are met. In addition, Chiron may pay royalties of 4% on future net product
sales of the product under the patent and license agreement.

On
April 1, 1999, Chiron received a $9.7 million promissory note in consideration for payment under a biopharmaceutical license agreement with SkyePharma plc. The note
bears interest at the London interbank offered rate plus 3.0% (4.9% at December 31, 2001 and 9.4% at December 31, 2000). The interest is due quarterly, and the principal is due in three
equal installments, with the first two payments of $3.2 million each received in June 2001 and 2000. The final installment is payable on June 30, 2002. On December 28,
2000, Chiron received a $3.5 million promissory note in consideration for another payment under the same biopharmaceutical license agreement. The note bears interest at the London interbank
offered rate plus 3.0% (4.9% at December 31, 2001 and 9.4% at December 31, 2000). The interest is due quarterly, and the principal is payable in three equal installments, with the first
payment of $1.2 million received in June 2001. The final two installments are payable on June 30, 2002 and June 30, 2003. Chiron recorded $4.4 million as "Current
portion of notes receivable" at both December 31, 2001 and 2000 and $1.2 million and $5.6 million as "Noncurrent notes receivable" at December 31, 2001 and 2000,
respectively, in the Consolidated Balance Sheets. The notes are collateralized by SkyePharma's right, title and interest in and to all amounts payable by Chiron under the biopharmaceutical license
agreement.

Note 8Related Party Transactions

Novartis

Chiron has an alliance with Novartis AG, a life sciences company headquartered in Basel, Switzerland. Under a series of agreements between Chiron and
Novartis, effective January 1995, Novartis increased its ownership interest in Chiron to 49.9%. As a result of subsequent stock issuances by Chiron, Novartis' ownership interest in Chiron has
been reduced to approximately 41.9% as of December 31, 2001.



In January 1995, Chiron and Novartis AG entered into a Governance Agreement whereby Novartis agreed not to increase its ownership interest in Chiron above
55% unless it acquires all of Chiron's outstanding capital stock in a "buy-out transaction." Novartis may exceed these standstill amounts and increase its ownership interest up to 79.9% if
a majority of the independent directors of Chiron's Board of Directors approves the transaction. Novartis has the right, but not the obligation, to initiate the buy-out transaction. If
Novartis proposes a buy-out transaction, the independent directors may accept the proposal subject to stockholder approval. If the independent directors do not accept the proposal,
Novartis may request binding arbitration to determine the third party sales value. The independent directors may delay the arbitration up to one year. Upon determination of the third party sales value
by arbitration, Novartis may either proceed with the proposed buy-out transaction at the third party sales value determined by arbitration or withdraw its proposed buy-out
transaction. If Novartis withdraws its proposed buy-out transaction, Novartis cannot withdraw any subsequent proposal that resulted in a second arbitration to determine the third party
sales value of Chiron.

F-31

---

If
Chiron's Board of Directors authorizes the issuance of any equity securities, Novartis may purchase a portion of such securities sufficient to preserve its ownership interest in
Chiron. Such purchases must occur at the same time and on the same terms as the new securities are issued and sold to third parties. In addition, Chiron may require Novartis to purchase shares of
Chiron's common stock directly from Chiron at fair market value, up to $500.0 million. No such purchases occurred in 2001 (including the Liquid Yield Option Notes issued in June), 2000 and
1999.

As
long as Novartis owns at least 40% of Chiron's outstanding voting stock, Chiron may not engage in certain corporate transactions without Novartis' approval. These transactions
generally include significant debt or equity issuances, debt or equity repurchases, most mergers and acquisitions, the payment of cash dividends, amendments to Chiron's Certificate of Incorporation or
By-laws, and other transactions that would adversely impact the rights of Novartis, or discriminate against Novartis, as a Chiron stockholder. In addition, a majority of the independent
directors must approve any material transactions between Chiron and Novartis.

Under
the terms of the Governance Agreement, Novartis may nominate three members of Chiron's Board of Directors. The number of directors that Novartis may nominate declines if Novartis'
ownership interest in Chiron is less than 30%.



Under the terms of the Investment Agreement, Novartis AG guaranteed certain Chiron obligations under revolving credit facilities through January 1, 2008.
The principal amount of indebtedness under the guaranteed credit facilities may not exceed $402.5 million. In November 1996, Chiron and Novartis agreed that Chiron could increase the
maximum borrowing amount under the guaranteed credit facilities by up to $300.0 million. In exchange for this increase, the amount of Chiron's common stock required to be purchased by a
Novartis affiliate (at Chiron's request) would be reduced by an equal amount. Under the Investment Agreement, Novartis had guaranteed $100.0 million under a U.S. credit facility (see
Note 11) and $172.6 million of Chiron's operating lease commitments (see Note 12) as of December 31, 2001.

Also
under the terms of the Investment Agreement, Chiron granted the right to receive cash payments from Novartis to individuals who on November 20, 1994 held options under
Chiron's stock option plan. The right to receive the payment vests as the underlying options vest. Once vested, the right is exercisable at any time the option is outstanding. For options that vested
after 1995, the optionee must surrender the underlying options to receive the payment. In 2001 and 2000, Novartis made no payments to eligible option holders in connection with the surrender for
cancellation of such options. In 1999, Novartis paid approximately $0.8 million to eligible option holders in connection with the surrender for cancellation of 120,503 options (see
Note 13).



In December 1995, Chiron and Novartis AG entered into a Limited Liability Company agreement (also known as the R&D Funding Agreement). Under the terms of
this agreement, Novartis funded certain research and development projects, including certain adult and pediatric vaccines and Insulin-like Growth Factor-I. In
December 1997, this agreement was amended to include research and development activities related to Factor VIII gene therapy and Herpes Simplex Virus-thymidine kinase. The

F-32

---

R&D Funding Agreement provides that Novartis will purchase interests in a limited liability company as a means of providing this funding. In December 2000, this agreement was amended to
provide that, through December 31, 2001, at Chiron's request, Novartis would fund up to 100% of the development costs incurred between January 1, 1995 and December 31, 2000 on
these projects. The amount of funding that Novartis was obligated to provide was subject to an aggregate limit of $265.0 million. Under this agreement, in 2001, 2000 and 1999, Chiron recognized
collaborative agreement revenues of $9.1 million, $3.0 million and $46.2 million, respectively. This agreement expired on December 31, 2001.

In
consideration of the funding provided by Novartis under the R&D Funding Agreement, Novartis may receive royalties on future worldwide sales from certain adult and pediatric vaccines,
Insulin-like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine kinase, if any, which Chiron
successfully develops. Novartis also has co-promotional rights, in countries other than in North America and Europe, for certain adult vaccines. Chiron will pay royalties on the designated
products for a minimum of 10 years from the later of October 1, 2001 or the date of the first commercial sale of individual products covered by the amended R&D Funding Agreement. As of
December 31, 2001, Chiron recorded royalties to Novartis of $0.7 million, which were recorded in "Cost of SalesRelated Parties" in the Consolidated Statements of Operations.
Chiron has the right, but not the obligation, to buy-out Novartis' interests in the designated products for a price equal to the aggregate amount of R&D funding provided by Novartis, less
any payments to or profits earned by Novartis in connection with the designated products, plus interest at the London interbank offered rate. Chiron allowed its buy-out right to lapse on
January 1, 2002.

In
December 1999, Chiron sold certain assets that it had developed or acquired in connection with its research and development of a Cytomegalovirus vaccine to Aventis Pasteur MSD
(formerly Pasteur Mérieux Connaught) for $10.0 million and licensed certain technology to Aventis Pasteur MSD for use in connection with the Cytomegalovirus vaccine. The sale of
these assets resulted in a gain of $7.5 million, which was included in "Gain on sale of intangible assets" in the Consolidated Statements of Operations. Under the terms of the agreements, in
the event Aventis Pasteur MSD successfully develops a Cytomegalovirus vaccine, it will pay Chiron royalties on net sales of such vaccine and will grant Chiron marketing rights to such vaccine in
Germany and Italy. Novartis had provided research funding for Chiron's Cytomegalovirus vaccine research and development program. In connection with this sale, Novartis waived its
co-promotion rights for the Cytomegalovirus vaccine in return for royalties equal to 25% of fees and royalties received by Chiron related to the Cytomegalovirus vaccines. In 1999, Chiron
recorded an amount payable to Novartis of $2.5 million, which represented 25% of Chiron's $10.0 million payment from Aventis Pasteur MSD. Chiron paid this amount in 2000.



Under the terms of a November 1995 agreement with Novartis AG, Novartis paid $26.0 million over a five-year period in exchange for a
non-exclusive license to utilize Chiron's combinatorial chemistry techniques. In addition, Novartis and Chiron collaborated to utilize combinatorial chemistry technology to identify
potential products in selected target areas. The agreement provided for research funding by Novartis and certain up-front milestone and royalty payments, as well as product
commercialization rights for both parties. In connection with this agreement, Chiron recognized collaborative agreement revenues of $3.3 million and $4.2 million in 2000 and 1999,
respectively. This agreement expired in the fourth quarter of 2000. In connection with the sale of its Australian subsidiary to Mimotopes Pty. Ltd. in

F-33

---

February 2000 (see Note 15), Chiron and Mimotopes entered into an agreement, under which Mimotopes performed the research and development for the remaining term of this agreement with
Novartis. Chiron paid Mimotopes $0.7 million for the research and development services, which it amortized over the period during which the services were performed.



In November 1996, in connection with the U.S. Federal Trade Commission's review of the merger between Ciba-Geigy Limited and Sandoz Limited
which created Novartis AG, Chiron and Novartis entered into a consent order pursuant to which Chiron granted a royalty-bearing license to Rhone-Poulenc Rorer, Inc. under certain Chiron patents
related to the Herpes Simplex Virus-thymidine kinase gene in the field of gene therapy. Chiron and Novartis entered into a separate agreement which provided, among other things, for certain cross
licenses between Chiron and Novartis, and under which Novartis paid Chiron $60.0 million over five years. In connection with the agreement, Chiron recognized collaborative agreement revenues of
$10.0 million for each of the years 2001, 2000 and 1999. This agreement expired in the fourth quarter of 2001.



In connection with the sale of Chiron Diagnostics to Bayer Corporation, a promissory note owed by Chiron Diagnostics to Novartis AG was transferred to and assumed
by Chiron. The note payable to Novartis bore interest at a variable rate based on the London interbank offered rate (5.7% at December 31, 1999). As of December 31, 1999, the outstanding
amount was $67.8 million, including accrued interest. Chiron paid in full the note and accrued interest on January 4, 2000.

Employee Loans

In September 1999, Chiron provided a loan of $0.4 million, which consists of two agreements in the principal amount of $0.2 million each, to
a senior executive officer. The loan is secured by a second deed of trust on real estate. The first agreement bears a fixed interest rate of 5.98%, and principal will be forgiven in annual
installments over a period of five years, with the outstanding principal balance to be forgiven in full on August 2, 2004, so long as the officer remains an employee of Chiron or a Chiron
affiliate. The second agreement bears a fixed interest rate of 6.25%, with the outstanding principal balance due in full on August 2, 2009. As of December 31, 2001 and 2000, the amount
outstanding on the loan was $0.3 million and $0.4 million, respectively.

In
July 1999, Chiron provided a loan of $0.2 million to a senior executive officer. The loan, which is non-interest bearing, is secured by a third deed of trust
on real estate. Principal will be forgiven in annual installments over a period of three years, with the outstanding principal balance to be forgiven in full on July 20, 2002, so long as the
officer remains an employee of Chiron or a Chiron affiliate. The senior executive officer terminated in 2001 and, as a result, paid the loan in full on March 15, 2001.

In
June 1998, Chiron provided a loan of $1.0 million to a senior executive officer. The loan, which is non-interest bearing, is secured by a primary deed of
trust on real estate. Principal is payable in annual installments of $0.05 million over a period of ten years, with the outstanding principal balance due in full on June 22, 2008. As of
both December 31, 2001 and 2000, the amount outstanding on the loan was

F-34

---

$0.9 million. In addition, Chiron has extended the senior executive officer an annual bonus of $0.05 million over the life of the loan.

In
April 1996, Chiron provided a loan of $0.2 million to a senior executive officer. The loan bore interest at a fixed rate of 8.25% and was secured by a second deed of
trust on real estate. The senior executive officer paid the loan and accrued interest in full on April 23, 2001.

Chiron
has also extended loans to various other employees primarily to acquire real estate. The loans generally are secured by a deed of trust on the real estate, with principal balances
due over a period of one to ten years. The average interest rates were 3.77% in 2001 and 5.80% in 2000. As of December 31, 2001 and 2000, amounts outstanding under these employee loans were
$1.0 million and $0.5 million, respectively.

Sale of the Amsterdam Manufacturing Facility

In December 1999, Chiron sold its Amsterdam manufacturing facility and related machinery and equipment assets to SynCo B.V., a company owned by a
director of Chiron, for $15.0 million in cash. The sale of the Amsterdam manufacturing facility resulted in a gain of $1.2 million, of which $0.9 million was included in "Gain
(loss) on sale of assets" in the Consolidated Statements of Operations and $0.3 million was deferred as a result of the leaseback described below. Chiron is amortizing the unearned revenue as a
reduction to rent expense over the lease term.

Chiron
is leasing back office and warehouse space in the Amsterdam facility for some operational and administrative activities. The lease is a noncancelable operating lease, which
expires in 2004 and may be extended for a period of two consecutive years (see Note 12). Annual rent is 0.6 million Euro ($0.5 million at December 31, 2001).

At
its option, Chiron may lease certain equipment under the same terms as the office and warehouse lease. As of December 31, 2001, Chiron had not exercised this option. Also, at
the option of SynCo, Chiron may provide various administrative services to SynCo. As of December 31, 2001, no such administrative services were being provided. At the option of Chiron, SynCo
may provide various manufacturing and quality control services to Chiron. In July 2001, Chiron and SynCo entered into another agreement, to include the manufacture of certain vaccine products
through January 1, 2004 upon Chiron's request. For the years ended December 31, 2001 and 2000, Chiron incurred expenses of approximately $0.6 million and $0.3 million,
respectively, which were included in "Cost of SalesRelated
parties" in the Consolidated Statements of Operations, related to such manufacturing and quality control services.

Consulting Agreements with Directors

In February 2000, Chiron entered into one-year consulting agreements with two directors. Under these agreements, Chiron paid the directors
$0.05 million and $0.2 million, respectively. These agreements expired in February 2001. In February 2001, Chiron renewed one of the consulting agreements with one of the
directors, under which he received $0.1 million for consulting services. This agreement expires in May 2002.

F-35

---

Other Arrangements with Executives and Directors

Chiron made charitable contributions to a local university, for which a Chiron director serves as a dean. Those contributions amounted to approximately
$0.7 million, $0.2 million and $0.06 million in 2001, 2000 and 1999, respectively.

In
connection with the sale of Chiron Diagnostics, Chiron discontinued its informatics program and terminated the employees engaged in that program in January 1999. The former
employees organized a new company, with which Chiron entered into a license agreement in June 1999. As payment for the license agreement, Chiron received shares representing approximately 15%
of common stock of the new company. In addition, a Chiron director also has an interest in the new company and serves on its board of directors.

Chiron
occasionally engaged a construction company, owned by an executive's family member, to provide construction services in connection with the maintenance or remodeling of certain
portions of Chiron's Emeryville facilities. Chiron paid that construction company approximately $0.07 million, $0.7 million and $1.7 million in 2001, 2000 and 1999, respectively.
An unaffiliated party purchased the construction company in January 2001.

Chiron
has a supplemental benefits arrangement with a director, under which Chiron paid the director $0.01 million in each of 2001, 2000 and 1999.

Note 9Joint Business Arrangement

In 1989, Chiron entered into an agreement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company, to jointly develop, manufacture and
market certain immunodiagnostic products. Under the terms of the agreement, Chiron receives 50% of the pretax operating profits of the joint business and is reimbursed for its continuing research,
development and manufacturing costs. The joint business sells a line of immunodiagnostic tests to screen blood for hepatitis viruses and retroviruses and provides supplemental tests and
microplate-based instrument systems to automate test performance and data collection. The joint business also holds the immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and
receives royalties from several companies, including Abbott Laboratories, Inc. and Bio-Rad Laboratories, Inc., for their sales of certain tests.

Chiron
records its share of profits from the joint business on a one-month lag using estimates provided by Ortho-Clinical Diagnostics. Through 1999, the joint business
recorded an inventory adjustment at the end of each year. Included in Chiron's share of the profits in 1999 were inventory adjustments of $(0.7) million. Beginning in 2000, the joint business
accounted for inventory adjustments on a quarterly basis. Profit sharing distributions are payable to Chiron within 90 days after the end of each quarter. At December 31, 2001 and 2000,
$21.8 million and $19.7 million, respectively, were due from Ortho-Clinical Diagnostics for profit sharing and reimbursement of costs. In 2001, 2000 and 1999, Chiron's 50% share of the
profits from the joint business, which was recorded in "Equity in earnings of unconsolidated joint businesses," was $84.5 million, $84.2 million and $78.1 million, respectively.
Revenues recognized under the cost reimbursement portion of the agreement in 2001, 2000 and 1999 were $20.3 million, $20.7 million and $18.4 million, respectively, for product
sales and $11.1 million, $10.1 million and $8.3 million, respectively, for collaborative research.

F-36

---

Note 10Fair Value of Financial Instruments

Marketable Securities

For the year ended December 31, 1999, Chiron recorded an unrealized gain on trading securities of $3.4 million as part of "Other income, net" in the
Consolidated Statements of Operations. In 2000, Chiron sold these securities and recognized a gain of $0.8 million, which was recorded in "Other income, net" in the Consolidated Statements of
Operations. Chiron had no trading securities at December 31, 2001 and 2000.

Available-for-sale
securities consisted of the following at December 31:

|                |  | 2001 |           | 2000
|--------------- |  | ---- | --------- | ----
|
|
|U.S. Government |  | $    | 37,115    |     
|Corporate Debt  |  |      | 885,565   |     
|Other           |  |      | 55,909    |     
|                |  |      |           |     
|                |  |      | 978,589   |     
|Equity          |  |      | 29,373    |     
|                |  |      |           |     
|                |  | $    | 1,007,962 |     
|                |  |      |           |     

Related to equity securities, Chiron selectively enters into forward sales contracts, which are designated as fair value hedges under Statement of
Financial Accounting Standards No. 133. At the inception of the hedge, the difference between the cost and the fair value of the equity security remains in comprehensive income. On
January 1, 2002, Chiron recorded, in other comprehensive income, net unrealized losses on equity securities of $5.9 million, which were offset completely in other comprehensive income by
changes in the fair value of the related forward sales contracts. Subsequent changes in the fair value of the forward sales contract and the underlying equity security are recognized in earnings. The
above table includes net unrealized gains on equity securities of $18.7 million, which were offset completely in earnings by the changes in the fair value of the related forward sales
contracts.

Available-for-sale
securities were classified in the Consolidated Balance Sheets as follows at December 31:

2001

2000(In thousands)Cash equivalents

$


$
6,164Short-term investments in marketable debt securities


456,506


534,621Noncurrent investments in marketable debt securities


524,858


149,925Investments in equity securities


127,150


146,613$
1,108,514

$
837,323


F-37

---

The
cost and estimated fair value of available-for-sale debt securities by contractual maturity consisted of the following at December 31, 2001:

Adjusted
Cost

Fair
Value(In thousands)Due in one year or less

$
454,208

$
456,506Due in one to five years


524,381


524,858$
978,589

$
981,364


Other Financial Instruments

The carrying amounts and fair values of financial instruments, other than those accounted for in accordance with Statement of Financial Accounting Standards
No.115, were as follows at December 31:

|                                                                       |                                                | 2001 |         | 2000 
|---------------------------------------------------------------------- | ---------------------------------------------- | ---- | ------- | -----
|
|
|Nonmarketable equity investments (accounted for under the cost method) |                                                | $    | 19,834  |      
|Notes receivable                                                       |                                                |      | 14,809  |      
|Employee loans receivable                                              |                                                |      | 2,149   |      
|Deposits                                                               |                                                |      | 2,215   |      
|Interest receivable on equity forward sales contracts                  |                                                |      | 2,962   |      
|Advance from lessors (see Note 12)                                     |                                                |      | 9,051   |      
|Non-current payable                                                    |                                                |      | 3,896   |      
|Liquid Yield Option Notes                                              |                                                |      | 406,251 |      
|Other notes payable (see Note 11)                                      |                                                |      | 2,666   |      
|Derivative financial instruments:                                      |                                                |      |         |      
|                                                                       | Foreign currency option contracts (asset)      |      |         | 756  
|                                                                       | Equity forward sales contracts (liability)     |      |         | 8,034
|                                                                       | Forward foreign currency contracts (liability) |      |         | 2,269
|                                                                       | Embedded derivative instruments (liability)    |      |         | 204  
|                                                                       |                                                |      |         |      
|                                                                       |                                                |      | 10,507  |      
|Off-balance sheet financial instruments:                               |                                                |      |         |      
|                                                                       | Equity forward sales contracts                 |      |         |     
|                                                                       | Forward foreign currency contracts             |      |         |     

The
fair value estimates provided above were based on information available at December 31, 2001 and 2000. Considerable judgment was required in interpreting market data to
develop the estimates of fair value. As such, these estimated fair values are not necessarily indicative of the amounts that Chiron could realize in a current market exchange.

F-38

---

The
fair value of nonmarketable equity investments that are accounted for under the cost method primarily was based on estimated market prices determined by a broker. The carrying values
of variable rate notes receivable, employee loans receivable and notes payable approximated fair value due to the market-based nature of these instruments. The fair value of the deposits was based on
the discounted value of expected future cash flows using current rates for assets with similar maturities. The carrying values of the interest-bearing advance and non-current payable
approximated fair value due to the market-based nature of these instruments. The fair value of Liquid Yield Option Notes was based on the market price at the close of business on the last day of the
fiscal year. The fair values of the equity forward sales contracts (including the related interest receivable), the forward foreign currency contracts, and the foreign currency option contracts were
based on estimated market prices, determined by a broker. Included in current assets and current liabilities were certain other financial instruments whose carrying values approximated fair value due
to the short-term nature of such instruments.

Equity Forward Sales Contracts

Beginning in 2001, Chiron designated its equity forward sales contracts as fair value hedges under Statement of Financial Accounting Standards No. 133.
"Other income, net" in the Consolidated Statements of Operations for the year ended December 31, 2001 included a net gain of $2.4 million for changes in the time value of these fair
value hedges. Chiron considers all time value changes to be ineffective and, therefore, recognizes them immediately in earnings.

Forward Foreign Currency Contracts

Forward foreign currency contracts are hedges, but are not accounted for as hedges under Statement of Financial Accounting Standards No. 133. Foreign
currency transaction gains from continuing operations, net of the impact of hedging with forward foreign currency contracts, were $1.9 million and $5.5 million in 2001 and 2000,
respectively. Foreign currency transaction gains and losses from continuing operations were not significant in 1999. In 2000, Chiron hedged a portion of its exposure to the British pound related to
Menjugate sales. Chiron settled this hedging contract upon substantial conclusion of Menjugate sales in the United Kingdom in the second quarter of 2000. The settlement
resulted in a gain of approximately $5.4 million, which was recorded in "Other income, net" in the Consolidated Statements of Operations.

Foreign Currency Option Contracts

Beginning in 2001, Chiron designated its foreign currency option contracts as cash flow hedges under Statement of Financial Accounting Standards No. 133.
For cash flow hedges, derivative gains and losses included in comprehensive income are reclassified into earnings at the time the forecasted revenue is recognized. Approximately $0.02 million
of net derivative gains were reclassified into earnings during 2001. Chiron settled all cash flow hedges as of December 31, 2001. "Other income, net" in the Consolidated Statements of
Operations for the year ended December 31, 2001 included net losses of $1.3 million for changes in the time value of cash flow hedges.

F-39

---

Embedded Derivative Instruments

The contingent additional principal and contingent cash interest features of the Liquid Yield Option Notes are considered embedded derivatives under Statement of
Financial Accounting Standards No. 133. The value of the embedded derivatives is reassessed at each balance sheet date, and any change from the prior balance sheet date is reflected currently
in earnings. The change in the value of the embedded derivatives was not material for year ended December 31, 2001.

Short Sales

Short sales entered into with major financial institutions substantially offset long positions and, in effect, neutralize the impact of market valuation shifts on
hedged securities. In 2000, Chiron settled its short sales upon sale of the related equity securities. The settlement resulted in a gain of approximately $2.4 million, which was recorded in
"Other income, net" in the Consolidated Statements of Operations.

Cross Currency Interest Rate Swaps

Cross currency interest rate swaps entered into with major financial institutions are used to modify the interest and/or currency characteristics of certain
assets and liabilities. Cross currency interest rate swaps involve the exchange of interest payments denominated in different currencies, based upon the terms described in the swap agreements. In
2000, Chiron terminated its cross currency interest rate swaps, resulting in a gain of approximately $2.7 million, which was recorded in "Other income, net" in the Consolidated Statements of
Operations.

Note 11Debt Obligations

Long-term debt consisted of the following at December 31:

2001

2000(In thousands)Liquid Yield Option Notes, net of unamortized discount of $323,749

$
406,251

$
Other notes payable


2,666


4,251408,917


4,251Less current portion





(1,212
)$
408,917

$
3,039


Liquid Yield Option Notes

In June 2001, Chiron issued zero coupon Liquid Yield Option Notes with a face value of $730.0 million and a yield to maturity of 2.0%. The Liquid
Yield Option Notes are carried net of an original issue discount of $328.2 million, which is being accreted to interest expense over the life of the Liquid Yield Option Notes using the
effective interest method. The Liquid Yield Option Notes mature on June 12, 2031. The Liquid Yield Option Notes are uncollateralized and unsubordinated, and rank equal in right of payment to
Chiron's existing and future uncollateralized and unsubordinated indebtedness.

F-40

---

Beginning
on June 12, 2004 and continuing through June 12, 2006, the holder may receive contingent additional principal if Chiron's stock price falls below the threshold
specified in the indenture. The
contingent additional principal will replace the original issue discount and bear an effective yield of 2.0 to 9.0% per year for the two-year period. After June 12, 2006, the
original issue discount will continue to accrue at 2.0% per year.

Beginning
after June 12, 2006, the holder may receive contingent cash interest during any six-month period if the average market price of the Liquid Yield Option Notes
is greater than or equal to the threshold specified in the indenture. The contingent cash interest in respect of any quarterly period will equal 0.0625% of the average market price of a Liquid Yield
Option Notes for a five trading day measurement period preceding the applicable six-month period.

At
the option of the holder, Chiron may be required to redeem all or a portion of the Liquid Yield Option Notes on the following dates at the following prices:

Date

PriceJune 12, 2004

$
584.31June 12, 2006

$
608.04June 12, 2011

$
671.65June 12, 2016

$
741.92June 12, 2021

$
819.54June 12, 2026

$
905.29


The
redemption prices would increase for any accrued contingent additional principal and accrued original issue discount thereon.

As
an alternative to redemption, holders may convert the Liquid Yield Option Notes at any time on or before the maturity date. For each Liquid Yield Option Note converted, the holder
will receive 7.1613 shares of Chiron common stock. Any accrued original discount, contingent additional principal and unpaid contingent cash interest are ineligible for conversion.

Upon
a change in control of Chiron occurring on or before June 12, 2006, each holder may require Chiron to purchase all or a portion of such holder's Liquid Yield Option Notes for
cash at a price equal to 100% of the issue price for such Liquid Yield Option Notes plus any accrued original issue discount and contingent additional principal (and accrued original issue discount
thereon) to the date of purchase. The change in control definition would allow Novartis to acquire beneficial ownership of up to 79.9% of Chiron's common stock without triggering a change in control
for purposes of the Liquid Yield Option Notes.

Bond
issuance costs amounted to approximately $9.9 million and are being amortized to interest expense on a straight-line basis, which approximated the effective
interest method, over three years, which represents the period from the issue date to the earliest put date. Bond issuance costs are recorded in "Other intangible assets, net" in the Consolidated
Balance Sheets.

F-41

---

Other Notes Payable

Chiron had various other notes payable with average interest rates of 6.0% and 5.0% at December 31, 2001 and 2000, respectively. Maturities range from 2003
to 2015. Future maturities of other notes payable are as follows: 2003-$0.5 million; 2004-$0.1 million; 2005-$0.1 million; 2006-$0.1 million; and $1.9 million
thereafter. Approximately $2.4 million of the other notes payable were collateralized by land and buildings with a net book value of $3.5 million at December 31, 2001.

Convertible Subordinated Debentures

In 1993, Chiron issued 1.90% convertible subordinated debentures with a face value of $253.9 million and a yield to maturity of 4.50%. The debentures were
carried net of an initial issue discount of $39.3 million, which was being accreted over the life of the debentures using the interest method. On August 11, 2000, Chiron's Board of
Directors authorized management to call for redemption the outstanding $253.9 million 1.90% convertible subordinated debentures, including $10.1 million held by Novartis AG, according to
the original indenture terms. The redemption price for each $1,000 principal amount of the debentures was $1,004.98, which included accrued interest of $7.60 to the redemption date. As an alternative
to redemption, bondholders were entitled to convert the debentures into shares of Chiron's common stock at a conversion price of $28.91 per share, or 34.6 shares for each $1,000 principal amount of
bonds held, plus cash in lieu of fractional shares. Through December 31, 2000, debentures with a face value of $253.8 million, and an amortized cost of $253.0 million, were
converted into 8.8 million shares of Chiron's common stock. The unamortized discount and the related deferred tax liability were recorded in additional paid-in capital. The interest
accrued through the conversion date, net of income taxes, was also recorded in additional paid-in capital. The remaining unconverted debentures were redeemed in cash.

As
a result of the 1991 acquisition of Cetus Corporation, Chiron had outstanding 5.25% convertible subordinated debentures with a face value of $100.0 million. In 1991, these
debentures were recorded at their then fair market value, which resulted in a discount of $20.0 million. This discount was being accreted over the life of the debentures using the interest
method. On April 4, 2000, Chiron's Board of Directors authorized management to call for redemption the outstanding $100.0 million 5.25% convertible subordinated debentures, according to
the original indenture terms. Through December 31, 2000, debentures with a face value of $98.4 million, and an amortized cost of $94.2 million, were converted into
3.2 million shares of Chiron's common stock, at a conversion price of $30.83 per share. The unamortized discount of $4.2 million and the related deferred tax liability of
$2.0 million were recorded in additional paid-in capital. The remaining unconverted debentures were redeemed in cash.

Short-Term Borrowings

Under a revolving, committed, uncollateralized credit agreement with a major financial institution, Chiron can borrow up to $100.0 million in the U.S. This
credit facility is guaranteed by Novartis AG under the November 1994 Investment Agreement (see Note 8), provides various interest rate options and matures in February 2003. There
were no borrowings outstanding under this credit facility at December 31, 2001 or 2000.

F-42

---

Chiron
also has various credit facilities available outside the U.S. Borrowings under these facilities totaled $0.5 million and $1.2 million at December 31, 2001 and
2000, respectively. One facility is maintained for all of Chiron's European subsidiaries and allows for total borrowings of $50.0 million. There were no outstanding borrowings under this
facility at December 31, 2001 and 2000. Chiron's Italian subsidiary also has various facilities, related to its receivables, which allow for total borrowings of 10.9 million Euro
($9.6 million at December 31, 2001). There were no outstanding borrowings under this facility at December 31, 2001. At December 31, 2000, $0.1 million were
outstanding under this facility. A third facility is maintained for Chiron's 51%-owned Indian subsidiary and allows for total borrowings of 200 million Indian Rupee ($4.1 million at
December 31, 2001). At December 31, 2001 and 2000, $0.5 million and $1.1 million, respectively, were outstanding under this facility. Outstanding borrowings under the
Indian credit facility were collateralized by machinery and equipment with a net book value of $3.6 million and trade receivables and inventory with a total net book value of
$3.9 million at December 31, 2001.

Note 12Commitments and Contingencies

Capital Commitments

In April 2001, Chiron, Rhein Biotech N.V. and GreenCross Vaccine Corporation entered into a collaboration to research and develop certain pediatric
combination vaccine products for sale outside of Europe and North America. The collaboration agreement requires capital commitments from Chiron, Rhein Biotech and GreenCross Vaccine. Based on current
estimates, Chiron's commitment is approximately 24.4 million Euro ($21.5 million at December 31, 2001), primarily for the expansion of Chiron's Italian manufacturing facilities,
which began in the fourth quarter of 2001 and is expected to continue through 2008.

In
February 2001, Chiron's Board of Directors approved a $235.0 million capital expansion project, which includes the construction of a parking structure and a research and
development facility (including a supporting central utility facility) in Emeryville, California. Related to the parking structure, Chiron had committed to $17.9 million in design and
construction services, under which Chiron had incurred costs of $8.4 million, as of December 31, 2001. Chiron may cancel these commitments at any time. Related to the research and
development facility, Chiron is evaluating various financing alternatives to fund this expansion. Chiron expects to begin construction on the research and development facility in the second half of
2002.

Chiron
had various other firm purchase and capital project commitments totaling approximately $4.3 million at December 31, 2001.

Leases

Chiron leases laboratory, office and manufacturing facilities, land and equipment under noncancelable operating leases, which expire through 2014. Rent expense,
net of sublease income, from continuing operations was $28.3 million, $28.7 million and $24.6 million in 2001, 2000 and 1999, respectively. Future minimum lease payments under
these leases, net of future minimum payments to be received under subleases, are as follows: 2002-$29.2 million; 2003-$26.2 million;
2004-$20.7 million;

F-43

---

2005-$17.7 million; 2006-$14.8 million; and thereafter-$56.9 million. Total future minimum rentals to be received under noncancelable subleases
approximated $1.4 million as of December 31, 2001.

In
June 1996, Chiron entered into a seven-year agreement with a group of financial institutions (referred to as the "lessors" in this section) to lease a research and
development facility. Construction was completed on this facility in 1999. The total cost of the facility covered by this lease was $172.6 million. Chiron accounts for this lease as an
operating lease and, as a result, records neither an asset nor a liability on its balance sheet. The future minimum lease payments stated above include only the annual lease payments of
$7.5 million for 2002 and $3.5 million for the first six months of 2003. The annual lease payments represent variable-rate interest payments (indexed to the London interbank
offered rate)
on the $172.6 million lease financing. Since the lease payments are clearly and closely related to the host contract (the lease agreement, in this case), this lease transaction is not subject
to Statement of Financial Accounting Standards No. 133. For tax purposes, the lease is considered a capital leasethe annual lease payments are characterized as interest expense
with the tax depreciation on the facility reducing taxable income and, therefore, the current tax liability.

The
lease provides a $146.7 million residual value guarantee from Chiron to the lessors in the event of property value declines. Consequently, Chiron's maximum payment obligation
is $146.7 million upon termination of the lease on or before July 1, 2003.

On
or before July 1, 2003, Chiron can choose to either purchase the facility from the lessors or sell the facility to a third party. This option accelerates if Chiron defaults on
its lease payments.

If
Chiron purchases the facility, Chiron must pay the lessors $172.6 million, record the facility (on its balance sheet) at the facility's cost and depreciate the facility over
its remaining estimated useful life. In addition, if Chiron finances the purchase of the facility, Chiron would incur interest expense.

If
Chiron sells the facility on the designated sale date, the sales proceeds would be distributed as follows: (1) to the lessors for their residual interest in the cost of the
facility (cost of the facility less the residual value guarantee or $25.9 million); and (2) to Chiron for amounts paid under the residual value guarantee on or before July 1,
2003. If Chiron does not sell the facility by the designated sale date, the lessors may market the facility for sale. When the lessors sell the facility, the sales proceeds first would be distributed
to the lessors for marketing and operating costs, then in the order as indicated in the previous sentence. If the facility is sold for more than $172.6 million, Chiron receives the remaining
proceeds and, possibly, recognizes a gain. Likewise, if the facility is sold for less than $172.6 million, Chiron recognizes a loss up to the residual value
guarantee.

As
of December 31, 2001, Novartis AG had guaranteed (under provisions of the Investment Agreement) payments on this lease commitment, including payment of the residual value
guarantee, to a maximum of $172.6 million.

Credit
rating agencies treat this operating lease as debt.

Chiron
understands that the Financial Accounting Standards Board is considering new rules on the accounting for certain off-balance sheet lease financing. Such rules may require that,
among other things, certain off-balance sheet lease financing be recorded on the balance sheet. The Financial Accounting Standards Board expects to issue the new rules in April 2002. As new
information is released, Chiron will continue to monitor the impact of these rules on our June 1996 lease agreement.

F-44

---

Cetus Healthcare Limited Partnerships

In 1987 and 1990, Cetus and its affiliate, EuroCetus International N.V., exercised their options to repurchase all of the limited partnership interests in Cetus
Healthcare Limited Partnership and Cetus Healthcare Limited Partnership II. Under the Cetus Healthcare Limited Partnership purchase agreements, which expired on December 31, 2001, Chiron was
obligated to pay royalties on sales of certain therapeutic products in the U.S. and certain diagnostic products worldwide, as well as a portion of license, distribution or other fees with respect to
such products, to the former limited partners of Cetus Healthcare Limited Partnership. Under the Cetus Healthcare Limited Partnership II purchase agreements, which expire on December 31, 2005,
Chiron is obligated to pay royalties and a portion of other income with respect to sales of certain products in Europe to the former limited partners of Cetus Healthcare Limited Partnership II. Chiron
is unable to estimate future costs subject to this obligation since these costs are based on future product sales.

Other Commitments

Effective July 1, 1998, Chiron and IBM Corporation executed a ten-year information technology services agreement. Under this agreement, IBM
agreed to provide Chiron with a full range of information services. Chiron can terminate this agreement at any time beginning July 1, 1999 subject to certain termination charges. If Chiron does
not terminate this agreement, payments to IBM are expected to be approximately $92.8 million. Payments to IBM are subject to adjustment depending upon the levels of services and infrastructure
equipment provided by IBM, as well as inflation.

At
December 31, 2001, Chiron had $4.5 million outstanding under a letter of credit, which is required by German law, related to ongoing legal proceedings in Germany. Chiron
also had various performance bonds and insurance-related letters of credit in the amount of $13.8 million outstanding at December 31, 2001.

Note 13Stockholders' Equity

Stock Compensation Plans

At December 31, 2001, Chiron has two stock-based compensation plansa fixed stock option plan and an employee stock purchase
planwhich are described below. Chiron applies Accounting Principles Board Opinion No. 25 and Financial Accounting Standards Board Interpretation No. 44 in accounting for its
plans for shares issued to employees. Accordingly, Chiron does not recognize compensation expense for its stock-based compensation plans, other than for share rights, as all other awards are issued at
fair value.

F-45

---

Had
compensation cost for stock-based compensation plans been determined based upon the fair value method prescribed under Statement of Financial Accounting Standards No. 123, net
income and related net income per share would have been reduced to the following pro forma amounts:

2001

2000

1999(In thousands, except per share data)Net income (loss)basic:As reported

$
180,036

$
8,514

$
160,577Pro forma

$
129,065

$
(21,594
)
$
139,760Net income (loss)diluted:As reported

$
180,036

$
8,514

$
162,513Pro forma

$
129,065

$
(21,594
)
$
141,696Basic net income (loss) per share:As reported

$
0.95

$
0.05

$
0.89Pro forma

$
0.68

$
(0.12
)
$
0.77Diluted net income (loss) per share:As reported

$
0.92

$
0.04

$
0.86Pro forma

$
0.66

$
(0.12
)
$
0.75


Fixed Stock Option Plan

Chiron's fixed stock option plan provides for the grant to employees of either nonqualified or incentive options and provides for the grant to directors,
consultants and contractors of nonqualified options. Incentive options are to be granted at not less than the fair market value of common stock at the date of grant and nonqualified options at not
less than 85% of such fair market value. Options are exercisable based on vesting terms determined by Chiron's Board of Directors (generally 4 years), and option terms cannot exceed
10 years.

In
2000, Chiron adopted the Executive Long-Term Incentive Plan, relating to stock options granted to certain executives under Chiron's stock option plan. These stock options
are granted at not less than the fair market value of common stock on the date of grant and generally vest upon the earlier of 7 years of service or the achievement of specified performance
objectives as established by the Compensation Committee of the Board of Directors. As a result, Chiron does not record compensation expense related to these stock options. Currently, the performance
objectives are based on total shareholder return over a three-year period as measured against certain published benchmark indices that represent Chiron's peer group. If total shareholder
return falls between 105% to 125% of the benchmark indices over that 3-year period, the stock options will vest from 10% to 100%. The Compensation Committee awarded 858,000 and 790,000
stock options (which are included in the below tables) in 2001 and 2000, respectively, related to the Executive Long-Term Incentive Plan. No awards were exercisable at December 31,
2001 and 2000. However, 171,600 stock options vested on January 2, 2002 related to 2001 total shareholder return.

F-46

---

Note 13Stockholders' Equity (Continued)

In 1996, the stockholders approved an amendment to Chiron's stock option plan, allowing certain executives to receive performance units. Performance units are
stock awards issued upon the attainment of certain pre-established performance goals as established by the Compensation Committee of the Board of Directors. Currently, the performance
units are based on total shareholder return over a three-year period as measured against certain published benchmark indices that represent Chiron's peer group. In order to qualify for a
stock award, Chiron's shareholder return must be within 15% of the three-year rolling weighted-average of the benchmark indices. In accordance with Accounting Principles Board Opinion
No. 25, compensation expense related to these awards is based on the extent to which the performance criteria are met. No such expense was recognized in 2001, 2000 or 1999. There were no
performance units awarded in 2001, 2000 or 1999. No awards were exercisable at December 31, 2001, 2000 and 1999.

In
1996, the stockholders also approved an amendment to Chiron's stock option plan, permitting the award of share rights to certain key individuals and non-employee
directors, allowing them the right to receive shares of Chiron's common stock, subject to certain vesting terms. In 2001, the Compensation Committee awarded certain key individuals an aggregate of
113,631 share rights that vest over four years. There were no share rights awarded to non-employee directors in 2001. In 2000, the Compensation Committee awarded non-employee
directors an aggregate of 6,642 share rights that vest over five years, and also awarded certain key individuals an aggregate of 264,325 share rights that vest over four years. In 1999, the
Compensation Committee awarded non-employee directors an aggregate of 11,098 share rights that vest over five years, and also awarded certain key individuals an aggregate of 228,175 share
rights that vest over four years. The intrinsic value of the share rights are recognized ratably over the related vesting periods. In 2001, 2000 and 1999, Chiron recognized $9.5 million,
$6.4 million and $2.1 million of compensation expense, respectively.

At
December 31, 2001, 3.5 million shares were available for grant. In January 2002, the stockholders approved an amendment to Chiron's stock option plan, increasing
the maximum number of shares that may be issued by 13.0 million shares to 73.3 million shares.

F-47

---

A
summary of stock option and share right activity is as follows:

|                                                                                                               |                                                  | 2001 |            | 2000       |   | 1999       |           
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---- | ---------- | ---------- | - | ---------- | ----------
|Outstanding options and share rights at January 1,                                                             |                                                  |      | 20,050,210 |            |   | 18,132,366 |           
|                                                                                                               | Granted                                          |      |            | 7,018,086  |   |            | 7,116,724 
|                                                                                                               | Forfeited                                        |      |            | (1,775,336 | ) |            | (1,321,421
|                                                                                                               | Surrendered against payment by Novartis (Note 8) |      |            |           |   |            |          
|                                                                                                               | Exercised                                        |      |            | (3,192,976 | ) |            | (3,877,459
|                                                                                                               |                                                  |      |            |            |   |            |           
|Outstanding options and share rights at December 31,                                                           |                                                  |      | 22,099,984 |            |   | 20,050,210 |           
|                                                                                                               |                                                  |      |            |            |   |            |           
|Options exercisable at December 31,                                                                            |                                                  |      | 9,698,458  |            |   | 9,135,550  |           
|                                                                                                               |                                                  |      |            |            |   |            |           
|Weighted average exercise price of:                                                                            |                                                  |      |            |            |   |            |           
|                                                                                                               | Outstanding options at December 31,              |      | $          | 35.37      |   | $          | 29.42     
|                                                                                                               | Options granted                                  |      | $          | 45.54      |   | $          | 46.47     
|                                                                                                               | Options forfeited                                |      | $          | 37.36      |   | $          | 27.32     
|                                                                                                               | Options exercised                                |      | $          | 19.30      |   | $          | 17.14     
|Weighted-average grant-date fair value of options granted during the year calculated pursuant to SFAS 123      |                                                  | $    | 26.84      |            | $ | 28.08      |           
|Weighted-average grant-date fair value of share rights granted during the year calculated pursuant to SFAS 123 |                                                  | $    | 46.66      |            | $ | 47.49      |           

The
weighted-average grant-date fair value of each option and share right grant was estimated using the Black-Scholes option-pricing model and the following weighted-average
assumptions: expected volatility of 61% for 2001 and 2000, and 37% for 1999; risk-free interest rates of 4.4%, 5.0% and 5.6% for 2001, 2000 and 1999, respectively; and an average expected
life of 5 years for 2001, 2000 and 1999. No dividends were factored into the calculation in 2001, 2000 or 1999.

The
following table summarizes information concerning options and share rights at December 31, 2001:

|                 |  | Outstanding |  | Exercisable
|---------------- |  | ----------- |  | -----------
|
|Less than $22    |  | 7,768,350   |  | 5.19       
|$22 to $42       |  | 2,594,307   |  | 7.10       
|$42 to $47       |  | 7,937,687   |  | 9.21       
|$47 to $56       |  | 3,774,482   |  | 8.63       
|Greater than $56 |  | 25,158      |  | 7.07       
|                 |  |             |  |            
|                 |  | 22,099,984  |  | 7.45       
|                 |  |             |  |            

Employee Stock Purchase Plan

Chiron has a stock purchase plan for U.S. employees in which eligible employees may participate through payroll deductions. At the end of each quarter, funds
deducted from participating employees'

F-48

---

salaries are used to purchase common stock at 85% of the lower of market value at the quarterly purchase date or the employees' eligibility date for participation. Purchases of shares made under the
plan were 0.3 million, 0.3 million and 0.4 million in 2001, 2000 and 1999, respectively. In 1997, the stockholders approved a new employee stock purchase plan, which effectively
replaced the existing plan, which was to expire in March 1998. The terms and provisions of the new plan are substantially similar to those of Chiron's previous plan. Under the new plan,
7.7 million shares have been reserved for issuance, of which 0.6 million shares represent the remaining shares reserved for issuance under Chiron's previous plan.

Under
Statement of Financial Accounting Standards No. 123, pro forma compensation cost is reported for the fair value of the employees' purchase rights, which was estimated using
the Black-Scholes model and the following assumptions: expected volatility of 38%, 71% and 40% for 2001, 2000 and 1999, respectively; risk-free interest rates of 2.2%, 5.3% and 5.1% for
2001, 2000 and 1999, respectively; and an average expected life of one year for 2001, 2000 and 1999. No dividends were factored into the calculation in 2001, 2000 or 1999. The weighted-average fair
value of the purchase rights granted was $13.36, $18.60 and $8.78 per share in 2001, 2000 and 1999, respectively.

Common Stock Warrant

As a result of the acquisition of Cetus Corporation on December 12, 1991, a warrant to purchase 0.6 million shares of Chiron common stock with an
exercise price of $13.125 per share was outstanding. On July 31, 2001, the holder elected a cashless exercise of the warrant, based upon the Company's closing stock price on August 3,
2001, for which the Company issued approximately 0.4 million shares of its common stock.

Put Options

In January 2001, Chiron initiated a put option program. Under this program, Chiron enters into contracts with third parties to sell put options on Chiron
stock, entitling the holders to sell to Chiron a specified number of shares at a specified price per share on a specified date. In connection with the sales, Chiron collects premiums, which are
recorded in "Additional paid-in capital" in the Consolidated Balance Sheets. For the year ended December 31, 2001, Chiron recorded premiums of $9.3 million and, for contracts
which expired, purchased 0.4 million shares in connection with the put option program. As of December 31, 2001, Chiron has an outstanding contract with a third party to sell put options
on Chiron stock, entitling the holder to sell to Chiron 0.3 million shares. The option expires in March 2002 and has an exercise price of $45.88 per share. The contract provides that if
the price of Chiron's stock is at or below $10.00 before the contract expires, the third party can exercise the option. The amount of Chiron's obligation to repurchase such shares upon exercise of the
outstanding put options, totaling $13.8 million, was reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the Consolidated Balance Sheets at
December 31, 2001.

Stock Repurchase Program

Chiron's Board of Directors authorized the repurchase of Chiron common stock on the open market to offset the dilution associated with the operation of the stock
option and employee stock purchase plans and the granting of share rights. In 2001, the Board of Directors approved a total 10.0 million share

F-49

---

increase. The Board has authorized such repurchases through December 31, 2002. As of December 31, 2001, Chiron may repurchase up to an additional 6.4 million shares of its common
stock.

Note 14Other Employee Benefit Plans

Retirement Savings Plans

Chiron sponsors a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code covering substantially all full-time U.S.
employees. Participating employees may contribute up to 15% of their eligible compensation up to the annual Internal Revenue Service contribution limit. Chiron also sponsors various
defined-contribution savings plans covering its full-time non-U.S. employees. In addition, Chiron sponsors a Supplemental Executive Retirement Program, which allows executives
to defer up to 15% of their eligible compensation. Effective January 1, 2002, executives may defer up to 25% of their eligible compensation, plus an additional 75% for their bonuses. Chiron
matched employee contributions according to specified formulas and contributed $5.8 million, $4.4 million and $3.8 million in 2001, 2000 and 1999, respectively, related to these
plans.

Pension Plan

Chiron has a non-contributory retirement program covering substantially all employees of its wholly-owned German subsidiary. The benefits for this
program are based primarily on years of service and employee compensation. The program is a defined-benefit pension plan and is not externally funded.

The
components of net periodic pension costs were as follows:

2001

2000

1999(in thousands)Service cost

$
339

$
423

$
421Interest cost


476


462


405Recognized actuarial loss


50


50


38$
865

$
935

$
864


F-50

---

The
change in the projected benefit obligation, reconciliation of funded status and weighted average assumptions were as follows:

|                                            |                                                   | 2001 |        | 2000   |   | 1999   |       
|------------------------------------------- | ------------------------------------------------- | ---- | ------ | ------ | - | ------ | ------
|
|Change in projected benefit obligation:     |                                                   |      |        |        |   |        |       
|                                            | Projected benefit obligation at beginning of year |      | $      | 8,912  |   | $      | 8,583 
|                                            | Service cost                                      |      |        | 339    |   |        | 423   
|                                            | Interest cost                                     |      |        | 476    |   |        | 462   
|                                            | Benefits paid                                     |      |        | (239   | ) |        | (184  
|                                            | Actuarial loss                                    |      |        | 161    |   |        | 162   
|                                            | Other                                             |      |        | 55     |   |        | 9     
|                                            | Foreign currency translation                      |      |        | (541   | ) |        | (543  
|                                            |                                                   |      |        |        |   |        |       
|Projected benefit obligation at end of year |                                                   | $    | 9,163  |        | $ | 8,912  |       
|                                            |                                                   |      |        |        |   |        |       
|Reconciliation of funded status:            |                                                   |      |        |        |   |        |       
|                                            | Funded status                                     |      | $      | (9,163 | ) | $      | (8,912
|                                            | Unrecognized actuarial loss                       |      |        | 1,644  |   |        | 1,607 
|                                            | Unrecognized prior service cost                   |      |        | (1,465 | ) |        | (1,131
|                                            |                                                   |      |        |        |   |        |       
|Net amount recognized                       |                                                   | $    | (8,984 | )      | $ | (8,436 | )     
|                                            |                                                   |      |        |        |   |        |       
|Weighted average assumptions:               |                                                   |      |        |        |   |        |       
|                                            | Discount rate                                     |      |        | 6.00   | % |        | 5.75  
|                                            | Rate of compensation increase                     |      |        | 3.00   | % |        | 2.75  

The
amounts recognized in the Consolidated Balance Sheets were as follows:

2001

2000

1999(in thousands)Accrued pension cost

$
7,519

$
7,305

$
6,947Accumulated other comprehensive income


1,465


1,131


1,071$
8,984

$
8,436

$
8,018


Postemployment Benefits Other Than to Retirees

In February 2001, the Board of Directors approved a change in control severance plan for its executive officers. The plan provides for three levels of
coverage: Tier 1 is applicable to the Chief Executive Officer and provides a change in control severance benefit of three times base salary and bonus plus various insurance coverage;
Tier 2 applies to other Executive Committee members and provides a change in control severance benefit of two times base salary and bonus plus various insurance coverage; and Tier 3
applies to all other executives and provides a change in control severance benefit equal to one times base salary and bonus plus various insurance coverage.

F-51

---

Effective
October 1, 1997, Chiron adopted the Chiron Corporation Severance Plan, which provides certain post employment salary and employee benefits to employees who are
involuntarily terminated as a result of a workforce reduction or job elimination.

Benefits
payable under these plans are accrued when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated in accordance with Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for Post Employment Benefits."

Note 15Non-Operating Income and Expense

Gain (Loss) on Sale of Assets

In January 2001, Chiron sold various assets, with a carrying value of approximately $1.8 million, of its San Diego facility for $4.9 million
in cash. Chiron incurred transaction costs of approximately $0.7 million. The San Diego facility was part of Chiron's biopharmaceuticals segment. The sale of the
assets resulted in a net gain of $2.4 million, which was included in "Gain (loss) on sale of assets" in the Consolidated Statements of Operations. In 2000 and 1999, Chiron recognized operating
expenses related to the San Diego facility of $9.3 million and $16.4 million, respectively.

In
February 2000, Chiron sold substantially all assets of its Australian subsidiary to Mimotopes, a wholly-owned subsidiary of MitoKor, for $1.0 million in cash,
$1.6 million in non-interest bearing promissory notes (which were paid in full in August 2001) and 500,000 shares of MitoKor Series E convertible preferred stock, to
which Chiron assigned no fair value due to the early-stage nature of MitoKor. In connection with the sale, Chiron wrote off $1.3 million in leasehold improvements, which became the property of
the landlord upon termination of the Australian subsidiary's building lease, and incurred selling costs of $0.4 million. Both amounts were included in "Gain (loss) on sale of assets" in the
Consolidated Statements of Operations. The Australian subsidiary was part of Chiron's biopharmaceuticals segment. The sale of the Australian assets, net of liabilities assumed, resulted in a net loss
of $0.2 million, which was included in "Gain (loss) on sale of assets" in the Consolidated Statements of Operations. In 2000 and 1999, Chiron recognized operating expenses related to the
Australian subsidiary of $0.6 million and $3.7 million, respectively.

In
December 1999, Chiron sold its Amsterdam manufacturing facility and related machinery and equipment assets to Synco B.V., a company owned by a director of Chiron, for
$15.0 million in cash. The Amsterdam manufacturing facility was part of Chiron's biopharmaceuticals segment. The sale of the Amsterdam manufacturing facility resulted in a net gain of
$1.2 million, of which $0.9 million was included in "Gain (loss) on sale of assets" in the Consolidated Statement of Operations and $0.3 million was deferred as a result of the
leaseback (see Note 8). At the time of the sale, the carrying amount of the Amsterdam manufacturing facility was $13.8 million. In 1999, Chiron recognized operating expenses related to
the Amsterdam manufacturing facility of $2.0 million.

Gain on Sale of Intangible Assets

In December 1999, Chiron sold certain assets that it had developed or acquired in connection with the research and development of a Cytomegalovirus vaccine
to Aventis Pasteur MSD for $10.0 million and licensed certain technology to Aventis Pasteur for use in connection with the Cytomegalovirus vaccine. The

F-52

---

sale of these assets resulted in a gain of $7.5 million, which was included in "Gain on sale of intangible assets" in the Consolidated Statements of Operations.

Interest Expense

"Interest expense" in the Consolidated Statements of Operations consisted of the following for the years ended December 31:

|                                                                    |  | 2001 |        | 2000 |   | 1999    |  
|------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | -
|
|Interest expense and related costs on the Liquid Yield Option Notes |  | $    | (5,882 | )    | $ |        |  
|Interest expense and related costs on convertible debentures        |  |      |       |      |   | (12,325 | )
|Interest expense on the note payable to Novartis                    |  |      |       |      |   | (48     | )
|Other interest expense                                              |  |      | (1,625 | )    |   | (414    | )
|                                                                    |  |      |        |      |   |         |  
|                                                                    |  | $    | (7,507 | )    | $ | (12,787 | )
|                                                                    |  |      |        |      |   |         |  

Other Income, Net

"Other income, net" in the Consolidated Statements of Operations consisted of the following for the years ended December 31:

|                                                                      |  | 2001 |        | 2000 |   | 1999   |  
|--------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|
|Interest income                                                       |  | $    | 51,617 |      | $ | 84,467 |  
|Write-down of debt and equity securities (see Notes 1 and 7)          |  |      | (5,543 | )    |   | (5,000 | )
|Net gain (loss) on sale of marketable debt securities                 |  |      | 836    |      |   | (3,720 | )
|Net gain on sale of equity securities                                 |  |      | 8,706  |      |   | 3,181  |  
|Unrealized gain on trading securities (see Note 10)                   |  |      |       |      |   |       |  
|Gain on sale of interests in affiliated companies (see below)         |  |      | 2,500  |      |   | 2,927  |  
|Net realized gain (loss) on foreign exchange transactions (see below) |  |      | 1,881  |      |   | 5,467  |  
|Other                                                                 |  |      | 917    |      |   | 762    |  
|                                                                      |  |      |        |      |   |        |  
|                                                                      |  | $    | 60,914 |      | $ | 88,084 |  
|                                                                      |  |      |        |      |   |        |  

In
December 1998, Chiron completed the sale of its 30% interest in General Injectibles & Vaccines, Inc. to Henry Schein, Inc. and received payment in full of
certain advances made by Chiron to General Injectibles & Vaccines. The agreement also provided for Chiron to receive additional payments, calculated as a pre-determined percentage
of the gross profit of products contributed by General Injectibles & Vaccines to Henry Schein, through 2003. Chiron received $2.5 million and $2.9 million in 2001 and 2000,
respectively, which it included in "Other income, net" in the Consolidated Statements of Operations.

As
discussed in Note 10, Chiron hedged a portion of its exposure to the British pound in 2000 related to Menjugate sales. Chiron settled this hedging contract upon
substantial conclusion of Menjugate sales in the United Kingdom in the second quarter of 2000. The settlement resulted in a gain of

F-53

---

approximately $5.4 million, which was recorded in "Other income, net" in the Consolidated Statements of Operations.

Note 16Segment Information

Chiron is organized based on the products and services that it offers. Under this organizational structure, there are three reportable segments:
(i) biopharmaceuticals, (ii) vaccines and (iii) blood testing. The biopharmaceuticals segment consists of therapeutic products and services, with an emphasis on the treatment of
cancer and infectious diseases, using the development and acquisition of technologies related to therapeutic proteins and small molecules. The vaccines segment consists principally of adult and
pediatric vaccines for viral infections. Chiron sells these vaccines primarily in Germany, Italy, the United Kingdom, Canada and other international markets. The vaccines segment is also involved in
the development of novel vaccines and vaccination technology. The blood testing segment consists of an alliance with Gen-Probe Incorporated and Chiron's one-half interest in
the pretax operating earnings of its joint business with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company. Chiron's alliance with Gen-Probe is focused on
developing and commercializing nucleic acid testing products using transcription-mediated amplification technology to screen donated blood and plasma products for viral infection. Chiron's joint
business with Ortho-Clinical Diagnostics sells a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to
automate test performance and data collection.

Chiron's
research and development unit earns revenues and incurs expenses that specifically benefit each of the reportable segments. As a result, such revenues and expenses have been
included in the results of operations of the respective reportable segment.

Chiron
views certain other revenues and expenses, particularly Novartis AG research and development funding, certain royalty and license fee revenues primarily related to HIV and
hepatitis C virus patents, and unallocated corporate expenses, as not belonging to any one reportable segment. As a result, Chiron has aggregated these items into an "Other" segment, as
permitted by Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information."

The
accounting policies of Chiron's reportable segments are the same as those described in Note 1The Company and Summary of Significant Accounting Policies. Chiron
evaluates the performance of its segments based on each segment's income (loss) from continuing operations, excluding certain special items, such as restructuring and reorganization charges and the
write-off of purchased in-process technologies, which are shown as reconciling items in the table below.

F-54

---

The
following segment information excludes all significant intersegment transactions as these transactions are eliminated for management reporting purposes:

|                                  |                                                                                                                                                     | 2001                                                        |   | 2000    |           | 1999 |        
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | - | ------- | --------- | ---- | -------
|
|Revenues                          |                                                                                                                                                     |                                                             |   |         |           |      |        
|                                  | Biopharmaceuticals                                                                                                                                  |                                                             | $ | 442,385 |           | $    | 324,670
|                                  | Vaccines, including $1,194 of equity in earnings of unconsolidated joint businesses in 1999                                                         |                                                             |   | 403,283 |           |      | 395,221
|                                  | Blood testing, including $84,528, $84,248 and $78,126 of equity in earnings of unconsolidated joint businesses in 2001, 2000 and 1999, respectively |                                                             |   | 184,947 |           |      | 139,261
|                                  | Other                                                                                                                                               |                                                             |   | 110,052 |           |      | 112,967
|                                  |                                                                                                                                                     |                                                             |   |         |           |      |        
|                                  |                                                                                                                                                     | Total revenues                                              |   | $       | 1,140,667 |      | $      
|                                  |                                                                                                                                                     |                                                             |   |         |           |      |        
|Income from continuing operations |                                                                                                                                                     |                                                             |   |         |           |      |        
|                                  | Biopharmaceuticals                                                                                                                                  |                                                             | $ | (13,621 | )         | $    | (28,554
|                                  | Vaccines                                                                                                                                            |                                                             |   | 117,745 |           |      | 125,681
|                                  | Blood testing                                                                                                                                       |                                                             |   | 88,918  |           |      | 72,758 
|                                  | Other                                                                                                                                               |                                                             |   | 7,133   |           |      | 30,485 
|                                  |                                                                                                                                                     |                                                             |   |         |           |      |        
|                                  |                                                                                                                                                     | Segment income from operations                              |   |         | 200,175   |      |        
|                                  | Operating income (expense) reconciling items:                                                                                                       |                                                             |   |         |           |      |        
|                                  |                                                                                                                                                     | Write-off of purchased in-process technologies              |   |         |          |      |        
|                                  |                                                                                                                                                     | Restructuring and reorganization charge reversals (charges) |   |         | (64       | )    |        
|                                  |                                                                                                                                                     |                                                             |   |         |           |      |        
|                                  | Income from operations                                                                                                                              |                                                             |   | 200,111 |           |      | 29,217 
|                                  |                                                                                                                                                     | Gain (loss) on sale of assets                               |   |         | 2,426     |      |        
|                                  |                                                                                                                                                     | Gain on sale of intangible assets                           |   |         |          |      |        
|                                  |                                                                                                                                                     | Interest expense                                            |   |         | (7,507    | )    |        
|                                  |                                                                                                                                                     | Other income, net                                           |   |         | 60,914    |      |        
|                                  |                                                                                                                                                     | Minority interest                                           |   |         | (1,194    | )    |        
|                                  |                                                                                                                                                     |                                                             |   |         |           |      |        
|                                  | Income from continuing operations before income taxes                                                                                               |                                                             | $ | 254,750 |           | $    | 103,481
|                                  |                                                                                                                                                     |                                                             |   |         |           |      |        

In
2000, Chiron changed its method of allocating certain legal costs to segments due to a change in the Executive Committee's evaluation of the performance of the segments. In 2001 and
2000, Chiron allocated certain legal costs to the "Other" segment, whereas in 1999, these certain legal costs were allocated to all segments. The effect of this change in methodology was not material
to the financial statements.

Segment Assets, Depreciation and Amortization Expenses and Capital Expenditures

Chiron does not evaluate the performance of and allocate resources to its reportable segments based on the financial position of each reportable segment. Rather,
Chiron evaluates the performance of and allocates resources to its reportable segments based on income from continuing operations, including depreciation and amortization expenses, and capital
expenditures.

F-55

---

Note 16Segment Information (Continued)

Depreciation and amortization expenses for property, plant, equipment and leasehold improvements and intangible assets, are included with other operating expenses
and allocated to each segment based upon each segment's percentage of total operating expenses. Depreciation and amortization expenses for each reportable segment were as follows:

2001

2000

1999(In thousands)Depreciation and amortization expensesBiopharmaceuticals

$
58,727

$
36,343

$
27,359Vaccines


38,663


32,851


36,316Blood testing


7,362


4,176


2,488Other


10,294


8,056


2,732Total depreciation and amortization expenses

$
115,046

$
81,426

$
68,895


Capital
expenditures are specifically identified by each reportable segment. Capital expenditures for each reportable segment were as follows:

2001

2000

1999(In thousands)Capital expendituresBiopharmaceuticals

$
25,341

$
21,496

$
7,706Vaccines


19,707


20,556


17,711Blood testing


5,347


3,768


5,197Other


14,483


8,533


33,980Total capital expenditures

$
64,878

$
54,353

$
64,594


Geographic Area Information

Revenues from product sales by geographic area are based on the customers' shipping locations rather than the customers' country of domicile. Collaborative
agreement, license fee and other revenues by geographic area are based on the country of domicile of the counterparty to the agreement. Royalty

F-56

---

revenues by geographic area are based on the location to which the product earning the royalties is shipped.

2001

2000

1999(In thousands)RevenuesDomestic

$
531,761

$
440,674

$
333,634Belgium


30,959


30,866


22,240Canada


68,177


7,767


11,181France


15,936


8,317


5,946Germany


160,745


162,969


170,191Italy


47,043


40,543


50,082Japan


24,364


6,928


300Switzerland


19,099


15,976


60,105United Kingdom


32,659


107,799


9,519Other


209,924


150,280


99,448Total revenues

$
1,140,667

$
972,119

$
762,646


2001

2000

1999(In thousands)Long-lived assetsDomestic

$
221,106

$
225,256

$
226,926Germany


25,475


22,821


13,671Italy


58,563


57,735


56,706Other


8,244


7,391


1,532Total long-lived assets

$
313,388

$
313,203

$
298,835


Major Customers

Two significant customers accounted for 12.2% and 11.3% of total revenues in 2001. Four significant customers accounted for 13.0%, 12.3%, 10.4% and 10.3% of total
revenues in 2000. Two significant customers accounted for 13.6% and 12.7% of total revenues in 1999. Revenues from Chiron's biopharmaceuticals segment consisted of 34.3%, 40.2% and 34.8% of revenues
from major customers in 2001, 2000 and 1999, respectively. Revenues from Chiron's blood testing segment consisted of 62.7%, 82.6% and 92.4% of revenues from major customers in 2001, 2000 and 1999,
respectively. Revenues from Chiron's vaccines segment consisted of 51.1% of revenues from major customers in 2000 and none from
major customers in 2001 or 1999. Revenues from Chiron's other segment consisted of none from major customers in 2001, 2000 or 1999.

F-57

---

Note 17Income Taxes

For financial reporting purposes, "Income from continuing operations before income taxes" included the following components for the years ended
December 31:

2001

2000

1999(In thousands)Domestic

$
110,124

$
(79,260
)
$
93,661Foreign


144,626


182,741


62,983$
254,750

$
103,481

$
156,644


Components of Provision for Income Taxes from Continuing Operations

Significant components of the provision for income taxes from continuing operations were as follows for the years ended December 31:

2001

2000

1999(In thousands)Current:Domestic

$
50,397

$
58,403

$
26,778Foreign


43,309


55,478


6,81393,706


113,881


33,591Deferred:Domestic


(10,330
)

(27,719
)

(10,232
)Foreign


(3,384
)

1,217


4,368(13,714
)

(26,502
)

(5,864
)Tax benefits that are allocated to reduce noncurrent intangible assets related to the acquired entity








513Provision for income taxes from continuing operations

$
79,992

$
87,379

$
28,240


Included
in the domestic portion of the deferred tax provision in 1999 was a benefit of $13.7 million resulting from the recognition of state tax benefits, which were previously
offset by a valuation allowance.

The
benefit related to tax deductions for Chiron's stock option plans was recorded as an increase to additional paid-in capital when realized. In 2001, 2000 and 1999, Chiron
realized tax benefits of approximately $25.9 million, $37.9 million and $42.8 million, respectively.

F-58

---

Rate Reconciliation

A reconciliation of the expected statutory tax rate (computed at the U.S. statutory income tax rate of 35.0%) to the actual tax rate on income from continuing
operations for the years ended December 31 is as follows:

|                                                            |                                                                  | 2001                                                            |      | 2000 |       | 1999 |     
|----------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------------------- | ---- | ---- | ----- | ---- | ----
|Expected statutory tax rate                                 |                                                                  | 35.0                                                            | %    | 35.0 | %     | 35.0 | %   
|Increases (reductions) in tax resulting from the following: |                                                                  |                                                                 |      |      |       |      |     
|                                                            | State taxes, net of federal benefit                              |                                                                 | 3.5  | %    | 2.9   | %    | 2.0 
|                                                            | Net impact of foreign tax rates and foreign tax credits          |                                                                 | (5.8 | %)   | 3.7   | %    | 1.0 
|                                                            | Write-off of purchased in-process technologies (see below)       |                                                                 |     |      | 58.0  | %    |    
|                                                            | Amortization of goodwill                                         |                                                                 | 1.9  | %    | 1.2   | %    |    
|                                                            | Tax benefit attributed to Foreign Sales Corporation              |                                                                 | (2.2 | %)   | (1.9  | %)   | (0.6
|                                                            | Impact of Novartis transaction costs not deducted in prior years |                                                                 |     |      |      |      | (3.0
|                                                            | Increase in (utilization of) deferred tax assets:                |                                                                 |      |      |       |      |     
|                                                            |                                                                  | Change in the valuation allowance for state deferred tax assets |      |     |       |     |     
|                                                            |                                                                  | Prepaid income                                                  |      |     |       |     |     
|                                                            |                                                                  | Other temporary differences                                     |      | 0.6  | %     |     |     
|                                                            | Utilization of tax credits                                       |                                                                 | (4.5 | %)   | (13.8 | %)   | (1.9
|                                                            | Other                                                            |                                                                 | 2.9  | %    | (0.7  | %)   | 1.4 
|                                                            |                                                                  |                                                                 |      |      |       |      |     
|Actual tax rate on income from continuing operations        |                                                                  | 31.4                                                            | %    | 84.4 | %     | 18.0 | %   
|                                                            |                                                                  |                                                                 |      |      |       |      |     

The
write-off of purchased in-process technologies and amortization of goodwill were permanent differences associated with the PathoGenesis Corporation
acquisition.

Summary of Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

Net
deferred tax assets have been recognized based on management's estimates of future taxable income for U.S. and certain foreign jurisdictions in which Chiron's operations have
historically been profitable. The above estimates of gross deferred tax assets and liabilities are subject to change based upon future events, which include the filing of tax returns and, therefore,
the amount of deferred tax assets recognized may increase or decrease accordingly.

F-59

---

Significant
components of Chiron's deferred income tax assets and liabilities from continuing operations were as follows at December 31:

2001

2000(In thousands)Deferred income tax assets:Capitalized research and development costs

$
3,437

$
4,553Prepaid income


15,363


28,585Reserves and expense accruals


65,342


71,489Net operating loss carryforwards


29,043


39,026Business tax credit carryforwards


32,807


15,771Foreign tax benefits associated with undistributed earnings of foreign subsidiaries not permanently reinvested


45,737


Other


2,535


3,558194,264


162,982Less valuation allowance


(22,448
)

(69,430
)171,816


93,552Deferred income tax liabilities:Basis differences-purchase accounting and intangibles


88,716


56,112Patent costs expensed for tax purposes


10,024


9,760Depreciation and amortization


12,094


11,544Tax effect of unrealized other comprehensive income


35,567


46,253Tax effect of contingent payment debt instrument


3,688


Undistributed earnings of foreign subsidiaries not permanently reinvested


40,969


Other


5,985


8,824197,043


132,493Net deferred income tax liability

$
(25,227
)
$
(38,941
)


The
above net deferred income tax liability has been reflected in the accompanying Consolidated Balance Sheets as follows:

2001

2000(In thousands)Current asset

$
33,717

$
35,980Noncurrent liability


(58,944
)

(74,921
)Net deferred income tax liability

$
(25,227
)
$
(38,941
)


Beginning
in the third quarter of 2001, management decided that foreign earnings associated with the German and Italian vaccines business for the year 2001 would not be treated as
permanently reinvested under Accounting Principles Board Opinion No. 23 "Accounting for Income TaxesSpecial Areas." Accordingly, a deferred tax asset has been established for the
underlying benefit of foreign taxes paid and a

F-60

---

deferred tax liability has been established for the U.S. tax provision associated with such earnings no longer treated as permanently reinvested.

The
net decrease in the valuation allowance for the years ended December 31, 2001, 2000 and 1999 was $47.0 million, $16.6 million and $58.3 million,
respectively.

The
valuation allowances of $22.4 million and $69.4 million as of December 31, 2001 and 2000, respectively, related to net operating loss carryforwards and
intangible assets in certain foreign jurisdictions.

Chiron
is presently under examination in several domestic and international tax jurisdictions. While there is no assurance that Chiron will prevail in all tax examinations in the event
the taxing authorities disagree with Chiron's interpretation of the tax law, Chiron's management does not believe, based upon information known to it, that the final resolution of any of these audits
will have a material adverse effect upon Chiron's consolidated financial position and results of operations and cash flows. Chiron's management has made adequate provisions for these tax examinations.

Subsequently
recognized tax benefits relating to the valuation allowance for deferred tax assets at December 31, 2001 will be allocated as follows (in thousands):

Income tax benefit

$
22,448Goodwill and other noncurrent intangible assets


$
22,448


Tax Operating Loss and Credit Carryforwards

At December 31, 2001, Chiron had foreign net operating loss carryforwards of approximately $65.6 million, all of which are available to offset
future taxable income indefinitely. At December 31, 2001, Chiron had federal net operating loss carryforwards and federal business credits attributed to the acquisition of PathoGenesis
Corporation of approximately $30.4 million and $6.0 million, respectively, expiring in 2007. The actual utilization of the net operating loss carryforwards and business tax credits is
restricted pursuant to section 382 of the Internal Revenue Code. In addition, at December 31, 2001, Chiron had federal and state business tax credit carryovers of $33.9 million,
of which $0.4 million expires in 2009, $5.0 million in 2016 and $28.5 million which can be carried over indefinitely.

Note 18Legal Proceedings

The Office of the Inspector General of the United States Department of Health and Human Services is investigating pharmaceutical industry practices concerning
reporting of average wholesale prices for products covered by Medicare and Medicaid. Chiron and a number of other companies have received document subpoenas in connection with that investigation.
Chiron has produced documents responsive to two subpoenas, which relate specifically to pricing of certain generic oncology drugs sold by Cetus-Ben Venue Therapeutics, a joint venture between Chiron
and Ben Venue Laboratories. Chiron sold its interest in that joint venture in 1996. It appears that the Office of the Inspector General's investigation is connected to a pending, but as yet unserved, qui tam(whistle blower) lawsuit, in which Chiron and other companies are named defendants.

F-61

---

Certain
State Attorneys General also are investigating reporting of average wholesale prices related to State Medicaid programs. In September 2000, the Office of the Attorney General of
the State of California Department of Justice propounded a document subpoena to Chiron focused on pricing of certain generic oncology drugs sold by Cetus-Ben Venue under the Medi-Cal program. The
State of Montana, through its Attorney General, filed a complaint against Chiron and a number of other pharmaceutical companies, raising state law claims and seeking actual and punitive damages
arising from setting of the average wholesale price for DepoCyt®. Additionally, non-governmental organizations, including the Citizens for Consumer Justice, have filed a class action
lawsuit against numerous defendants, including Chiron, alleging that in setting average prices for certain Medicare reimbursed products (including DepoCyt®), federal antitrust and
racketeering statutes were violated.

It
is anticipated that additional lawsuits involving the average wholesale price issues may arise. If any such action resulted in a final judgment against Chiron, Chiron could face
substantial damages exposure. It is not currently possible to estimate the probability of loss or to estimate the amount of liability related to these matters.

Chiron
is party to various claims, investigations and legal proceedings arising in the ordinary course of business. These claims, investigations and legal proceedings relate to
intellectual property rights, contractual rights and obligations, employment matters, claims of product liability and other issues. While there is no assurance that an adverse determination of any of
such matters could not have a material adverse impact in any future period, management does not believe, based upon information known to it, that the final resolution of any of these matters will have
a material adverse effect upon Chiron's consolidated financial position and results of operations or cash flows.

Note 19Quarterly Financial Data (Unaudited)

|                                    |                          | 2001
|----------------------------------- | ------------------------ | ----
|
|
|Total revenues                      |                          | $   
|Gross margin from net product sales |                          |     
|Income from continuing operations:  |                          |     
|                                    | Income                   |     
|                                    | Basic income per share   |     
|                                    | Diluted income per share |     
|Net income:                         |                          |     
|                                    | Income                   |     
|                                    | Basic income per share   |     
|                                    | Diluted income per share |     

F-62

---

|                                          |                                 | 2001
|----------------------------------------- | ------------------------------- | ----
|
|
|Total revenues                            |                                 | $   
|Gross margin from net product sales       |                                 |     
|Income (loss) from continuing operations: |                                 |     
|                                          | Income (loss)                   |     
|                                          | Basic income (loss) per share   |     
|                                          | Diluted income (loss) per share |     
|Net income (loss):                        |                                 |     
|                                          | Income (loss)                   |     
|                                          | Basic income (loss) per share   |     
|                                          | Diluted income (loss) per share |     

Certain
minor arithmetical variances between the table above and the consolidated financial statements may arise due to rounding.

Historically,
Chiron's operating results have varied considerably from period to period due to the nature of Chiron's collaborative, royalty and license arrangements and the seasonality
of the vaccine products. In addition, the mix of products sold and the introduction of new products will affect the comparability of gross margins from quarter to quarter. As a consequence, Chiron's
results in any one quarter are not necessarily indicative of results to be expected for a full year. Accordingly, Chiron should be evaluated on the basis of annual financial information.

Continuing Operations

Related to an agreement with F. Hoffmann-LaRoche Limited, Chiron received $10.0 million in the fourth quarter of 2000, which Chiron deferred, and received
$10.0 million in the first quarter of 2001. These amounts included a refundable license fee and royalties for past sales related to F. Hoffmann La-Roche's use of Chiron's HIV
patent in itsin vitrodiagnostic products in Europe. These amounts became nonrefundable in January 2001 when the European Patent Office upheld
Chiron's HIV patent. As a result, Chiron recognized the entire $20.0 million as revenue in the first quarter of 2001. The agreement also provides for royalties on future sales related to
F. Hoffmann La-Roche's use of Chiron's HIV patent in itsin vitrodiagnostic products, which also commenced in the first quarter 2001
when the European Patent Office Board of Technical Appeals upheld Chiron's HIV patent. Chiron will recognize additional revenue of $10.0 million under this arrangement when and if patents on
HIV are issued to Chiron in the U.S.

The
fourth quarter of 2000 included (i) royalty revenues of $34.0 million for past sales related to F. Hoffmann-LaRoche's use of Chiron's hepatitis C virus patent in its in vitrodiagnostic
products and
(ii) the write-off of purchased in-process technologies of $171.6 million and amortization expense of $9.6 million related to the acquisition of
PathoGenesis Corporation (see Note 5).

The
fourth and second quarters of 2001 included $2.6 million and $6.1 million, respectively, related to the sale of certain equity securities. The fourth and first quarters
of 2000 included $2.4 million and $0.8 million, respectively, related to the sale of certain equity securities.

F-63

---

The
third and second quarters of 2001 included losses attributable to the other-than-temporary impairment of debt and equity securities of $4.5 million and
$1.0 million, respectively. The second quarter of 2000 included losses attributable to the other-than temporary impairment of equity securities of $5.0 million.

Discontinued Operations (see Note 4)

"Gain (loss) on disposal of discontinued operations" included income tax benefits of $0.1 million and $0.5 million in the fourth and second quarters
of 2001, respectively, and income tax provisions of $0.1 million in both the third and first quarters of 2001. "Gain (loss) on disposal of discontinued operations" also included the following:



"Gain
(loss) on disposal of discontinued operations" included income tax provisions of $9.0 million and $0.1 million in the fourth and first quarters of 2000, respectively.
Also included in the "Gain (loss) on disposal of discontinued operations" was $2.2 million recognized in the second quarter of 2000 related to the reversal of reserves for contractual
obligations to indemnify Bausch & Lomb against certain potential claims.

Note 20Subsequent Events

On February 20, 2002, Chiron acquired Matrix Pharmaceutical, Inc., a company that develops drugs (including tezacitabine) to treat cancer. Chiron
acquired substantially all of the outstanding shares of common stock of Matrix Pharmaceutical at $2.21 per share, which, including estimated acquisition costs, resulted in a total purchase price of
approximately $59.7 million. Chiron will account for the acquisition as an asset purchase and include Matrix Pharmaceutical's operating results in its consolidated operating results beginning
on March 1, 2002. Matrix Pharmaceutical's operating results for the remaining business days in February 2002 were not significant to Chiron's consolidated operating results. Matrix
Pharmaceutical will be part of Chiron's biopharmaceuticals segment.

In
2001, Chiron recorded a charge of $1.5 million to write-down debt securities with a face value of $5.0 million due to the decline in the credit rating of the issuer. On
March 1, 2002, the issuer paid Chiron $5.1 million, the full principal plus interest.

F-64

---



SCHEDULE II

CHIRON CORPORATION  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES  YEARS ENDED DECEMBER 31, 2001, 2000 and 1999

|Description                                       |  | Balance at
Beginning
of Year |        | Charged to
Costs and
Expenses, net of reversals |   | Utilizations |      | Balance At End
of Year
|------------------------------------------------- |  | ---------------------------- | ------ | ----------------------------------------------- | - | ------------ | ---- | ----------------------
|
|2001:                                             |  |                              |        |                                                 |   |              |      |                       
|Accounts receivable and product returns allowance |  | $                            | 14,576 |                                                 | $ | 27,531       |      | $                     
|Inventory reserves                                |  |                              | 27,374 |                                                 |   | 10,205       |      |                       
|Restructuring and reorganization accrual          |  |                              | 2,655  |                                                 |   | 64           |      |                       
|2000:                                             |  |                              |        |                                                 |   |              |      |                       
|Accounts receivable and product returns allowance |  |                              | 16,998 |                                                 |   | 12,656       |      |                       
|Inventory reserves                                |  |                              | 20,138 |                                                 |   | 7,743        |      |                       
|Restructuring and reorganization accrual          |  |                              | 5,688  |                                                 |   | (732         | )(1) |                       
|1999:                                             |  |                              |        |                                                 |   |              |      |                       
|Accounts receivable and product returns allowance |  |                              | 18,160 |                                                 |   | 6,420        |      |                       
|Inventory reserves                                |  |                              | 12,859 |                                                 |   | 10,636       |      |                       
|Restructuring and reorganization accrual          |  |                              | 23,796 |                                                 |   | 197          |      |                       

---

F-65

---

QuickLinks