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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2002
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

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CHIRON CORPORATION(Exact name of registrant as specified in its charter)

Delaware

94-2754624(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)4560 Horton Street, Emeryville, California

94608(Address of principal executive offices)

(Zip code)(510) 655-8730(Registrant's telephone number, including area code)Not Applicable(Former name, former address and former fiscal year, if changed since last report)


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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 ý    No o

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of Class

Outstanding at July 31, 2002Common Stock, $0.01 par value

188,981,912


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CHIRON CORPORATION  TABLE OF CONTENTS

|                              |                                                                                               | Page No.                                                                                                                       
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                                                
|                              | ITEM 1. Financial Statements                                                                  |                                                                                                                                
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 (Unaudited)                                    
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 (Unaudited)          
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2002 and 2001 (Unaudited)
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (Unaudited)                    
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                               
|                              | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                
|                              | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                                
|                              | ITEM 1. Legal Proceedings                                                                     |                                                                                                                                
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                
|                              | ITEM 5. Other Information                                                                     |                                                                                                                                
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                
|SIGNATURES                    |                                                                                               | 57                                                                                                                             

2

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Item 1. Financial Statements

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

|                                                                |                                                                                                       | June 30,
2002                                              |           | December 31,
2001 |          
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------- | ----------------- | ---------
|ASSETS                                                          |                                                                                                      
|Current assets:                                                 |                                                                                                       |                                                            |           |                   |          
|                                                                | Cash and cash equivalents                                                                             |                                                            | $         | 268,328           |          
|                                                                | Short-term investments in marketable debt securities                                                  |                                                            |           | 575,608           |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total cash and short-term investments                      |           |                   | 843,936  
|                                                                | Accounts receivable, net                                                                              |                                                            |           | 249,711           |          
|                                                                | Current portion of notes receivable                                                                   |                                                            |           | 6,317             |          
|                                                                | Inventories                                                                                           |                                                            |           | 140,935           |          
|                                                                | Current net deferred income tax asset                                                                 |                                                            |           | 41,683            |          
|                                                                | Derivative financial instruments                                                                      |                                                            |           | 13,663            |          
|                                                                | Other current assets                                                                                  |                                                            |           | 46,285            |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total current assets                                       |           |                   | 1,342,530
|Noncurrent investments in marketable debt securities            |                                                                                                       |                                                            | 406,933   |                   |          
|Property, plant, equipment and leasehold improvements, at cost: |                                                                                                       |                                                            |           |                   |          
|                                                                | Land and buildings                                                                                    |                                                            |           | 149,774           |          
|                                                                | Laboratory, production and office equipment                                                           |                                                            |           | 395,806           |          
|                                                                | Leasehold improvements                                                                                |                                                            |           | 91,932            |          
|                                                                | Construction-in-progress                                                                              |                                                            |           | 57,889            |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       |                                                            | 695,401   |                   |          
|                                                                | Less accumulated depreciation and amortization                                                        |                                                            |           | (347,449          | )        
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Property, plant, equipment and leasehold improvements, net |           |                   | 347,952  
|Purchased technologies, net                                     |                                                                                                       |                                                            | 267,914   |                   |          
|Goodwill                                                        |                                                                                                       |                                                            | 236,006   |                   |          
|Other intangible assets, net                                    |                                                                                                       |                                                            | 145,618   |                   |          
|Investments in equity securities and affiliated companies       |                                                                                                       |                                                            | 88,638    |                   |          
|Noncurrent notes receivable                                     |                                                                                                       |                                                            | 8,609     |                   |          
|Noncurrent derivative financial instruments                     |                                                                                                       |                                                            | 17,407    |                   |          
|Other noncurrent assets                                         |                                                                                                       |                                                            | 30,385    |                   |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | $                                                          | 2,891,992 |                   | $        
|                                                                |                                                                                                       |                                                            |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                            |                                                                                                      
|Current liabilities:                                            |                                                                                                       |                                                            |           |                   |          
|                                                                | Accounts payable                                                                                      |                                                            | $         | 59,327            |          
|                                                                | Accrued compensation and related expenses                                                             |                                                            |           | 39,586            |          
|                                                                | Derivative financial instruments                                                                      |                                                            |           |                  |          
|                                                                | Short-term borrowings                                                                                 |                                                            |           | 292               |          
|                                                                | Current portion of unearned revenue                                                                   |                                                            |           | 21,477            |          
|                                                                | Income taxes payable                                                                                  |                                                            |           | 85,841            |          
|                                                                | Other current liabilities                                                                             |                                                            |           | 120,263           |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total current liabilities                                  |           |                   | 326,786  
|Long-term debt                                                  |                                                                                                       |                                                            | 412,816   |                   |          
|Noncurrent derivative financial instruments                     |                                                                                                       |                                                            | 259       |                   |          
|Noncurrent net deferred income tax liability                    |                                                                                                       |                                                            | 32,234    |                   |          
|Noncurrent unearned revenue                                     |                                                                                                       |                                                            | 67,699    |                   |          
|Other noncurrent liabilities                                    |                                                                                                       |                                                            | 47,480    |                   |          
|Minority interest                                               |                                                                                                       |                                                            | 4,731     |                   |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total liabilities                                          |           |                   | 892,005  
|                                                                |                                                                                                       |                                                            |           |                   |          
|Commitments and contingencies (Note 8)                          |                                                                                                       |                                                            |           |                   |          
|Put options                                                     |                                                                                                       |                                                            | 11,361    |                   |          
|                                                                |                                                                                                       |                                                            |           |                   |          
|Stockholders' equity:                                           |                                                                                                       |                                                            |           |                   |          
|                                                                | Common stock                                                                                          |                                                            |           | 1,917             |          
|                                                                | Additional paid-in capital                                                                            |                                                            |           | 2,448,857         |          
|                                                                | Deferred stock compensation                                                                           |                                                            |           | (15,671           | )        
|                                                                | Accumulated deficit                                                                                   |                                                            |           | (352,350          | )        
|                                                                | Accumulated other comprehensive income (loss)                                                         |                                                            |           | 22,522            |          
|                                                                | Treasury stock, at cost (2,714,000 shares at June 30, 2002 and 2,341,000 shares at
December 31, 2001) |                                                            |           | (116,649          | )        
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | Total stockholders' equity                                 |           |                   | 1,988,626
|                                                                |                                                                                                       |                                                            |           |                   |          
|                                                                |                                                                                                       | $                                                          | 2,891,992 |                   | $        
|                                                                |                                                                                                       |                                                            |           |                   |          

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

3

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

|                                                      |                                                       | Three Months Ended
June 30, |        | Six Months Ended
June 30, |        
|----------------------------------------------------- | ----------------------------------------------------- | --------------------------- | ------ | ------------------------- | -------
|
|Revenues:                                             |                                                       |                             |        |                           |        
|                                                      | Product sales, net                                    |                             | $      | 211,293                   |        
|                                                      | Equity in earnings of unconsolidated joint businesses |                             |        | 27,394                    |        
|                                                      | Collaborative agreement revenues                      |                             |        | 6,602                     |        
|                                                      | Royalty and license fee revenues                      |                             |        | 45,494                    |        
|                                                      | Other revenues                                        |                             |        | 8,495                     |        
|                                                      |                                                       |                             |        |                           |        
|                                                      |                                                       | Total revenues              |        |                           | 299,278
|                                                      |                                                       |                             |        |                           |        
|Operating expenses:                                   |                                                       |                             |        |                           |        
|                                                      | Cost of sales                                         |                             |        | 76,225                    |        
|                                                      | Research and development                              |                             |        | 83,530                    |        
|                                                      | Selling, general and administrative                   |                             |        | 71,093                    |        
|                                                      | Amortization expense                                  |                             |        | 7,446                     |        
|                                                      | Write-off of purchased in-process technologies        |                             |        |                          |        
|                                                      | Other operating expenses                              |                             |        | 899                       |        
|                                                      |                                                       |                             |        |                           |        
|                                                      |                                                       | Total operating expenses    |        |                           | 239,193
|                                                      |                                                       |                             |        |                           |        
|Income from operations                                |                                                       |                             | 60,085 |                           |        
|Gain on sale of assets                                |                                                       |                             |       |                           |        
|Interest expense                                      |                                                       |                             | (3,133 | )                         |        
|Other income, net                                     |                                                       |                             | 12,613 |                           |        
|Minority interest                                     |                                                       |                             | (464   | )                         |        
|                                                      |                                                       |                             |        |                           |        
|Income from continuing operations before income taxes |                                                       |                             | 69,101 |                           |        
|Provision for income taxes                            |                                                       |                             | 18,657 |                           |        
|                                                      |                                                       |                             |        |                           |        
|Income from continuing operations                     |                                                       |                             | 50,444 |                           |        
|Gain on disposal of discontinued operations (Note 3)  |                                                       |                             |       |                           |        
|                                                      |                                                       |                             |        |                           |        
|Net income                                            |                                                       | $                           | 50,444 |                           | $      
|                                                      |                                                       |                             |        |                           |        
|Basic earnings per share (Note 2):                    |                                                       |                             |        |                           |        
|                                                      | Income from continuing operations                     |                             | $      | 0.27                      |        
|                                                      |                                                       |                             |        |                           |        
|                                                      | Net income                                            |                             | $      | 0.27                      |        
|                                                      |                                                       |                             |        |                           |        
|Diluted earnings per share (Note 2):                  |                                                       |                             |        |                           |        
|                                                      | Income from continuing operations                     |                             | $      | 0.26                      |        
|                                                      |                                                       |                             |        |                           |        
|                                                      | Net income                                            |                             | $      | 0.26                      |        
|                                                      |                                                       |                             |        |                           |        

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

4

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CHIRON CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (Unaudited)  (In thousands)

|                                   |                                                                                                                                                                                                                                                                               | Three Months Ended
June 30,                                                                                                                                                                                                                                               |         | Six Months Ended
June 30, |       
|---------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------------------- | ------
|
|Net income                         |                                                                                                                                                                                                                                                                               | $                                                                                                                                                                                                                                                                         | 50,444  |                           | $     
|                                   |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       
|Other comprehensive income (loss): |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       
|                                   | Change in foreign currency translation adjustment during the period, net of tax (provision) benefit of $(7,294) and $293 for the three months ended June 30, 2002 and 2001, respectively, and $(6,449) and $545 for the six months ended June 30,
2002 and 2001, respectively |                                                                                                                                                                                                                                                                           |         | 61,668                    |       
|                                   | Unrealized derivative gains (losses) from cash flow hedges:                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                           |         |                           |       
|                                   |                                                                                                                                                                                                                                                                               | Net unrealized derivative gains (losses) from cash flow hedges arising during the period, net of tax (benefit) provision of $(72) and $240 for the three months ended June 30, 2002 and 2001, respectively, and $417 for
the six months ended June 30, 2001               |         |                           | (118  
|                                   |                                                                                                                                                                                                                                                                               | Reclassification adjustment for net gains included in net income, net of tax provision of $147 for the three and six months ended June 30, 2001                                                                                                                           |         |                           |      
|                                   |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       
|                                   |                                                                                                                                                                                                                                                                               | Net unrealized derivative gains (losses) from cash flow hedges                                                                                                                                                                                                            |         |                           | (118  
|                                   | Unrealized gains (losses) from investments:                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                           |         |                           |       
|                                   |                                                                                                                                                                                                                                                                               | Net unrealized holding gains (losses) arising during the period, net of tax (provision) benefit of $651 and $(8,591) for the three months ended June 30, 2002 and 2001, respectively, and $3,532 and $3,401 for the six
months ended June 30, 2002 and 2001, respectively |         |                           | 658   
|                                   |                                                                                                                                                                                                                                                                               | Reclassification adjustment for net gains included in net income, net of tax provision of $1,891 and $2,394 for the three months ended June 30, 2002 and 2001, respectively, and $3,587 and $2,651 for the six months
ended June 30, 2002 and 2001, respectively          |         |                           | (3,065
|                                   |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       
|                                   |                                                                                                                                                                                                                                                                               | Net unrealized gains (losses) from investments                                                                                                                                                                                                                            |         |                           | (2,407
|                                   |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       
|                                   | Other comprehensive income (loss)                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                           |         | 59,143                    |       
|                                   |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       
|Comprehensive income               |                                                                                                                                                                                                                                                                               | $                                                                                                                                                                                                                                                                         | 109,587 |                           | $     
|                                   |                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                           |         |                           |       

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

5

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CHIRON CORPORATION  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)  (In thousands)

|                                                     |                                                                               | Six Months Ended
June 30,                            |        
|---------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------------------------- | -------
|
|Net cash provided by operating activities            |                                                                               | $                                                    | 82,566 
|                                                     |                                                                               |                                                      |        
|Cash flows from investing activities:                |                                                                               |                                                      |        
|                                                     | Purchases of investments in marketable debt securities                        |                                                      |        
|                                                     | Proceeds from sale and maturity of investments in marketable debt
securities  |                                                      |        
|                                                     | 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                        |                                                      |        
|                                                     | Other, net                                                                    |                                                      |        
|                                                     |                                                                               |                                                      |        
|                                                     |                                                                               | Net cash used in investing activities                |        
|                                                     |                                                                               |                                                      |        
|Cash flows from financing activities:                |                                                                               |                                                      |        
|                                                     | Net repayment of short-term borrowings                                        |                                                      |        
|                                                     | Repayment of debt and capital leases                                          |                                                      |        
|                                                     | Payments to acquire treasury stock                                            |                                                      |        
|                                                     | Proceeds from reissuance of treasury stock                                    |                                                      |        
|                                                     | Proceeds from issuance of Liquid Yield Option Notes                           |                                                      |        
|                                                     | Proceeds from put options                                                     |                                                      |        
|                                                     |                                                                               |                                                      |        
|                                                     |                                                                               | Net cash (used in) provided by financing activities  |        
|                                                     |                                                                               |                                                      |        
|                                                     |                                                                               | Net (decrease) increase in cash and cash equivalents |        
|Cash and cash equivalents at beginning of the period |                                                                               |                                                      | 320,673
|                                                     |                                                                               |                                                      |        
|Cash and cash equivalents at end of the period       |                                                                               | $                                                    | 268,328
|                                                     |                                                                               |                                                      |        

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

6

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CHIRON CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        June 30, 2002        (Unaudited)

Note 1The Company and Summary of Significant Accounting Policies

Basis of Presentation

The information presented in the condensed consolidated financial statements at June 30, 2002, and for the three and six months ended June 30, 2002
and 2001, is unaudited but includes all normal recurring adjustments, which Chiron Corporation believes to be necessary for fair presentation of the periods presented.

The
condensed consolidated balance sheet amounts at December 31, 2001 have been derived from audited financial statements. 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 certain vaccine products. In addition, the mix of products sold
and the introduction of new products will affect comparability from quarter to quarter. As a consequence, Chiron's interim results in any one quarter are not necessarily indicative of results to be
expected for a full year. This information should be read in conjunction with Chiron's audited consolidated financial statements for
the year ended December 31, 2001, which are included in the Annual Report on Form 10-K filed by Chiron with the Securities and Exchange Commission.

Principles of Consolidation

The condensed 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 condensed 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.

On
February 20, 2002, Chiron acquired Matrix Pharmaceutical, Inc., a company that was developing tezacitabine, a drug to treat cancer. Chiron acquired 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 $67.1 million.
Chiron accounted for the acquisition as an asset purchase and included Matrix Pharmaceutical's operating results, including the seven business days in February 2002, in its consolidated
operating results beginning on March 1, 2002. Matrix Pharmaceutical is part of Chiron's biopharmaceuticals segment.

In
2001, Chiron became a limited partner of Forward Venture IV, L.P. Chiron will pay $15.0 million over ten years, of which $6.6 million was paid through June 30,
2002, 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
$15.3 million was paid through June 30, 2002, for a 23.26% 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 addition, in July 2002, Chiron agreed to invest up to $5.0 million in TPG Biotechnology
Partners, L.P.

7

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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
recognizes a portion of revenue for product sales of Betaseron® upon shipment to its marketing partner, and the remainder based on a contractual percentage of sales by
its marketing partner. Chiron also earns royalties on the marketing partner's European sales of Betaferon®. Prior to the first quarter 2002, Chiron had accounted for non-U.S.
product sales on a one-quarter lag and royalties as a percentage of forecast received from its marketing partner, with an adjustment of the estimate to actual in the subsequent quarter.
More current information of non-U.S. Betaseron® sales became available in 2002, and as a result, Chiron is able to recognize Betaseron® product sales and
Betaferon® royalties on a current basis. The effect of this change on results, net of tax, was a decrease in net loss for the first quarter 2002 and an increase in net income for the six
months ended June 30, 2002, by $3.1 million for product sales and $2.8 million for royalties ($0.03 per basic and diluted share).

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

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

Inventories

Inventories are stated at the lower of cost or market using the moving weighted-average cost method. Inventories consisted of the following (in thousands):

June 30,
2002

December 31,
2001Finished goods

$
35,071

$
26,683Work-in-process


76,992


60,512Raw materials


28,872


24,162$
140,935

$
111,357


8

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Income Taxes

The reported effective tax rate for 2002 is 27.0% of pretax income from continuing operations, excluding the write-off of purchased
in-process technologies related to the acquisition of Matrix Pharmaceutical, Inc. (see Note 4). The effective tax rate may be affected in future periods by changes in
Chiron's estimates with respect to the deferred tax assets and other items affecting the overall tax rate. Income tax expense for the six months ended June 30, 2001 was based on an estimated
annual effective tax rate on pretax income from continuing operations of approximately 31.4%.

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.

As
of June 30, 2002, 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.
In connection with the sale, Chiron collected a $0.9 million premium. The option expired on August 6, 2002 and had an exercise price of
$37.87 per share. The amount of Chiron's obligation to repurchase such shares upon exercise of the outstanding put options, totaling $11.4 million, was reclassified from "Additional
paid-in capital" to "Put options" in temporary equity in the Condensed Consolidated Balance Sheet at June 30, 2002. On August 6, 2002, Chiron's closing stock price was
$34.21. Since the closing stock price was below the stipulated $37.87, the third party elected to exercise the options. As a result, Chiron repurchased the shares in the third quarter 2002.

In
July 2002, Chiron entered into another contract with a third party to sell put options on Chiron stock, entitling the holder to sell to Chiron 0.5 million shares. In
connection with the sale, Chiron collected a $1.7 million premium. The option expires in October 2002 and has an exercise price of $32.05 per share. The amount of Chiron's obligation to
repurchase such shares upon exercise of the outstanding put options, totaling $16.0 million, will be reclassified from "Additional paid-in capital" to "Put options" in temporary
equity in the third quarter 2002.

As
of December 31, 2001, Chiron had 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 expired on March 28, 2002 and had an exercise price of $45.88 per share. 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 Condensed Consolidated Balance Sheet at
December 31, 2001. On March 28, 2002, Chiron's closing stock price was $45.89. Since the closing stock price was above the stipulated $45.88, the third party elected not to exercise the
options. As a result, the temporary equity of $13.8 million was reclassified to permanent equity in the first quarter 2002.

9

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Comprehensive Income

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 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.

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." Chiron
charged losses of $5.4 million and $22.9 million for the three and six months ended June 30, 2002, respectively, and $25.1 million and $40.8 million for the three
and six months ended June 30, 2001, respectively, to "Accumulated deficit" in the Condensed Consolidated Balance Sheets.

New Accounting Standards

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue (referred to as EITF) No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an
entity's commitment to an exit plan, as required under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002,
with earlier application encouraged. Chiron is currently analyzing the effect, if any, the adoption of this standard will have on the consolidated financial statements.

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, "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

10

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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. The implementation of the provisions of this standard did not have a material effect on Chiron's consolidated financial position or results of operations.

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 consolidated financial statements.

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 and the related leased facilities be recorded on the balance sheet. As new information is released, Chiron will
continue to monitor the impact of these rules on its June 1996 lease financing, disclosed in Note 12, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesCommitments," in Chiron's Annual Report on
Form 10-K for the year ended December 31, 2001.

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 to the extent that dilutive shares are assumed issuable; (iii) the assumed exercise of outstanding
put options, which are included under the reverse treasury-stock method; and (iv) convertible notes and debentures, which are included under the if-converted method.

11

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The
following table sets forth the computations for basic and diluted earnings per share on income from continuing operations (in thousands, except per share data):

|                           |                                                                                              | Three Months Ended
June 30,           |      | Six Months Ended
June 30,
|-------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | -------------------------
|
|Income (Numerator):        |                                                                                              |                                       |      |                          
|                           | Income from continuing operations available to common stockholders                           |                                       | $    | 50,444                   
|                           | Plus: Interest on convertible Liquid Yield Option Notes, net of taxes                        |                                       |      |                         
|                           |                                                                                              |                                       |      |                          
|                           | Income from continuing operations available to common stockholders, plus assumed conversions |                                       | $    | 50,444                   
|                           |                                                                                              |                                       |      |                          
|Shares (Denominator):      |                                                                                              |                                       |      |                          
|                           | Weighted-average common shares outstanding                                                   |                                       |      | 189,579                  
|                           | Effect of dilutive securities:                                                               |                                       |      |                          
|                           |                                                                                              | Stock options and equivalents         |      |                          
|                           |                                                                                              | Warrants                              |      |                          
|                           |                                                                                              | Put options                           |      |                          
|                           |                                                                                              | Convertible Liquid Yield Option Notes |      |                          
|                           |                                                                                              |                                       |      |                          
|                           | Weighted-average common shares outstanding, plus assumed conversions                         |                                       |      | 192,925                  
|                           |                                                                                              |                                       |      |                          
|Basic earnings per share   |                                                                                              | $                                     | 0.27 |                          
|                           |                                                                                              |                                       |      |                          
|Diluted earnings per share |                                                                                              | $                                     | 0.26 |                          
|                           |                                                                                              |                                       |      |                          

12

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The
following table sets forth the computations for basic and diluted earnings per share on net income (in thousands, except per share data):

|                           |                                                                       | Three Months Ended
June 30,           |      | Six Months Ended
June 30,
|-------------------------- | --------------------------------------------------------------------- | ------------------------------------- | ---- | -------------------------
|
|Income (Numerator):        |                                                                       |                                       |      |                          
|                           | Net income available to common stockholders                           |                                       | $    | 50,444                   
|                           | Plus: Interest on convertible Liquid Yield Option Notes, net of taxes |                                       |      |                         
|                           |                                                                       |                                       |      |                          
|                           | Net income available to common stockholders, plus assumed conversions |                                       | $    | 50,444                   
|                           |                                                                       |                                       |      |                          
|Shares (Denominator):      |                                                                       |                                       |      |                          
|                           | Weighted-average common shares outstanding                            |                                       |      | 189,579                  
|                           | Effect of dilutive securities:                                        |                                       |      |                          
|                           |                                                                       | Stock options and equivalents         |      |                          
|                           |                                                                       | Warrants                              |      |                          
|                           |                                                                       | Put options                           |      |                          
|                           |                                                                       | Convertible Liquid Yield Option Notes |      |                          
|                           |                                                                       |                                       |      |                          
|                           | Weighted-average common shares outstanding, plus assumed conversions  |                                       |      | 192,925                  
|                           |                                                                       |                                       |      |                          
|Basic earnings per share   |                                                                       | $                                     | 0.27 |                          
|                           |                                                                       |                                       |      |                          
|Diluted earnings per share |                                                                       | $                                     | 0.26 |                          
|                           |                                                                       |                                       |      |                          

For
the three months ended June 30, 2002 and 2001, stock options to purchase 14.1 million and 6.0 million shares, respectively, and for the six months ended
June 30, 2002 and 2001, stock options to purchase 13.8 million and 6.3 million shares, respectively, with exercise prices greater than the average market prices of common stock,
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 were 5.2 million shares of common stock for each of the three and six months ended June 30, 2002, issuable
upon conversion of the Liquid Yield Option Notes, as their inclusion would be antidilutive.

Note 3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. There was no activity related to discontinued operations during the three and six months ended June 30, 2002. For the three and six months ended
June 30, 2001, basic and diluted earnings per share from discontinued operations were $0.02.

13

---

The
"Gain on disposal of discontinued operations" for the three and six months ended June 30, 2001, consisted of the following (in thousands):

Reversal of reserves for indemnity obligations

$
1,500Gain on the sale of the real estate assets


1,644Income tax benefit


509$
3,653


Chiron Diagnostics

The results of operations for Chiron Diagnostics are reported as a discontinued operation for the three and six months ended June 30, 2001 in the Condensed
Consolidated Statements of Operations. In connection with the sale of Chiron Diagnostics, Chiron 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 Chiron a license fee of $100.0 million, which became nonrefundable in decreasing amounts through 2001. For the three and
six months ended June 30, 2001, Chiron recognized license fee revenues of $5.0 million and $10.0 million, respectively, which represented the portion of the $100.0 million
payment that became nonrefundable during those periods. This revenue was recorded as a component of "Royalty and license fee revenues" in the Condensed Consolidated Statements of Operations. Chiron
recognized the final portion of revenue in the fourth quarter 2001.

Chiron Vision

Upon completion of the sale of all of the outstanding capital stock of Chiron Vision to Bausch & Lomb Incorporated, 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. 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 and recognized a net gain of $1.6 million upon the sale of the remaining real estate assets. These amounts were recorded
as components of "Gain 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 as of both
June 30, 2002 and December 31, 2001, 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 as of both June 30, 2002 and December 31, 2001 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 discontinued operations.

14

---

Note 4Acquisition of Matrix Pharmaceutical, Inc.

On February 20, 2002, Chiron acquired Matrix Pharmaceutical, Inc. a company that was developing tezacitabine, a drug to treat cancer. Chiron
acquired 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 preliminary purchase price of
approximately $67.1 million. Matrix Pharmaceutical is part of Chiron's biopharmaceuticals segment. Tezacitabine expanded Chiron's portfolio of cancer therapeutics.

Chiron
accounted for the acquisition as an asset purchase and included Matrix Pharmaceutical's operating results, including the seven business days in February 2002, in its
consolidated operating results beginning on March 1, 2002. The components and allocation of the preliminary purchase price, based on their fair values, consisted of the following (in
thousands):

Consideration and acquisition costs:Cash paid for common stock

$
58,737Cash paid for options on common stock


2,231Acquisition costs paid as of June 30, 2002


5,312Acquisition costs not yet paid as of June 30, 2002


807Total purchase price

$
67,087Allocation of preliminary purchase price:Cash and cash equivalents

$
17,337Assets held for sale


2,300Deferred tax asset


10,000Other assets


1,469Write-off of purchased in-process technologies


54,781Accounts payable


(2,898
)Accrued liabilities


(15,902
)Total purchase price

$
67,087


Acquisition
costs included contractual severance and involuntary termination costs, as well as other direct acquisition costs. Approximately $5.1 million represented severance
payments, assumed by Chiron, to eligible employees as dictated by their employment agreements.

Chiron
allocated the preliminary purchase price based on the fair value of the assets acquired and liabilities assumed. Chiron allocated a portion of the purchase price to purchased
in-process technologies and wrote this off entirely in the first quarter 2002. Chiron does not anticipate that there will be any alternative future use for the in-process
technologies that were written off. The write-off of purchased in-process technologies represented the fair value, calculated using
probability-of-success-adjusted cash flows and a 20% discount rate, at the acquisition date. Chiron assumed cash flows from tezacitabine to commence after 2005. As with all
pharmaceutical products, the probability of commercial success for any research and development project is highly uncertain.

Chiron
is moving the manufacturing operations at the San Diego, California facility to either its Emeryville or Vacaville, California location and intends to close the San Diego facility
during the third quarter 2002. A significant assumption made by Chiron as part of the purchase price allocation was

15

---

that an assignee would not be found for the manufacturing facility lease. Accordingly, Chiron allocated a portion of the purchase price to a liability for asset disposal and lease cancellation.
However, if an assignee is found, Chiron will update the charge for purchased in-process technologies in future periods if necessary.

As
indicated in the above table, a portion of the purchase price was allocated to assets held for sale. In March 2002, Chiron sold the leasehold improvements and assigned the
lease related to a facility located in Fremont, California. Chiron received an amount equivalent to the fair value of the assets at the date of acquisition.

In
March 2002, Chiron paid $6.0 million related to a bank loan assumed during the purchase of Matrix. This payment is reflected on the Condensed Consolidated Statement of
Cash Flows as a component of "Cash paid to purchase businesses, net of cash acquired" for the six months ended June 30, 2002.

The
deferred tax asset primarily related to future utilization of net operating loss carryforwards. Chiron acquired federal and state net operating loss carryforwards of approximately
$289.8 million attributed to Matrix Pharmaceutical. The utilization of such net operating loss carryforwards is limited in any one year under provisions of the internal revenue code. As such, a
significant portion of Matrix losses are expected to expire unutilized.

The
following unaudited pro forma information presents the results of operations of Chiron and Matrix Pharmaceutical for the three and six months ended June 30, 2002 and 2001 as
if Chiron's acquisition of Matrix Pharmaceutical had been consummated as of January 1, 2002 and 2001, respectively. The pro forma information is presented in accordance with Statement of
Financial Accounting Standards No. 141, "Business Combinations," and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and does not purport to
be indicative of what would have occurred had the acquisition been made as of those dates 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):

Three Months Ended
June 30,

Six Months Ended
June 30,2002

2001

2002

2001Total revenues

$
299,278

$
261,415

$
551,780

$
521,507Income from continuing operations

$
50,444

$
25,908

$
81,244

$
64,027Pro forma earnings per share from continuing operations:Basic

$
0.27

$
0.14

$
0.43

$
0.34Diluted

$
0.26

$
0.13

$
0.42

$
0.33


16

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Note 5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 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 371 positions, 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.

For
the six months ended June 30, 2002, Chiron had no restructuring and reorganization adjustments. Of the 371 positions for elimination, 363 were terminated as of June 30,
2002.

For
the six months ended June 30, 2001, the net restructuring and reorganization activity included a charge of $0.2 million and a charge reversal of $0.2 million.
The charge of $0.2 million primarily related to revised estimates of termination and other employee-related costs recorded in connection with the elimination of the 371 positions, of which 359
had terminated as of June 30, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

Chiron
expects to substantially settle the restructuring and reorganization accruals within one to six years of accruing the related charges.

The
activity in accrued restructuring and reorganization for the six months ended June 30, 2002 and 2001 is summarized as follows (in thousands):

|                                                        |  | Accrual at
December 31,
2001 |     | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge Reversal |  | Amount
Utilized
Through
June 30, 2002 |   | Amount to
Be Utilized
In Future
Periods
|------------------------------------------------------- |  | ---------------------------- | --- | ------------------------------------ | - | --------------------------------------------- |  | ------------------------------------- | - | ---------------------------------------
|Employee-related costs and
Other facility-related costs |  | $                            | 693 |                                      | $ |                                              |  | $                                     |  |                                        
|                                                        |  |                              |     |                                      |   |                                               |  |                                       |   |                                        

|                                                        |  | Accrual at
December 31,
2000 |       | Amount of
Total
Restructuring
Charge |   | Amount of
Total
Restructuring
Charge Reversal |  | Amount
Utilized
Through
June 30, 2001 |      | Amount to
Be Utilized
In Future
Periods
|------------------------------------------------------- |  | ---------------------------- | ----- | ------------------------------------ | - | --------------------------------------------- |  | ------------------------------------- | ---- | ---------------------------------------
|Employee-related costs and
Other facility-related costs |  | $                            | 2,655 |                                      | $ | 190                                           |  | $                                     | (190 | )                                      
|                                                        |  |                              |       |                                      |   |                                               |  |                                       |      |                                        

Note 6Intangible Assets

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) 141, "Business
Combinations," and SFAS 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

17

---

(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.
Chiron has no intangible assets with indefinite useful lives. 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 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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 reassessed the useful lives and residual values of all intangible assets (excluding goodwill and assembled workforce) acquired in purchase
business combinations. No adjustments to amortization periods were necessary.

In
connection with the transitional goodwill impairment evaluation, the adoption of SFAS 142 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 then determined 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 subsequently determined the fair value of each reporting
unit using the present value of expected future cash flows and compared it to the reporting unit's carrying amount. Each reporting unit's fair value exceeds its carrying amount. Based on this
analysis, Chiron has no indication of a transitional impairment loss and no further analysis is required.

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.

18

---

A
reconciliation of reported net income to adjusted net income, as if SFAS 142 had been implemented as of January 1, 2001, 2000 and 1999, respectively, is as follows (in
thousands, except per share data):

|                                                   |                                                                 | Three Months Ended
June 30, |        | Six Months Ended
June 30, |   | Year Ended
December 31,
|-------------------------------------------------- | --------------------------------------------------------------- | --------------------------- | ------ | ------------------------- | - | -----------------------
|
|Reported net income                                |                                                                 | $                           | 50,444 |                           | $ | 37,597                 
|                                                   | Add back: Goodwill (including assembled workforce)
amortization |                             |        |                          |   |                        
|                                                   |                                                                 |                             |        |                           |   |                        
|Adjusted net income                                |                                                                 |                             | 50,444 |                           |   | 41,851                 
|                                                   |                                                                 |                             |        |                           |   |                        
|                                                   | Add back: Interest on assumed debt conversions                  |                             |        |                          |   |                        
|                                                   |                                                                 |                             |        |                           |   |                        
|Adjusted net income, plus assumed debt conversions |                                                                 | $                           | 50,444 |                           | $ | 42,202                 
|                                                   |                                                                 |                             |        |                           |   |                        
|Basic earnings per share:                          |                                                                 |                             |        |                           |   |                        
|                                                   | Reported net income                                             |                             | $      | 0.27                      |   | $                      
|                                                   | Goodwill (including assembled workforce) amortization           |                             |        |                          |   |                        
|                                                   |                                                                 |                             |        |                           |   |                        
|                                                   | Adjusted net income                                             |                             | $      | 0.27                      |   | $                      
|                                                   |                                                                 |                             |        |                           |   |                        
|Diluted earnings per share:                        |                                                                 |                             |        |                           |   |                        
|                                                   | Reported net income plus assumed debt conversions               |                             | $      | 0.26                      |   | $                      
|                                                   | Goodwill (including assembled workforce) amortization           |                             |        |                          |   |                        
|                                                   |                                                                 |                             |        |                           |   |                        
|                                                   | Adjusted net income plus assumed debt conversions               |                             | $      | 0.26                      |   | $                      
|                                                   |                                                                 |                             |        |                           |   |                        

19

---

Intangible
assets subject to amortization consisted of the following (in thousands):

|                                                |                               | June 30, 2002 |         | December 31, 2001
|----------------------------------------------- | ----------------------------- | ------------- | ------- | -----------------
|
|Purchased technologies                          |                               | $             | 331,179 |                  
|                                                |                               |               |         |                  
|Patents                                         |                               | $             | 101,349 |                  
|Trademarks                                      |                               |               | 51,172  |                  
|Licenses and technology rights                  |                               |               | 30,685  |                  
|Customer relationships                          |                               |               | 22,757  |                  
|Know how                                        |                               |               | 10,335  |                  
|Databases                                       |                               |               | 7,100   |                  
|Assembled workforce                             |                               |               |        |                  
|Other                                           |                               |               | 15,209  |                  
|                                                |                               |               |         |                  
|                                                | Total other intangible assets |               | $       | 238,607          
|                                                |                               |               |         |                  
|Total intangible assets subject to amortization |                               | $             | 569,786 |                  
|                                                |                               |               |         |                  

Aggregate amortization expense is as follows (in thousands):

For the six months ended June 30, 2002 (reported)

$
21,666For the remaining six months in the year ended December 31, 2002 (estimated)


20,856For the year ended December 31, 2002 (estimated)

$
42,522For the year ended December 31, 2003 (estimated)

$
40,345For the year ended December 31, 2004 (estimated)

$
36,979For the year ended December 31, 2005 (estimated)

$
32,600For the year ended December 31, 2006 (estimated)

$
31,660For the year ended December 31, 2007 (estimated)

$
30,966


The
changes in the carrying value of goodwill by reporting unit consisted of the following (in thousands):

Biopharmaceuticals

Vaccines

TotalGoodwill (including assembled workforce):Balance as of December 31, 2001

$
196,513

$
28,229

$
224,742Assembled workforce


1,875


5,946


7,821Tax impact of implementation (1)


(675
)




(675
)Effect of exchange rate changes





4,118


4,118Balance as of June 30, 2002

$
197,713

$
38,293

$
236,006


---

20

---

Note 7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 which terminated in 2001, 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."

Amortization
expense of $5.9 million and $11.8 million for the three and six months ended June 30, 2002, respectively, related to intangible assets acquired in the
PathoGenesis acquisition has been allocated to the biopharmaceuticals segment. Prior to the first quarter 2002, amortization expense relating to these intangibles was allocated to the "Other" segment.
Segment information for the three and six months ended June 30, 2001 has been reclassified to conform with the current period presentation.

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 above and
in Chiron's Annual Report on Form 10-K. Chiron evaluates the performance of its segments based on each segment's income (loss) from continuing operations, excluding certain special
items such as the write-off of purchased in-process technologies, which is shown as a reconciling item in the table below.

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

|                                  |                                                                                                                                                                                                                                                             | Three Months Ended
June 30,                    |   | Six Months Ended
June 30, |        
|--------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | - | ------------------------- | -------
|
|Revenues                          |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|                                  | Biopharmaceuticals                                                                                                                                                                                                                                          |                                                | $ | 125,918                   |        
|                                  | Vaccines                                                                                                                                                                                                                                                    |                                                |   | 80,944                    |        
|                                  | Blood testing, includes equity in earnings of unconsolidated joint businesses of $27,394 and $22,256 for the three months ended June 30, 2002 and 2001, respectively, and $46,192 and $37,881 for the six months ended
June 30, 2002 and 2001, respectively |                                                |   | 77,475                    |        
|                                  | Other                                                                                                                                                                                                                                                       |                                                |   | 14,941                    |        
|                                  |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|                                  |                                                                                                                                                                                                                                                             | Total revenues                                 |   | $                         | 299,278
|                                  |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|Income from continuing operations |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|                                  | Biopharmaceuticals                                                                                                                                                                                                                                          |                                                | $ | 2,216                     |        
|                                  | Vaccines                                                                                                                                                                                                                                                    |                                                |   | 15,810                    |        
|                                  | Blood testing                                                                                                                                                                                                                                               |                                                |   | 43,630                    |        
|                                  | Other                                                                                                                                                                                                                                                       |                                                |   | (1,571                    | )      
|                                  |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|                                  |                                                                                                                                                                                                                                                             | Segment income from operations                 |   |                           | 60,085 
|                                  | Operating expense reconciling item:                                                                                                                                                                                                                         |                                                |   |                           |        
|                                  |                                                                                                                                                                                                                                                             | Write-off of purchased in-process technologies |   |                           |       
|                                  |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|                                  | Income from operations                                                                                                                                                                                                                                      |                                                |   | 60,085                    |        
|                                  |                                                                                                                                                                                                                                                             | Gain on sale of assets                         |   |                           |       
|                                  |                                                                                                                                                                                                                                                             | Interest expense                               |   |                           | (3,133 
|                                  |                                                                                                                                                                                                                                                             | Other income, net                              |   |                           | 12,613 
|                                  |                                                                                                                                                                                                                                                             | Minority interest                              |   |                           | (464   
|                                  |                                                                                                                                                                                                                                                             |                                                |   |                           |        
|                                  | Income from continuing operations before income taxes                                                                                                                                                                                                       |                                                | $ | 69,101                    |        
|                                  |                                                                                                                                                                                                                                                             |                                                |   |                           |        

Note 8Commitments and Contingencies

In July 2002, Chiron agreed to invest up to $5.0 million in TPG Biotechnology Partners, L.P.

In
April 2001, Chiron, Rhein Biotech N.V. (now a part of Berna Biotech) 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, Berna Biotech and GreenCross Vaccine. Chiron's commitment is approximately 26.4 million Euro ($26.1 million) at June 30, 2002 for the expansion of
Chiron's Italian

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manufacturing facilities, of which Chiron had incurred costs of 0.4 million Euro ($0.4 million), as of June 30, 2002. This agreement started 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. Chiron has committed to $35.4 million in design and construction services, under which Chiron
has incurred costs of $21.1 million, as of June 30, 2002. 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
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 annual results of operations and cash flows.

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 interpretations of the tax law, Chiron's management does not believe, based upon information known to it, that the final resolution of any of these tax
examinations will have a material adverse effect upon Chiron's consolidated financial position and annual results of operations and cash flows.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

This 10-Q contains forward-looking statements concerning plans, objectives, goals, strategies, future events or performance, and 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-Q reflect our current beliefs and expectations on the date of this 10-Q. 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,
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.

You should read the discussion below in conjunction with Part I, Item 1.,"Financial Statements," of this 10-Q and Part II, Items 7.,
7A. and 8., "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and "Financial Statements and
Supplementary Data," respectively, of our Annual Report on Form 10-K for the year ended December 31, 2001.

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®. 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
Haemophilus 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 developing and
commercializing 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.

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



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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
Condensed Consolidated Financial Statements above and in our Annual Report on Form 10-K.

On
February 20, 2002, we acquired Matrix Pharmaceutical, Inc., a company that was developing tezacitabine, a drug to treat cancer. We accounted for the acquisition as an
asset purchase and included Matrix Pharmaceutical's operating results, including the seven business days in February 2002, in our consolidated operating results beginning on March 1,
2002. Matrix Pharmaceutical is part of our biopharmaceuticals segment.

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

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

Results of Operations

Biopharmaceuticals

Product salesBiopharmaceutical product sales were $104.0 million and $84.5 million for the three months ended
June 30, 2002 and 2001, respectively, and $194.5 million and $162.6 million for the six months
ended June 30, 2002 and 2001, respectively. Biopharmaceutical product sales in 2002 and 2001 consisted principally of Betaseron®, TOBI® and Proleukin®.

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

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sales by Berlex Laboratories and Schering. We also earn royalties on Schering's European sales of Betaferon®, manufactured by Boehringer Ingelheim, which we record in royalty and license
fee revenues for the biopharmaceuticals segment.

Betaseron®
product sales were $34.2 million and $26.9 million for the three months ended June 30, 2002 and 2001, respectively, and $56.0 million
and $46.8 million for the six months ended June 30, 2002 and 2001, respectively. As discussed in "Royalties and license fee revenues" below, Betaferon® royalties also
increased in 2002 compared with 2001. The increase in Betaseron® product sales in 2002 as compared with 2001 was partially due to the effect of recording revenue based on more current
information available from Schering. Prior to 2002, we accounted for non-U.S. product sales based on information provided by Schering on a one-quarter lag. More current information of non-U.S.
Betaseron® sales is available in 2002, and as a result, we are able to recognize Betaseron® product sales on a current basis. This change resulted in incremental product sales
revenues recognized during the first quarter 2002 of $4.3 million. During the second quarter 2002, fluctuations in Berlex Laboratories and Schering's inventory levels, as well as wholesaler
inventory levels, following the launch of our new room-temperature formulation positively influenced sales. Also contributing to the increase in product sales in 2002 as compared with 2001, were
increased underlying sales to end users in the U.S. and non-U.S. countries excluding Europe driven by increased utilization of beta interferon therapy for multiple sclerosis. Inventory management
practices and foreign currency exchange rates may influence future Betaseron® sales.

Pursuant
to the agreement with Schering, we will begin to supply Betaferon® to Schering in the fourth quarter 2002 for a majority of the European market. This will result in
a shift of revenue recognized under this agreement to product sales, and a decrease in royalty revenues, primarily in 2003. In 2001, we began to ship product to Schering for sale in Switzerland. In
order to supply Betaferon® to Schering, we are required to make capital improvements to our existing manufacturing facilities. During the first quarter 2002, we recorded charges related to
this project. See "Research and development" below.

TOBI®We sell TOBI® directly in the U.S. and in certain international markets. The U.S. Food and Drug
Administration approved TOBI® for cystic fibrosis lung infections in December 1997. TOBI® was launched 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 $33.6 million and $23.4 million for the three months ended June 30, 2002 and 2001, respectively and
$69.4 million and $55.9 million for the
six months ended June 30, 2002 and 2001, respectively. Increased TOBI® sales primarily related to (i) the launch in various European countries, (ii) increased use in
the U.S. by patients with cystic fibrosis and (iii) price increases. These increases were partially offset by fluctuations in wholesaler inventory levels. 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, reimbursement pressures and foreign currency exchange rates
may influence future TOBI® sales.

Proleukin®Proleukin® is approved in over 50 countries for the treatment of metastatic
(stage 4) renal cell carcinoma and also 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 $27.6 million and $27.9 million for the three months ended
June 30, 2002 and 2001, respectively, and $51.6 million and $47.4 million for the six months ended June 30, 2002 and 2001, respectively. Proleukin® product
sales year-to-date 2002 as compared with year-to-date 2001 increased primarily as a result of price increases and fluctuations in wholesaler inventory management practices. Wholesaler inventory
management practices, reimbursement pressures and foreign currency exchange rates may influence future Proleukin® sales.

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

We
expect competitive pressures related to many of our biopharmaceutical 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" of our Annual Report on Form 10-K for the year ended December 31, 2001.

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 $3.5 million and $6.3 million for the three months ended
June 30, 2002 and 2001, respectively, and $7.1 million and $11.8 million for the six months ended June 30, 2002 and 2001, respectively.

NovartisIn 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 $2.5 million and $5.0 million for the three and six months ended June 30, 2001,
respectively. This agreement expired in the fourth quarter 2001.

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. 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 $3.0 million for each of the three months ended June 30, 2002
and 2001, respectively, and $6.1 million and $5.9 million for the six months ended June 30, 2002 and 2001, respectively, under this arrangement.

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
by third parties to develop therapeutic products. The biopharmaceuticals segment recognized royalty and license fee revenues of $16.4 million and $15.8 million for the three months ended
June 30, 2002 and 2001, respectively, and $33.7 million and $31.4 million for the six months ended June 30, 2002 and 2001, respectively.

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Betaferon®We earn royalties on Schering AG's European sales of Betaferon®. Betaferon® is
the only product that is approved in Europe for the treatment of both relapsing/remitting and secondary progressive multiple sclerosis. For the three months ended June 30, 2002 and 2001, we
recognized $10.6 million and $10.1 million, respectively, and $24.2 million and $20.0 million for the six months ended June 30, 2002 and 2001, respectively, under
this arrangement. As discussed in "Product salesBetaseron®" above, the increases in Betaferon® royalties in 2002 as compared with 2001 primarily related to the
effect of recording revenue based on more current European Betaferon® actual sales data which is now available. Prior to 2002, we accounted for Betaferon® royalties as a
percentage of forecast received from Schering, with an adjustment of the estimate to actual in the subsequent quarter. More current
information of European Betaseron® sales is available in 2002, and as a result, we are able to recognize Betaferon® royalties on a current basis. This change resulted in
incremental revenues recognized during the first quarter 2002 of $3.9 million. In addition, there was increased utilization of beta interferon therapy for multiple sclerosis. These increases
were offset partially by the shift of revenue from royalties to product sales related to Switzerland as Schering began to sell product purchased in 2001 into the market. We will begin to supply
Betaferon® to Schering in the fourth quarter 2002 for a majority of the European market. This will result in a shift of revenue recognized under this agreement to product sales, and a
decrease in royalty revenues, primarily in 2003.

GATBIn June 2002, we granted the Global Alliance for TB Drug Development rights under our patents relating to a
certain chemical compound for Tuberculosis for development and commercialization. The GATB paid us a license fee, which we deferred and will recognize pursuant to terms of the agreement. In addition,
the agreement provides for royalties to us on products sold by the GATB.

MerckIn May 2002, we granted Merck & Co., Inc. rights under certain of our hepatitis C virus
patents, for which we recognized a license fee in the second quarter 2002.

AbbottIn March 2002, we granted Abbott Laboratories rights under certain of our hepatitis C virus patents, for
which we recognized a license fee in the first quarter 2002.

EximiasIn January 2001, we granted Eximias Pharmaceutical Corporation (formerly Zarix Incorporated) rights under our
recombinant protein technology, for which we recognized a license and technology transfer fee in the second quarter 2001. For the six months ended June 30, 2002, we recognized
$0.2 million under this agreement.

Japan TobaccoIn January 2001, we granted Japan Tobacco, Inc. rights under certain of our hepatitis C
virus patents. The agreement provided for the payment of a license fee, which we received and recognized as revenue in the first quarter 2001. We did not recognize any significant revenues under this
agreement in the second quarter 2001 or during the six months ended June 30, 2002.

Novo NordiskWe earn royalty revenues on insulin and glucagon product sales by Novo Nordisk AS. We recognized
$1.3 million and $1.4 million for the three months ended June 30, 2002 and 2001, respectively, and $3.3 million and $3.2 million for the six months ended
June 30, 2002 and 2001, respectively, under this arrangement.

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, the timing of receipt of license fees and the expiration of patents. 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

29

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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 biopharmaceuticals segment recognized other revenues of $2.0 million and $3.9 million for
the three months ended June 30, 2002 and 2001, respectively, and $6.7 million and $4.4 million for the six months ended June 30, 2002 and 2001, respectively. Other revenues
primarily included contract manufacturing revenues of $1.9 million and $3.5 million for the three months ended June 30, 2002 and 2001, respectively and $6.3 million and
$3.8 million for the six months ended June 30, 2002 and 2001, respectively. The fluctuations resulted from the level of activity and timing of contract manufacturing activities.

The
balance of other revenues recognized by the 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 72% and 68% for the three months ended
June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, biopharmaceutical gross profit as a percentage of net product sales was 74% and 72%, respectively.
Biopharmaceuticals gross profit margins in 2002 as compared with 2001 increased primarily as a result of a more favorable mix of biopharmaceutical product sales and price increases taken in the first
quarter 2002.

Biopharmaceutical
gross profit percentages may fluctuate significantly in future periods due to production yields and as the biopharmaceutical product and customer mix changes.

Research and developmentOur biopharmaceuticals segment recognized research and development expenses of $63.6 million
and $65.1 million for the three months ended June 30, 2002 and 2001, respectively, and $122.9 million and $130.1 million for the six months ended June 30, 2002 and
2001, respectively. The decrease in research and development spending in 2002 as compared with 2001
primarily related to the timing of various clinical trials, including the conclusion of the clinical trial for tifacogin (recombinant Tissue Factor Pathway Inhibitor) for severe sepsis in the fourth
quarter 2001. The decreases were offset by the progress in other development platforms, including (i) those activities under our December 2001 collaboration agreement with Inhale
Therapeutic Systems, Inc. related to, among other things, the development of a dry powder formulation of our inhaled TOBI® product for the treatment of pseudomonas aeruginosain cystic fibrosis
patients, (ii) those activities related to the development of tezacitabine, obtained as a part of the
acquisition of Matrix Pharmaceutical in the first quarter 2002 and (iii) those activities related to the development of interleukin-2 in combination with various monoclonal antibodies. In
addition, as discussed in "Product salesBetaseron®" above, we are required to make capital improvements to our existing manufacturing facilities to support the supply of
Betaferon® to Schering. During the first quarter 2002, we performed test runs related to the installed equipment, which resulted in a charge of approximately $3.9 million in the
first quarter 2002.

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 $23.9 million and $18.4 million for the three months ended June 30, 2002 and 2001, respectively, and $43.9 million and $39.9 million for the six months ended
June 30, 2002 and 2001, respectively. Increased selling, general and administrative expenses primarily related to increased sales and marketing costs related to various biopharmaceutical
products including the launch

30

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of TOBI® in Europe. These increases were offset by lower lease payments, which represent variable-rate interest payments (indexed to the London interbank offered rate) on our
June 1996 lease financing. The London interbank offered rate was lower in the first half of 2002 as compared with the first half of 2001.

Amortization expenseOur biopharmaceuticals segment recognized amortization expense of $5.9 million and
$9.6 million for the three months ended June 30, 2002 and 2001, respectively, and $11.8 million and $19.1 million for the six months ended June 30, 2002 and 2001,
respectively. 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 technologies 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. On January 1, 2002, as discussed in "New Accounting Standards" below, we
implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." 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. 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. Amortization expense related
to goodwill (including assembled workforce) would have been approximately $7.2 million for the six months ended June 30, 2002.

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 $72.7 million and $74.9 million for the three months ended
June 30, 2002 and 2001, respectively, and $130.6 million and $152.6 million for the six months ended June 30, 2002 and 2001, respectively.

The
fluctuations in product sales in 2002 as compared with 2001 primarily were due to sales of Menjugate, our conjugate vaccine against meningococcal meningitis caused by
the bacterium N. meningitidis serogroup C. Menjugate sales amounted to $9.9 million and $15.6 million for the three months ended June 30, 2002 and 2001,
respectively, and $15.7 million and $45.0 million for the six months ended June 30, 2002 and 2001, respectively. The decrease in sales of Menjugate in 2002 as
compared with 2001 primarily related to fewer shipments, as expected. The 2001 activity related to the completion of a tender with the National Health Service in the United Kingdom. As of
July 31, 2002, we have orders from various countries to ship approximately $18.0 million of Menjugate through late 2002, early 2003. We are exploring opportunities for
additional Menjugate sales in other countries. However, we do not expect Menjugate shipments in 2002 will be commensurate with those in 2001. Competitive pressures, in
particular pricing, may influence future Menjugate sales.

Sales
of all other vaccine products were $62.8 million and $59.3 million for the three months ended June 30, 2002 and 2001, respectively, and $114.9 million
and $107.6 million for the six months ended June 30, 2002 and 2001, respectively. The increase in 2002 other vaccine product sales as compared with 2001 primarily was related to
(i) increased tick-borne encephalitis vaccine sales with the

31

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2002 launch of a new formulation in Germany and regulatory difficulties of a competitor's product and (ii) increased polio vaccine sales to not-for-profit agencies and developing markets such
as India.

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" of our Annual Report on Form 10-K for the year ended
December 31, 2001.

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
$2.8 million and $5.0 million for the three months ended June 30, 2002 and 2001, respectively, and $5.4 million and $9.7 million for the six months ended
June 30, 2002 and 2001, 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 $1.7 million and $1.1 million of such royalties for the three months ended June 30, 2002 and 2001, respectively, and
$3.6 million and $2.7 million of such royalties for the six months ended June 30, 2002 and 2001, respectively.

OtherWe recognized $1.1 million and $3.9 million of royalty revenues primarily on third party sales of
hepatitis B virus vaccine products for the three months ended June 30, 2002 and 2001, respectively, and $1.8 million and $7.0 million for the six months ended
June 30, 2002 and 2001, respectively. The decrease in 2002 as compared with 2001 primarily was due to a decrease in sales of hepatitis B virus vaccine products due to competitive
multivalent hepatitis B virus vaccine products. In addition, certain terms of one of the hepatitis B virus arrangements expired in the third quarter 2001.

Royalty
and license fee revenues may fluctuate based on the nature of the related agreements, the timing of receipt of license fees and the expiration of patents. 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 $5.1 million and $8.0 million for the three
months ended June 30, 2002 and 2001, respectively, and $9.1 million and $11.3 million for the six months ended June 30, 2002 and 2001, respectively.

Commission revenuesWe earn commission revenues on sales of hepatitis B virus vaccine products. Commission revenues
were $0.3 million and $0.8 million for the three months ended June 30, 2002 and 2001, respectively, and $0.8 million and $1.6 million for the six months ended
June 30, 2002 and 2001, respectively. The decrease in commission revenues in 2002 as compared with 2001 primarily was 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 $2.6 million and $5.3 million for the three months ended
June 30, 2002 and 2001, respectively, and $4.7 million and $5.7 million for the six months ended June 30, 2002 and 2001, respectively, under these arrangements.

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

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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 61% and 65% for the three months ended
June 30, 2002 and 2001, respectively, and 55% and 64% for the six months ended June 30, 2002 and 2001, respectively. The decrease in vaccine gross profit margins in 2002 as compared with
2001 primarily related to (i) product reserves in the first half of 2002 due to various issues, including seasonality patterns, excess and obsolete inventory and production yields,
(ii) lower sales of Menjugate and (iii) the commencement, in the fourth quarter 2001, of royalty payments to Novartis AG based on Menjugate sales under the
December 1995 Limited Liability Company agreement.

Vaccines
gross profit percentages may fluctuate significantly in future periods due to product and customer mix, seasonality and ordering patterns and production yields.

Research and developmentOur vaccines segment recognized research and development expenses of $15.0 million and
$15.4 million for the three months ended June 30, 2002 and 2001, respectively, and $30.3 million and $30.8 million for the six months ended June 30, 2002 and 2001,
respectively. The decrease in research and development spending in 2002 compared with 2001 primarily was due to the timing of clinical trials related to our various vaccines programs.

In
April 2001, Chiron, Rhein Biotech N.V. (now a part of Berna Biotech) 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. Under the collaboration agreement, we share the research and development expenses with Berna Biotech and GreenCross Vaccine
Corporation. The collaboration agreement also requires capital commitments from Chiron, Berna Biotech and GreenCross Vaccine Corporation. Chiron's commitment is approximately 26.4 million Euro
($26.1 million) at June 30, 2002, for the expansion of Chiron's Italian manufacturing facilities (see "Liquidity and Capital ResourcesSources and uses of cash" below).

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
$19.8 million and $20.9 million for the three months ended June 30, 2002 and 2001, respectively. The decrease in selling, general and administrative expenses in the second quarter
2002 compared with the second quarter 2001 primarily was due to less commissions recognized under a co-marketing and co-promotion agreement with Aventis Pasteur MSD related to
sales of Menjugate. For the six months ended June 30, 2002 and 2001, our vaccines segment recognized selling, general and administrative expenses of $39.8 million and
$37.8 million, respectively. Chiron made a payment in the first quarter 2002 to the German government in lieu of statutory price reductions on prescription drugs that are reimbursed under the
German government's healthcare program. We expensed this payment in the first quarter 2002. In addition, we incurred sales and marketing costs associated with the 2002 launch of our newly formulated
tick-borne encephalitis vaccine. These increases were partially offset by the reduced commissions in the second quarter 2002.

Amortization expenseOur vaccines segment recognized amortization expense of $1.5 million and $1.7 million for
the three months ended June 30, 2002 and 2001, respectively, and $2.9 million and $3.7 million for the six months ended June 30, 2002 and 2001, 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

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on a straight-line basis over 20 years. We were amortizing goodwill on a straight-line basis over 20 years. On January 1, 2002, as discussed in "New
Accounting Standards" below, we implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." 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. As circumstances dictate, we will evaluate the useful life and value of each intangible asset, which may result in future adjustments to the amortization periods or book values.
Amortization expense related to goodwill (including assembled workforce) would have been approximately $1.2 million for the six months ended June 30, 2002.

Blood testing

Product salesOur blood testing segment recognized product sales of $34.6 million and $14.3 million for the
three months ended June 30, 2002 and 2001, respectively, and $59.8 million and $27.3 million for the six months ended June 30, 2002 and 2001, respectively.

ProcleixOn February 27, 2002, the U.S. Food and Drug Administration approved the Procleix
HIV-1/ HCV Assay. Under a collaboration agreement with Gen-Probe Incorporated, we market and sell the
Procleix HIV-1 /HCV Assay and the related instrument system. We are also jointly participating with Gen-Probe 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
$29.5 million and $10.3 million for the three months ended June 30, 2002 and 2001, respectively, and $47.5 million and $18.5 million for the six months ended
June 30, 2002 and 2001, respectively.

Chiron
sells directly in the U.S., Australia and various European markets. We also have contracts with various agencies and distributors worldwide. During the second quarter 2002, we
signed new commercial contracts with existing America's Blood Centers customers and the Association of Independent Blood Centers to provide the Procleix HIV-1/ HCV Assay.
Commercial pricing contained in these agreements has resulted in a significant increase in revenue as compared with 2001. During the quarter we also extended an existing agreement with the American
National Red Cross (ARC), revising the price to commercial levels, which has resulted in increased revenues in the second quarter 2002. In addition, evaluation studies are being conducted to consider
the adoption of Procleix HIV-1/ HCV Assay for blood screening in additional countries. We recognize product revenues based on the details of each contract.

In
the first and second quarters of 2002, we recognized positive adjustments under previously existing contracts with all our U.S. customers for increased donations exceeding contractual
minimums. In the third quarter 2001, all of our U.S. customers renewed their investigational use agreements, most with moderate price increases, for nucleic acid testing products.

Outside
the U.S., the Italian government mandated the use of nucleic acid testing for blood screening in the second half of 2001, with implementation required in 2002. We began
recognizing revenues from the commercial sales of assays and instruments and the provision of services in the third quarter 2001. 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 the third quarter 2001.

Ortho-Clinical DiagnosticsUnder the Ortho-Clinical Diagnostics, Inc. contract, we manufacture bulk reagents and
antigens and confirmatory test kits for immunodiagnostic products. We recognized product sales under this contract of $5.1 million and $4.0 million for the three months ended
June 30, 2002 and 2001, respectively, and $12.3 million and $8.8 million for the six months ended June 30, 2002 and 2001, respectively. The fluctuations between 2002 and
2001 primarily were due to the timing of manufacturing services and an increase in products manufactured to support business continuity

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planning. In addition, Chiron manufactures bulk antigens for Ortho-Clinical Diagnostics to be included in products to be sold by Bayer under a June 2001 agreement among Chiron, Ortho-Clinical
Diagnostics and Bayer Corporation (see also "Royalty and license fee revenuesBayer" below).

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" of our Annual Report on Form 10-K for the year ended December 31, 2001.

Equity in earnings of unconsolidated joint businessesOur share of earnings from our joint business with Ortho-Clinical
Diagnostics, Inc. were $27.4 million and $22.3 million for the three months ended June 30, 2002 and 2001, respectively, and $46.2 million and $37.9 million
for the six months ended June 30, 2002 and 2001, respectively. The increase in 2002 as compared with 2001 primarily was due to increased profitability of Ortho-Clinical Diagnostics' foreign
affiliates and nominal price increases in the U.S.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Under the Ortho-Clinical Diagnostics, Inc. contract, we conduct research and development services related to immunodiagnostic products. Our blood
testing segment recognized collaborative agreement revenues related to immunodiagnostic products of $2.8 million and $2.6 million for the three months ended June 30, 2002 and
2001, respectively, and $5.4 million and $6.2 million for the six months ended June 30, 2002 and 2001, respectively. The fluctuations between 2002 and 2001 primarily were due to
the timing of research services.

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 products. The blood testing segment recognized royalty and license fee
revenues of $12.6 million and $3.4 million for the three months ended June 30, 2002 and 2001, respectively, and $22.8 million and $6.0 million for the six months
ended June 30, 2002 and 2001, respectively.

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 vitroclinical diagnostic 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
$11.3 million and $3.4 million for the three months ended June 30, 2002 and 2001, respectively, and $20.2 million and $6.0 million for the six months ended
June 30, 2002 and 2001, respectively. The increase
related to a contractual increase in the royalty rates and positive adjustments of the estimate to actual in subsequent periods. Royalties will continue under these new agreements 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 begin to expire in 2015 for
the U.S. and in 2008 for Europe. Currently, the applicable issued HIV patent in Europe expires in

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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, the timing of receipt of license fees and the expiration of patents. 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 41% and 19% for the three months ended
June 30, 2002 and 2001, respectively and 39% and 26% for the six months ended June 30, 2002 and 2001, respectively. The increase in blood testing gross profit margins in 2002 as compared
with 2001 related to (i) the increase in nucleic acid testing product sales as a percentage of total blood testing product sales and (ii) the timing of manufacturing services under the
Ortho-Clinical Diagnostics contract.

Blood
testing gross profit percentages may fluctuate in future periods as the blood testing product and customer mix changes and with the anticipated increase in nucleic acid testing
revenues from the Procleix HIV-1/ HCV Assay.

Research and developmentOur blood testing segment recognized research and development expenses of $5.2 million and
$4.1 million for the three months ended June 30, 2002 and 2001, respectively, and $9.4 million and $8.4 million for the six months ended June 30, 2002 and 2001,
respectively. The increase in research and development spending in 2002 compared with 2001 primarily was due to the continued development of nucleic acid testing technology and the timing of
activities under the Ortho-Clinical Diagnostics contract.

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
$8.0 million and $5.7 million for the three months ended June 30, 2002 and 2001, respectively, and $15.2 million and $12.7 million for the six months ended
June 30, 2002 and 2001, respectively. The increased selling, general and administrative expenses related to the expansion of our customer base for the Procleix
HIV-1/HCV Assay in the U.S., Europe and other international markets.

Other

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Our other segment did not recognize any collaborative agreement revenues during the three and six months ended June 30, 2002. Our other segment
recognized collaborative agreement revenues of $3.0 million for each of the three and six months ended June 30, 2001, under an agreement with Novartis AG, which expired on
December 31, 2001.

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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 $13.7 million and $16.8 million for the three months ended June 30, 2002 and 2001, respectively, and
$28.5 million and $56.1 million for the six months ended June 30, 2002 and 2001, 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 patents consisted of the following (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,2002

2001

2002

2001Royalty revenues

$
13,593

$
11,795

$
28,439

$
23,409License fee revenues





5,000





30,000$
13,593

$
16,795

$
28,439

$
53,409


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 itsin 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. The increase in royalty revenues in 2002
as compared with 2001 primarily related to increased product sales recognized by F. Hoffmann La-Roche.

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

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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.

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 the final portion of revenue in the fourth quarter 2001. We recognized license fee revenues for the three and six months ended
June 30, 2001, which represented the portion of the $100.0 million payment that became nonrefundable during that period. In addition, the cross-license agreement provides for royalties
to us on HIV and hepatitis C virus products sold by Bayer, which increased in 2002 as compared with 2001.

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.

The
balance of royalty and license fee revenues for the three and six months ended June 30, 2002 and 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. Hoffmann La-Roche and its
licensees. For the six months ended June 30, 2001, we recognized $2.6 million under this agreement. F. Hoffmann 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 $2.6 million adjustment for the final fourth quarter 2000 royalties in the first quarter 2001.

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.

Selling, general, and administrativeFor the three months ended June 30, 2002 and 2001, our other segment recognized
selling, general and administrative expenses of $19.4 million and $15.9 million, respectively, and $35.0 million and $29.3 million for the six months ended June 30,
2002 and 2001, respectively. The increase in selling, general and administrative expenses in 2002 as compared with 2001 primarily was due to our continued investment in and defense of our patents and
technology as well as increased general and administrative expenses since our acquisition of Matrix Pharmaceutical in the first quarter 2002.

Write-off of purchased in-process technologiesThe write-off of purchased
in-process technologies was $54.8 million in 2002.

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On
February 20, 2002, we acquired Matrix Pharmaceutical, Inc. and accounted for the acquisition as an asset purchase. We allocated the purchase price based on the fair
value of the assets acquired and liabilities assumed. We allocated a portion of the purchase price to purchased in-process technologies and wrote this off entirely in the first quarter
2002. 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 20% discount rate. We assumed revenue from tezacitabine to commence after 2005. As with all
pharmaceutical products, the probability of commercial success for any research and development project is highly uncertain.

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 St. Louis, Missouri facilities and (iii) the ongoing restructuring of our business operations. 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 371 positions, 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.

For
the six months ended June 30, 2002, we had no restructuring and reorganization adjustments. Of the 371 positions for elimination, 363 had terminated as of June 30,
2002.

For
the six months ended June 30, 2001, we recorded net restructuring and reorganization activity, which included a charge of $0.2 million and a charge reversal of
$0.2 million. The charge of $0.2 million primarily related to revised estimates of termination and other employee-related costs recorded in connection with the elimination of the 371
positions, of which 359 had terminated as of June 30, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

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.

Gain on sale of assetsIn January 2001, we sold various assets of our San Diego facility, resulting in a net gain of
$2.4 million.

Interest expenseFor the three months ended June 30, 2002 and 2001, we recognized interest expense of
$3.1 million and $0.9 million, respectively, and $6.3 million and $1.3 million for the six months ended June 30, 2002 and 2001, respectively. The increase in
interest expense in 2002 as compared with 2001 primarily was due to the interest expense recognized on the Liquid Yield Option Notes that were issued in June 2001.

Other income, netOther income, net, primarily consisted of interest income on our cash and investment balances and other
non-operating gains and losses. For the three months ended June 30, 2002 and 2001, we recognized interest income of $9.3 million and $12.1 million, respectively, and
$19.1 million and $25.5 million for the six months ended June 30, 2002 and 2001, respectively. The decrease in interest income in 2002 as compared with 2001 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
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

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values of those securities accordingly. For the six months ended June 30, 2002 and 2001, we recognized losses attributable to the other-than-temporary impairment of
certain of these equity securities of $4.6 million and $4.5 million, respectively. In the second quarter 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 $5.1 millionthe full
principal plus interest. We recorded $1.5 million in other income, net, for the six months ended June 30, 2002.

For
the three and six months ended June 30, 2002, we recognized gains of $7.8 million and $14.3 million, respectively, and $6.0 million for each of the three
and six months ended June 30, 2001, related to the sale of certain equity securities.

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 an annual payment of $5.4 million and $2.5 million during the six months ended
June 30, 2002 and 2001, respectively.

Income taxesThe effective tax rate for 2002 is 27.0% of pretax income from continuing operations, excluding the
write-off of purchased in-process technologies related to the Matrix Pharmaceutical acquisition. The effective tax rate for the six months ended June 30, 2001 was 31.4%
of pretax income from continuing operations. The write-off of purchased in-process technologies in 2002 is not tax deductible. The 2002 effective tax rate is lower than the
2001 effective tax rate due to the non-deductibility of goodwill amortization in 2001 and increased benefits received in 2002 from foreign income taxed at rates lower than the U.S. tax
rate. The effective tax rate may be affected in future periods by changes in management's estimates with respect to our deferred tax assets and other items affecting the overall tax rate.

Discontinued operationsIn a strategic effort to focus on its core businesses of biopharmaceuticals, vaccines and blood
testing, we completed the sale of Chiron Diagnostics and Chiron Vision in 1998 and 1997, respectively.

Under
the terms of the Bausch & Lomb agreement related to the sale of Chiron Vision, we provided customary indemnities and, accordingly, reserved for such contractual obligations
to indemnify Bausch & Lomb against certain potential claims. In the second quarter 2001, we reversed the remaining reserves of $1.5 million upon the sale of the remaining real estate
assets, as discussed below. This amount was recorded as a component of "Gain 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. As of
March 31, 2001, the remaining real estate assets amounted to $1.9 million. In April 2001, we sold these remaining real estate assets and recognized a net gain on the sale of these
assets of $1.6 million. This gain was recorded as a component of "Gain on disposal of discontinued operations."

New Accounting Standards

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue (referred to as EITF) No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an
entity's commitment to an exit plan, as required under EITF 94-3. The provisions of SFAS 146

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are effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. We are currently analyzing the effect, if any, the adoption of this
standard will have on our consolidated financial statements.

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, "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. The implementation of the provisions of this standard did not have a material effect on our consolidated financial position or results of
operations.

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 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," as discussed above. 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 reassessed the useful lives and residual values of all intangible assets (excluding goodwill and assembled workforce) acquired in purchase business
combinations. No adjustments to amortization periods were necessary.

In
connection with the transitional goodwill impairment evaluation, the adoption of SFAS 142 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 then determined 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 subsequently determined the fair value of each reporting unit using the
present value of expected future cash flows and compared it to the reporting unit's carrying amount. Each reporting unit's fair value exceeds its carrying amount. Based on this analysis, we have no
indication of a transitional impairment loss and no further analysis is required.

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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.

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 consolidated 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 and the related leased facilities be recorded on the balance sheet. As new information is released, we will continue to
monitor the impact of these rules on our June 1996 lease financing, disclosed in Note 12, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesCommitments," in our Annual Report on
Form 10-K for the year ended December 31, 2001.

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 $1,250.9 million at June 30, 2002, 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 $268.3 million and $294.7 million at
June 30, 2002 and 2001, respectively.

Operating activitiesFor the six months ended June 30, 2002, net cash provided by operating activities was
$82.6 million as compared with $15.3 million for the six months ended June 30, 2001. The increase in cash provided by operating activities was due primarily to (i) higher
income from operations before depreciation and amortization and other non-cash charges, (ii) the timing of payments received under the Betaferon® royalty arrangement and
(iii) lower tax payments. Income from operations before depreciation and amortization and other non-cash charges was $166.6 million for the six months ended June 30,
2002 as compared with $127.4 million for the same six month period in 2001. In addition, we made approximately $17.0 million in federal tax payments during the first half of 2002 as
compared with approximately $24.8 million in the first half of 2001.

Unutilized
net operating loss carryforwards and federal business credits attributed to the acquisition of PathoGenesis Corporation carried forward into 2002 amounted to approximately
$30.4 million and $6.0 million, respectively, and are available to offset future domestic taxable income through 2007 and are expected to be fully utilized to reduce tax payments in
2002.

Unutilized
net operating loss carryforwards and federal business credits attributed to the acquisition of Matrix Pharmaceutical amounting to approximately $289.8 million and
$8.8 million, respectively, are available to offset future domestic taxable income through 2021. We estimate that we will utilize approximately $3.0 million in 2002 and
$3.4 million in 2003 and thereafter, as restricted pursuant to
section 382 of the Internal Revenue Code, of such net operating loss carryforwards and federal business credits.

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We
anticipate that research and development expenditures in 2002 will primarily be driven by (i) those activities under our December 2001 and June 2002 collaboration
agreements with Inhale Therapeutic Systems, Inc. related to, among other things, the development of a dry powder formulation of our inhaled TOBI® product for the treatment of pseudomonas aeruginosain cystic fibrosis patients and a dry powder inhaleable erythromyclamine product targeted for the treatment of acute
exacerbations of chronic bronchitis, (ii) those activities related to the development of tezacitabine, obtained as a part of the acquisition of Matrix Pharmaceutical in the first quarter 2002
and (iii) those activities related to the development of interleukin-2 in combination with various monoclonal antibodies. Net cash from operating activities will fund these research
and development activities.

Investing activitiesFor the six months ended June 30, 2002, net cash used in investing activities consisted of
purchases of investments in marketable debt securities of $320.7 million, net cash paid to acquire Matrix Pharmaceutical, Inc. of $54.9 million, capital expenditures of
$54.3 million, purchases of equity securities and interests in affiliated companies of $3.1 million, other uses of cash of $0.9 million, and cash paid for acquisition costs
related to the acquisition of PathoGenesis of $0.4 million. Cash used in investing activities was offset by proceeds from the sale and maturity of investments in marketable debt securities of
$311.1 million, proceeds from the sale of equity securities and interests in affiliated companies of $13.4 and proceeds from the sale of assets of $0.2 million.

In
April 2001, we entered into a collaboration with Rhein Biotech N.V. (now part of Berna Biotech) and GreenCross Vaccine Corporation 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, Berna Biotech and GreenCross Vaccine. Our commitment is
approximately 26.4 million Euro ($26.1 million) at June 30, 2002 for the expansion of our Italian manufacturing facilities, of which we had incurred costs of 0.4 million
Euro ($0.4 million), as of June 30, 2002. This agreement started in the fourth quarter of 2001 and is expected to continue through 2008. We currently are evaluating various financing
alternatives to fund this expansion.

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. We had committed to $35.4 million in design and construction services, under which we had
incurred costs of $21.1 million, as of June 30, 2002. We may cancel these commitments at any time. Related to the research and development facility, we are evaluating various financing
alternatives to fund this expansion.

The
purchases of equity securities and interests in affiliated companies consisted of a $1.3 million capital contribution under a 2001 limited partnership agreement and a
$1.8 million capital contribution
under a 2000 limited partnership agreement. In 2001, Chiron became a limited partner of Forward Venture IV, L.P. Chiron will pay $15.0 million over ten years, of which $6.6 million was
paid through June 30, 2002, 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 $15.3 million was paid through June 30, 2002, for a 23.26% ownership percentage. Chiron accounts for both investments under the equity method of accounting. In addition,
in July 2002, we agreed to invest up to $5.0 million in TPG Biotechnology Partners, L.P.

For
the six months ended June 30, 2001, net cash used in investing activities consisted of purchases of investments in marketable debt securities of $666.1 million, capital
expenditures of $25.8 million, purchases of equity securities and interests in affiliated companies of $11.1 million and cash paid for acquisition costs related to the acquisition of
PathoGenesis of $5.6 million. Cash used in investing activities was offset by proceeds from the sale and maturity of investments in marketable debt securities of $424.5 million, proceeds
from the sale of assets of $8.2 million, proceeds from the sale of equity securities and interests in affiliated companies of $7.6 million and other sources of cash of
$2.8 million. In April 2001, we sold the remaining Chiron Vision real estate assets for $3.3 million in cash, and in

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January 2001, we sold various assets of our San Diego facility for $4.9 million in cash. The purchases of equity securities and interests in affiliated companies consisted of a
$4.3 million capital contribution under a 2001 limited partnership agreement, a $3.9 million capital contribution under a 2000 limited partnership agreement and a $3.0 million
capital contribution under a third limited partnership agreement. Under the third limited partnership agreement, we invested in a Singapore-based joint venture, S*BIO, to research and develop
therapeutic, diagnostic and vaccine products. We had invested $8.0 million, which we wrote off entirely due to the early stage of the joint venture's research and development activities, for a
19.9% ownership interest and are accounting for the investment under the cost method.

Financing activitiesFor the six months ended June 30, 2002, net cash used in financing activities consisted of
$45.1 million for the acquisition of treasury stock and $0.3 million for the repayment of short-term borrowings. Cash used in financing activities was offset by
$18.0 million in proceeds from the reissuance of treasury stock (primarily related to stock option exercises and employee stock purchases) and $2.0 million in proceeds from put options.

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 December 2001, our Board of Directors approved a 5.0 million share increase. The Board has authorized such repurchases through
December 31, 2002. As of June 30, 2002, we may repurchase up to an additional 3.7 million shares of our common stock.

We
utilize put options to facilitate the repurchase of common stock. Under our put option program, we enter into contracts with third parties to sell put options on Chiron stock,
entitling the holders to sell to us a specified number of shares at a specified price per share on a specified date. As of June 30, 2002, we had an outstanding contract with a third party to
sell put options on Chiron stock, entitling the holder to sell us 0.3 million shares. In connection with the sale, we collected a $0.9 million premium.
For the six months ended June 30, 2002, we collected premiums of $2.0 million. The option expired on August 6, 2002 and had an exercise price of $37.87 per share. The amount of
our obligation to repurchase such shares upon exercise of the outstanding put options, totaling $11.4 million, was reclassified from "Additional paid-in capital" to "Put options" in
temporary equity in the Condensed Consolidated Balance Sheet at June 30, 2002. On August 6, 2002, our closing stock price was $34.21. Since the closing stock price was below the
stipulated $37.87, the third party elected to exercise the options. As a result, we repurchased the shares in the third quarter 2002.

In
July 2002, we entered into another contract with a third party to sell put options on Chiron stock, entitling the holder to sell us 0.5 million shares. In connection
with the sale, we collected a $1.7 million premium. The option expires in October 2002 and has an exercise price of $32.05 per share. The amount of our obligation to repurchase such
shares upon exercise of the outstanding put options, totaling $16.0 million, will be reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the third
quarter 2002.

As
of December 31, 2001, we had 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 expired on March 28, 2002 and had an exercise price of $45.88 per share. The amount of our 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 Condensed Consolidated Balance Sheet at December 31, 2001. On
March 28, 2002, our closing stock price was $45.89. Since the closing stock price was above the stipulated $45.88, the third party elected not to exercise the options. As a result, the
temporary equity of $13.8 million was reclassified to permanent equity in the first quarter 2002.

For
the six months ended June 30, 2001, net cash provided by financing activities consisted of $401.8 million in proceeds from the issuance of the Liquid Yield Option
Notes, $35.8 million in proceeds from the reissuance of treasury stock primarily related to stock option exercises and employee

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stock purchases, and $4.2 million in proceeds from put options. Cash provided by financing activities was offset by $63.1 million for the acquisition of treasury stock,
$0.6 million related to the repayment of debt and $0.1 million for the repayment of short-term borrowings.

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.

Borrowing arrangementsUnder 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 June 30, 2002 and December 31, 2001. 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 $0.3 million and $0.5 million at June 30, 2002 and
December 31, 2001, respectively. One facility is maintained for all of our European subsidiaries and our 51%-owned Indian subsidiary, and allows for total borrowings of $50.0 million.
The Indian subsidiary is limited to total borrowings of 200 million Indian Rupee ($4.1 million at June 30, 2002) under this facility. There were no outstanding borrowings under
this facility at June 30, 2002. At December 31, 2001, $0.5 million was outstanding under this facility. Our Italian subsidiary also has various facilities, related to its
receivables, which allow for total borrowings of 10.9 million Euro ($10.8 million at June 30, 2002). At June 30, 2002, $0.3 million was outstanding under this
facility. There were no outstanding borrowings under this facility at December 31, 2001.

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-Q 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.

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Regulatory Standards

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" in our Form 10-K. 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. In addition, regulations may be amended from time to time. Revised regulations may require us to reformulate products on a country or regional basis, obtain
additional regulatory approvals, and/or accept additional risks that our products will not maintain market acceptance or be eligible for third party insurance coverage. There is no guarantee that we
will be able to satisfy these new regulatory requirements and may suffer a loss of revenue as a result.

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 one 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. Most of our 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.

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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, 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).

Product Liability

We are exposed to product liability and other claims in the event that the use of our products is alleged to have resulted in adverse effects. While we will
continue to take precautions, we may not avoid significant product liability exposure. Although we maintain product liability insurance, there is no guarantee that this coverage will be sufficient. We
are not able to obtain adequate insurance coverage for certain products and essentially we are self-insured in relation to these products. If we are sued for any injury caused by our
products, we could suffer a significant financial loss.

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:



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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 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.

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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 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,



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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.

Earnings Volatility

Our operating results may vary considerably from quarter to quarter. Any number of factors may affect our quarterly operating results. These factors include, but
are not limited to the following,



Our
results in any one quarter are not necessarily indicative of results to be expected for a full year.

Accounting Standards, Financial Reporting Requirements and Tax Laws

We must follow accounting standards, financial reporting requirements and tax laws set by the governing bodies and lawmakers in the U.S. and other countries where
we do business. From time to time, these governing bodies and lawmakers implement new and revised rules and laws. These new and revised accounting standards, financial reporting requirements and tax
laws may require changes in the future to our financial statements, information filed by us with the governing bodies and enforcement of tax laws against us. It is impossible to predict the impact, if
any, on Chiron of future changes to accounting standards, financial reporting requirements and tax laws. In addition, it is possible that the application of certain current accounting standards may
change due to environmental factors, which may necessitate a change in our standard practice related to these accounting standards.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk managementOur 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. There were no significant changes in our market risk exposures during the first half of 2002. These activities are discussed in further detail in Part II, Item 7A., "Quantitative
and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended December 31, 2001.

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PART II

Item 1. Legal Proceedings

We are party to certain lawsuits and legal proceedings, which are described in Part I, Item 3. "Legal Proceedings" of our Annual Report on
Form 10-K for the year ended December 31, 2001. The following is a description of material developments during the period covered by this Quarterly Report and should be read
in conjunction with the Annual Report on Form 10-K.

Average Wholesale Pricing

In July 2002, John Rice filed a class action lawsuit in the Superior Court of the State of California in Alameda County against 41 biotechnology and
pharmaceutical companies, including Chiron and Cetus Oncology, in connection with average wholesale prices for various products, including DepoCyt® and oncology drugs, which are reimbursed
by Medicare. Plaintiff alleges that defendants violated California Business and Professions Codes by engaging in unfair and fraudulent business practices, and seeks injunctive relief against such
practices as well as compensatory and punitive damages.

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

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 its 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. In June 2002, the Court of Milan declared that it lacked jurisdiction over the non-Italian
parts of the 150 patent, thereby limiting the lawsuit to issues involving only the Italian portion of the 150 patent.

It
is not known when nor on what basis this matter will be resolved.

F. Hoffmann La-Roche A.G.

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, DD 298 524, DD 287 104, DD 297 446 (collectively, the "German patents") and
Chiron's European Patent No. EP 0 450 931 (the "931 patent"). The Landgericht subsequently separated the matter into individual actions and then stayed oral hearings on the 931 patent and German
patents pending results of the nullity proceedings initiated by Roche in December 2000 in the German Federal Patent court ("Bundespatentgericht"). The Bundespatentgericht has scheduled hearings
on the nullity actions for August 2002.

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. In January 2002, Chiron withdrew the action from certain foreign jurisdictions. 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 on infringement of the 931 patent. Chiron filed an appeal with the Karlsruhe Superior
Regional Court in May 2002, and a hearing on Chiron's appeal has been scheduled for September 2002.

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

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. The complainants seek a determination that Roche pricing for its blood screening kits based upon the number of donations tested is unreasonable and should be prohibited through interim
measures to be ordered by the Commission prior to final resolution of the action. A prohibition of "per-donation" pricing could have a significant adverse effect upon royalties payable by
Roche to Chiron and upon Chiron's revenues from sale of its own blood screening products in Europe. It is not known whether or if the Commission will order any interim measures. Chiron filed its
initial 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, filed in support of the German complaint, similarly alleges anticompetitive practices in violation of Articles 81 and 82 of the EC Treaty. The National Blood
Authority of England also filed a related complaint with the Commission against Chiron and Roche in February 2002. The National Blood Authority complaint focused exclusively on hepatitis C
virus licensing. Chiron has been informed that blood banking entities from Finland and Luxembourg have filed similar complaints with the Commission.

In
July 2002, the Directorate General for Competition provided its provisional assessment concerning both the October 2000 hepatitis C virus and HIV nucleic acid testing
licensing agreements for clinical diagnostics and the May 2001 hepatitis C virus and HIV nucleic acid testing licensing agreements for blood screening between Chiron and Roche which had
been notified to the European Commission in May 2001 and September 2001, respectively, and the complaints referenced above. The provisional assessment indicates that certain field of use
restrictions and most favored nation license provisions appear to give rise to competition restrictions incompatible with Article 81(1) of the EC Treaty and unlikely to qualify for exemption
under Article 81(3) of the EC Treaty. The provisional assessment did not indicate that the per donation pricing was incompatible with the EC Treaty. Chiron will respond to the provisional
assessment. It is not known when or whether the Commission will determine to initiate formal proceedings in this matter. Final resolution of these cases could involve substantial fines and damage
awards, in addition to the material adverse effect of interim measures or final remedies that may be ordered.

It
is not known when nor on what basis these matters 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 March 2002, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal order.
Plaintiffs did not appeal the decision, and the matter is therefore concluded.

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Sorin Biomedica/Snia

In June 1994, Sorin Biomedica S.p.A. ("Sorin") 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's allegations and filed a counterclaim seeking a declaration of infringement. In February 1997, the Court enjoined Sorin from manufacturing or selling hepatitis C virus
immunoassay kits in Italy. After Sorin made further objections, the Court ruled in October 1999 that certain 216 patent claims were valid and that Sorin'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. In December 2000, Snia S.p.A., Sorin'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 May 2002, the Court of Appeal of Milan declared
that Snia's claims were inadmissible and dismissed Snia's appeal. This judgment is subject to appeal.

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 the
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.

Item 4. Submission of Matters to a Vote of Security Holders



Directors

For

WithheldLewis W. Coleman

169,500,842

1,770,132Paul L. Herrling

169,913,706

1,357,268William J. Rutter

168,365,008

2,905,966Jack W. Schuler

168,365,008

2,905,966


All
nominees were declared to have been elected as directors to hold office until the Annual Meeting of Stockholders in the year 2005 as noted above. No abstentions or broker
non-votes were cast for the election of directors.

The
following directors shall continue in office after Chiron's Annual Meeting of Stockholders held on May 16, 2002: Raymund Breu, Seán P. Lance and Pieter J.
Strijkert shall continue in office until the Annual Meeting of Stockholders in the year 2003; Vaughn D. Bryson, Pierre E. Douaze and Edward E. Penhoet shall continue in office until the Annual Meeting
of Stockholders in the year 2004.



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Item 5. Other Information

Audit Committee MembershipConsistent with the Nasdaq audit committee structure and membership requirements, the Audit
Committee is comprised of three members: Messrs. Coleman, Breu and Schuler. Mr. Breu is the Chief Financial Officer and a Member of the Executive Committee of Novartis. Because of the
nature of Chiron's relationship with Novartis (see"Certain Relationships and Related Transactions" of Chiron's Definitive Proxy Statement, filed with
the Securities and Exchange Commission on March 27, 2002) and Mr. Breu's affiliation with Novartis, he is deemed to be a "non-independent" director. As permitted under the
Nasdaq requirements, the Board carefully considered Mr. Breu's affiliation with Novartis as well as his accounting and financial expertise and determined that it is in the best interest of
Chiron and its shareholders that he continue to serve as a member of the Audit Committee. Both Mr. Coleman and Mr. Schuler are independent directors under the Nasdaq requirements.

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Item 6. Exhibits and Reports on Form 8-K

|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, 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 above), 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.317         |  | Association Agreement Regarding the Sale and Servicing of Blood Screening Products, dated as of May 1, 2002, between America's Blood Centers and Chiron, and Form of Member Supplement. (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".)
|10.503         |  | Forms of Stock Option Agreements, Chiron 1991 Stock Option Plan, as amended, for Non-Employee Directors of Chiron.*                                                                                                                                                                                                                                                                                                                                                                                              
|10.505         |  | Form of Amendment Letter to Automatic Share Rights Letter Agreement for Non-Employee Directors of Chiron, Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                                                            
|10.506         |  | Form of Amendment Letter to Automatic Stock Option Agreement for Non-Employee Directors of Chiron, Chiron 1991 Stock Option Plan, as amended.*                                                                                                                                                                                                                                                                                                                                                                   

---

None.

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CHIRON CORPORATION
June 30, 2002

SIGNATURES

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

|                     |  | CHIRON CORPORATION
|-------------------- |  | ------------------
|DATE: August 9, 2002 |  | BY:               
|DATE: August 9, 2002 |  | BY:               
|DATE: August 9, 2002 |  | BY:               

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