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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 March 31, 2003               
|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(State or other jurisdiction of
incorporation or organization)             |  | 94-2754624(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------- |  | ----------------------------------------------
|4560 Horton Street, Emeryville, California(Address of principal executive offices) |  | 94608(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
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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 April 30, 2003
|----------------------------- |  | -----------------------------
|Common Stock, $0.01 par value |  | 186,424,167                  

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CHIRON CORPORATION  TABLE OF CONTENTS

|                              |                                                                                               | Page No.                                                                                                           
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                                    
|                              | ITEM 1. Financial Statements (Unaudited)                                                      |                                                                                                                    
|                              |                                                                                               | Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002                                      
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002                 
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2003 and 2002
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002                 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                               
|                              | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                    
|                              | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                    
|                              | ITEM 4. Controls and Procedures                                                               |                                                                                                                    
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                    
|                              | ITEM 1. Legal Proceedings                                                                     |                                                                                                                    
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                    
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                    
|SIGNATURES                    |                                                                                               | 57                                                                                                                 
|CERTIFICATIONS                |                                                                                               | 58                                                                                                                 

2

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Item 1.    Financial Statements

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

|                                                                |                                                      | March 31,
2003                                             |           | December 31,
2002 |          
|--------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------------- | --------- | ----------------- | ---------
|ASSETS                                                          |                                                     
|Current assets:                                                 |                                                      |                                                            |           |                   |          
|                                                                | Cash and cash equivalents                            |                                                            | $         | 245,507           |          
|                                                                | Short-term investments in marketable debt securities |                                                            |           | 597,338           |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Total cash and short-term investments                      |           |                   | 842,845  
|                                                                | Accounts receivable, net                             |                                                            |           | 266,915           |          
|                                                                | Current portion of notes receivable                  |                                                            |           | 734               |          
|                                                                | Inventories                                          |                                                            |           | 166,211           |          
|                                                                | Current net deferred income tax asset                |                                                            |           | 38,278            |          
|                                                                | Derivative financial instruments                     |                                                            |           | 12,712            |          
|                                                                | Other current assets                                 |                                                            |           | 46,918            |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Total current assets                                       |           |                   | 1,374,613
|Noncurrent investments in marketable debt securities            |                                                      |                                                            | 436,759   |                   |          
|Property, plant, equipment and leasehold improvements, at cost: |                                                      |                                                            |           |                   |          
|                                                                | Land and buildings                                   |                                                            |           | 170,224           |          
|                                                                | Laboratory, production and office equipment          |                                                            |           | 439,256           |          
|                                                                | Leasehold improvements                               |                                                            |           | 95,955            |          
|                                                                | Construction-in-progress                             |                                                            |           | 80,267            |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      |                                                            | 785,702   |                   |          
|                                                                | Less accumulated depreciation and amortization       |                                                            |           | (398,163          | )        
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Property, plant, equipment and leasehold improvements, net |           |                   | 387,539  
|Purchased technologies, net                                     |                                                      |                                                            | 252,030   |                   |          
|Goodwill, net                                                   |                                                      |                                                            | 240,914   |                   |          
|Other intangible assets, net                                    |                                                      |                                                            | 145,169   |                   |          
|Investments in equity securities and affiliated companies       |                                                      |                                                            | 74,507    |                   |          
|Noncurrent notes receivable                                     |                                                      |                                                            | 8,949     |                   |          
|Noncurrent derivative financial instruments                     |                                                      |                                                            | 13,953    |                   |          
|Other noncurrent assets                                         |                                                      |                                                            | 33,619    |                   |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | $                                                          | 2,968,052 |                   | $        
|                                                                |                                                      |                                                            |           |                   |          

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

3

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

|                                             |                                                                                                        | March 31,
2003             |           | December 31,
2002 |          
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------- | --------- | ----------------- | ---------
|LIABILITIES AND STOCKHOLDERS' EQUITY         |                                                                                                       
|Current liabilities:                         |                                                                                                        |                            |           |                   |          
|                                             | Accounts payable                                                                                       |                            | $         | 64,042            |          
|                                             | Accrued compensation and related expenses                                                              |                            |           | 48,100            |          
|                                             | Short-term borrowings                                                                                  |                            |           |                  |          
|                                             | Current portion of unearned revenue                                                                    |                            |           | 23,597            |          
|                                             | Income taxes payable                                                                                   |                            |           | 29,313            |          
|                                             | Other current liabilities                                                                              |                            |           | 99,213            |          
|                                             |                                                                                                        |                            |           |                   |          
|                                             |                                                                                                        | Total current liabilities  |           |                   | 264,265  
|Long-term debt                               |                                                                                                        |                            | 418,941   |                   |          
|Noncurrent derivative financial instruments  |                                                                                                        |                            | 255       |                   |          
|Noncurrent net deferred income tax liability |                                                                                                        |                            | 43,628    |                   |          
|Noncurrent unearned revenue                  |                                                                                                        |                            | 58,958    |                   |          
|Other noncurrent liabilities                 |                                                                                                        |                            | 38,242    |                   |          
|Minority interest                            |                                                                                                        |                            | 5,804     |                   |          
|                                             |                                                                                                        |                            |           |                   |          
|                                             |                                                                                                        | Total liabilities          |           |                   | 830,093  
|                                             |                                                                                                        |                            |           |                   |          
|Commitments and contingencies                |                                                                                                        |                            |           |                   |          
|Put options                                  |                                                                                                        |                            | 18,394    |                   |          
|Stockholders' equity:                        |                                                                                                        |                            |           |                   |          
|                                             | Common stock                                                                                           |                            |           | 1,917             |          
|                                             | Additional paid-in capital                                                                             |                            |           | 2,450,717         |          
|                                             | Deferred stock compensation                                                                            |                            |           | (11,863           | )        
|                                             | Accumulated deficit                                                                                    |                            |           | (166,280          | )        
|                                             | Accumulated other comprehensive income                                                                 |                            |           | 60,909            |          
|                                             | Treasury stock, at cost (5,542,000 shares at March 31, 2003 and 4,830,000 shares at December 31, 2002) |                            |           | (215,835          | )        
|                                             |                                                                                                        |                            |           |                   |          
|                                             |                                                                                                        | Total stockholders' equity |           |                   | 2,119,565
|                                             |                                                                                                        |                            |           |                   |          
|                                             |                                                                                                        | $                          | 2,968,052 |                   | $        
|                                             |                                                                                                        |                            |           |                   |          

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

4

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

|                                                             |                                                       | Three Months Ended
March 31, |       
|------------------------------------------------------------ | ----------------------------------------------------- | ---------------------------- | ------
|
|Revenues:                                                    |                                                       |                              |       
|                                                             | Product sales, net                                    |                              | $     
|                                                             | Equity in earnings of unconsolidated joint businesses |                              |       
|                                                             | Collaborative agreement revenues                      |                              |       
|                                                             | Royalty and license fee revenues                      |                              |       
|                                                             | Other revenues                                        |                              |       
|                                                             |                                                       |                              |       
|                                                             |                                                       | Total revenues               |       
|                                                             |                                                       |                              |       
|Operating expenses:                                          |                                                       |                              |       
|                                                             | Cost of sales                                         |                              |       
|                                                             | Research and development                              |                              |       
|                                                             | Selling, general and administrative                   |                              |       
|                                                             | Amortization expense                                  |                              |       
|                                                             | Write-off of purchased in-process technologies        |                              |       
|                                                             | Restructuring and reorganization charges              |                              |       
|                                                             | Other operating expenses                              |                              |       
|                                                             |                                                       |                              |       
|                                                             |                                                       | Total operating expenses     |       
|                                                             |                                                       |                              |       
|Income (loss) from operations                                |                                                       |                              | 70,970
|Interest expense                                             |                                                       |                              | (3,462
|Other income, net                                            |                                                       |                              | 14,318
|Minority interest                                            |                                                       |                              | (400  
|                                                             |                                                       |                              |       
|Income (loss) from continuing operations before income taxes |                                                       |                              | 81,426
|Provision for income taxes                                   |                                                       |                              | 20,357
|                                                             |                                                       |                              |       
|Income (loss) from continuing operations                     |                                                       |                              | 61,069
|Gain on disposal of discontinued operations                  |                                                       |                              | 1,426 
|                                                             |                                                       |                              |       
|Net income (loss)                                            |                                                       | $                            | 62,495
|                                                             |                                                       |                              |       
|Basic earnings (loss) per share:                             |                                                       |                              |       
|                                                             | Income (loss) from continuing operations              |                              | $     
|                                                             |                                                       |                              |       
|                                                             | Net income (loss)                                     |                              | $     
|                                                             |                                                       |                              |       
|Diluted earnings (loss) per share:                           |                                                       |                              |       
|                                                             | Income (loss) from continuing operations              |                              | $     
|                                                             |                                                       |                              |       
|                                                             | Net income (loss)                                     |                              | $     
|                                                             |                                                       |                              |       

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

5

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

|                                   |                                                                                                                                                        | Three Months Ended
March 31,                                                                                                                                                        |       
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
|
|Net income (loss)                  |                                                                                                                                                        | $                                                                                                                                                                                   | 62,495
|                                   |                                                                                                                                                        |                                                                                                                                                                                     |       
|Other comprehensive income (loss): |                                                                                                                                                        |                                                                                                                                                                                     |       
|                                   | Change in foreign currency translation adjustment during the period, net of tax benefit of $845 for the three months ended March 31, 2002              |                                                                                                                                                                                     |       
|                                   | Net unrealized derivative gains from cash flow hedges arising during the period, net of tax provision of $72 for the three months ended March 31, 2002 |                                                                                                                                                                                     |       
|                                   | Unrealized losses from investments:                                                                                                                    |                                                                                                                                                                                     |       
|                                   |                                                                                                                                                        | Net unrealized holding losses arising during the period, net of tax benefit of $257 and $2,881 for the three months ended March 31, 2003 and 2002, respectively                     |       
|                                   |                                                                                                                                                        | Reclassification adjustment for net gains included in net income (loss), net of tax provision of $1,792 and $1,696 for the three months ended March 31, 2003 and 2002, respectively |       
|                                   |                                                                                                                                                        |                                                                                                                                                                                     |       
|                                   |                                                                                                                                                        | Net unrealized losses from investments                                                                                                                                              |       
|                                   |                                                                                                                                                        |                                                                                                                                                                                     |       
|                                   | Other comprehensive income (loss)                                                                                                                      |                                                                                                                                                                                     |       
|                                   |                                                                                                                                                        |                                                                                                                                                                                     |       
|Comprehensive income (loss)        |                                                                                                                                                        | $                                                                                                                                                                                   | 68,543
|                                   |                                                                                                                                                        |                                                                                                                                                                                     |       

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

6

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

|                                                     |                                                                               | Three Months Ended
March 31,                        |        
|---------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------------------------------- | -------
|
|Net cash provided by operating activities            |                                                                               | $                                                   | 66,180 
|                                                     |                                                                               |                                                     |        
|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 for acquisitions, 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                                                             |                                                     |        
|                                                     | Payments to acquire treasury stock                                            |                                                     |        
|                                                     | Proceeds from reissuance of treasury stock                                    |                                                     |        
|                                                     | Proceeds from put options                                                     |                                                     |        
|                                                     |                                                                               |                                                     |        
|                                                     |                                                                               | Net cash (used in) provided by financing activities |        
|                                                     |                                                                               |                                                     |        
|                                                     |                                                                               | Net decrease in cash and cash equivalents           |        
|Cash and cash equivalents at beginning of the period |                                                                               |                                                     | 247,950
|                                                     |                                                                               |                                                     |        
|Cash and cash equivalents at end of the period       |                                                                               | $                                                   | 245,507
|                                                     |                                                                               |                                                     |        

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

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CHIRON CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        March 31, 2003        (Unaudited)

Note 1The Company and Summary of Significant Accounting Policies

Basis of Presentation

The information presented in the condensed consolidated financial statements at March 31, 2003, and for the three months ended March 31, 2003 and
2002, 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, 2002, 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, 2002, 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
July 1, 2002, Chiron completed its acquisition of Pulmopharm GmbH, a distributor of TOBI® products in Germany and Austria by purchasing the remaining 80.1%
ownership that Chiron did not previously own. Previously, Chiron owned 19.9% of Pulmopharm and accounted for the investment under the equity method. Chiron accounted for the acquisition using the
purchase method of accounting and included Pulmopharm's operating results in its consolidated operating results beginning on July 1, 2002. Pulmopharm is part of Chiron's biopharmaceuticals
segment (see Note 4).

On
February 20, 2002, Chiron acquired Matrix Pharmaceutical, Inc., a company that was developing tezacitabine, a drug to treat cancer. Chiron included Matrix
Pharmaceutical's operating results, including the seven business days from February 20 to 28, 2002, in its consolidated operating results beginning on March 1, 2002 (see Note 4).

Chiron
is a limited partner of several venture capital funds. Chiron will pay $45.0 million over ten years, of which $27.0 million was paid through March 31, 2003.
Chiron accounts for these investments under the equity method of accounting pursuant to Emerging Issues Task Force, referred to as EITF, Topic No. D-46 "Accounting for Limited
Partnership Investments."

8

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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's
blood testing segment consists of 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 joint business with Ortho-Clinical Diagnostics sells a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provides supplemental
tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. Prior to the first quarter 2003, Chiron had accounted for non-U.S. affiliate
sales on a one-quarter lag, with an adjustment of the estimate to actual in the subsequent quarter. More current information of non-U.S. affiliate sales became available in
2003, and as a result, Chiron is able to recognize non-U.S. affiliate sales on a one-month lag. The effect of this change, net of tax, was an increase to net income by
$3.2 million for equity in earnings of unconsolidated joint businesses for the three months ended March 31, 2003.

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® in those cases where Chiron does not supply the product. 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, net of tax, was a decrease in net loss by $3.1 million for
product sales and $2.8 million for royalties for the three months ended March 31, 2002.

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.

Inventories

Inventories are stated at the lower of cost or market using the moving weighted-average cost method. Inventory that is obsolete (inventory that will no longer be
used in the manufacturing process),

9

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expired,
or in excess of forecasted usage is written down to its market value. Inventories consisted of the following (in thousands):

March 31,
2003

December 31,
2002Finished goods

$
46,034

$
32,697Work-in-process


75,517


77,232Raw materials


44,660


36,076$
166,211

$
146,005


Income Taxes

The reported effective tax rate for 2003 is 25% of pretax income from operations. 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 three months ended March 31, 2002, was based on an estimated annual
effective tax rate on pretax income from continuing operations of approximately 27%, excluding the write-off of purchased in-process technologies related to the acquisition of
Matrix Pharmaceutical, Inc. (see Note 4).

Put Options

Chiron uses written put options to reduce the effective costs of repurchasing its common stock. The put option contracts provide that Chiron, at its choice, can
settle with net cash or through physical delivery. The cash redemption value of the put option contracts is classified as temporary equity in accordance with EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."

In
February 2003, Chiron entered into a contract with a third party to sell put options on Chiron stock, entitling the holder to sell to Chiron 0.5 million shares. The
option expires in May 2003 and has an exercise price of $36.79 per share. The put option contracts are classified as equity in accordance with EITF Issue No. 00-19, however,
under the terms of the contract, because the net share settlement in unregistered shares is not available, the cash redemption value, totaling $18.4 million, was reclassified from "Additional
paid-in capital" to "Put options" in temporary equity in the Condensed Consolidated Balance Sheet at March 31, 2003.

As
of December 31, 2002, Chiron had an outstanding put option contract with a third party entitling the holder to sell to Chiron 0.5 million shares. The option expired on
January 29, 2003, and had an exercise price of $38.11 per share. The put option contracts are classified as equity in accordance with EITF Issue No. 00-19, however, under the
terms of the contract, because the net share settlement in unregistered shares is not available, the cash redemption value, totaling $19.1 million, was reclassified from "Additional
paid-in capital" to "Put options" in temporary equity in the Condensed Consolidated Balance Sheet at December 31, 2002. On January 29, 2003, Chiron's closing stock price was
$37.94. Although the closing stock price was below the stipulated $38.11, the third party elected not to exercise the options. As a result, the temporary equity of $19.1 million was
reclassified to permanent equity in the first quarter 2003.

10

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Stock-Based Compensation

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

In
accordance with Statement of Financial Accounting Standards, referred to as SFAS, No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based CompensationTransition and Disclosure," Chiron has provided, below, the pro forma disclosures of the effect on net income (loss) and net income (loss) per
share as if SFAS No. 123 had been applied in measuring compensation expense for all periods presented. Due to rounding, quarterly amounts may not sum fully to yearly amounts.

Three Months Ended
March 31,2003

2002(in thousands,
except per share data)Net income (loss):As reported

$
62,495

$
(18,937
)Add:

Stock-based employee compensation expense included in reported net income (loss), net of related tax effects


901


835Less:

Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


18,112


14,267Pro forma

$
45,284

$
(32,369
)Basic net income (loss) per share:As reported

$
0.33

$
(0.10
)Pro forma

$
0.24

$
(0.17
)Diluted net income (loss) per share:As reported

$
0.33

$
(0.10
)Pro forma

$
0.24

$
(0.17
)


Comprehensive Income

In the first quarter 2003, the foreign currency translation component of comprehensive income was not adjusted for income taxes, as they relate to permanent
investments in non-U.S. subsidiaries. In 2002, the foreign currency translation component of comprehensive income included the tax effects of

11

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certain
profit repatriations from Chiron's German and Italian vaccines subsidiaries. Additionally in 2002, all other foreign profits, net of the German and Italian profit repatriations, were
considered permanently reinvested.

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 $7.5 million and $17.5 million for the three months ended March 31, 2003 and 2002, respectively, to "Accumulated deficit" in the Condensed Consolidated Balance
Sheets.

New Accounting Standards

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (referred to as FIN No. 46), "Consolidation of
Variable Interest Entities" which address the accounting for certain off-balance sheet lease financing. The recognition provisions of FIN No. 46 will be effective for Chiron for the
interim period ended September 30, 2003. In June 1996, Chiron entered into a seven-year agreement with a group of financial institutions (the "lessors") to lease a research
and development facility. On or before August 1, 2003, Chiron can choose to either purchase the facility from the lessors or sell the facility to a third party. If Chiron purchases the
facility, Chiron must pay the lessors $172.6 million. This lease financing is described further in Note 13"Commitments and Contingencies," in Chiron's Annual Report on
Form 10-K for the year ended December 31, 2002. As Chiron finalizes the options related to its June 1996 lease financing by August 1, 2003, Chiron will continue
to monitor the impact of FIN No. 46 on its Consolidated Financial Statements.

In
November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (referred to as FIN No. 45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of Financial Accounting Standards Board Statements No. 5, 57, and 107 and Rescission of Financial
Accounting Standards Board Interpretation No. 34." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. The initial recognition
and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

Chiron
enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners, contractors, clinical sites,
insurers and customers. Under these provisions Chiron generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of Chiron's
activities. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments Chiron could be required to make
under these indemnification provisions is unlimited. The estimated fair value of the indemnity obligations of these agreements is minimal. Accordingly, Chiron has no liabilities recorded for these
agreements as of

12

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March 31,
2003. Chiron has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

In
November 2002, the Financial Accounting Standards Board issued EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue
No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 provides
guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF Issue
No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result
of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are
excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after
June 15, 2003. Chiron is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have in its Consolidated Financial Statements.

In
June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue 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 No. 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 Issue
No. 94-3. The adoption of SFAS No. 146 affects the timing of recognizing future restructuring costs as well as the amount recognized under such costs. The provisions of SFAS
No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Chiron adopted the provisions of SFAS No. 146 effective January 1, 2003.

In
June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires liability
recognition for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Chiron adopted the provisions of SFAS No. 143
effective January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Consolidated Financial Statements.

Note 2Earnings (Loss) 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. Due to
rounding, quarterly amounts may not sum fully to yearly amounts.

13

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

Three Months Ended
March 31,2003

2002Income (Numerator):Income (loss) from continuing operations available to common stockholders

$
61,069

$
(18,937
)Shares (Denominator):Weighted-average common shares outstanding


186,649


189,577Effect of dilutive securities:Stock options and equivalents


3,038


Weighted-average common shares outstanding, plus assumed conversions


189,687


189,577Basic earnings (loss) per share from continuing operations

$
0.33

$
(0.10
)Diluted earnings (loss) per share from continuing operations

$
0.32

$
(0.10
)


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

Three Months Ended
March 31,2003

2002Income (Numerator):Net income (loss) available to common stockholders

$
62,495

$
(18,937
)Shares (Denominator):Weighted-average common shares outstanding


186,649


189,577Effect of dilutive securities:Stock options and equivalents


3,038


Weighted-average common shares outstanding, plus assumed conversions


189,687


189,577Basic earnings (loss) per share

$
0.33

$
(0.10
)Diluted earnings (loss) per share

$
0.33

$
(0.10
)


For
the three months ended March 31, 2003 and 2002, stock options to purchase 17.3 million and 11.9 million shares, respectively, with exercise prices greater than
the average market prices of common stock, were excluded from the respective computations of diluted earnings (loss) per share as their inclusion would be antidilutive.

14

---

Also
excluded from the computations of diluted earnings per share for the three months ended March 31, 2003 were 5.2 million shares of common stock issuable upon conversion
of the Liquid Yield Option Notes, as their inclusion would be antidilutive.

All
potential common shares have been excluded from the computation of diluted loss per share for the three months ended March 31, 2002, as their inclusion would be antidilutive
due to the net loss.
These potential common shares included stock options to purchase 4.0 million shares of common stock, put options on 0.01 million shares of common stock and 5.2 million shares of
common stock issuable upon conversion of the Liquid Yield Option Notes.

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. Discontinued operations had no impact on basic earnings per share for the three months ended March 31, 2003. Diluted earnings per share from
discontinued operations was $0.01 for the three months ended March 31, 2003. There was no activity related to discontinued operations during the three months ended March 31, 2002.

Chiron Diagnostics

In the first quarter 2003, Chiron and Bayer Corporation reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase
Agreement dated September 17, 1998, between Chiron and Bayer. Under this settlement agreement, Chiron was required to make a payment to Bayer during the first quarter 2003. Chiron utilized an
amount previously reserved for indemnity obligations, based upon the settlement agreement with Bayer. These amounts resulted in a net charge of $7.6 million, offset by an income tax benefit of
$9.0 million, resulting in a net gain of $1.4 million which was recorded as a "Gain on disposal of discontinued operations" for the three months ended March 31, 2003.

Income Taxes

In connection with the sale of Chiron Diagnostics and Chiron Vision, Chiron recorded cumulative net deferred tax assets of $0.4 million and
$8.5 million at March 31, 2003 and December 31, 2002, respectively, principally attributable to the timing of the deduction of certain expenses associated with these sales. Chiron
also recorded corresponding valuation allowances of $0.4 million and $8.5 million at March 31, 2003 and December 31, 2002, respectively, to offset these deferred tax
assets, as management believes that it is more likely than not that the deferred tax assets to which the valuation allowance relates will not be realized. The future recognition of these deferred tax
assets will be reported as a component of "Gain (loss) on disposal of discontinued operations."

Note 4Acquisitions

Pulmopharm GmbHOn July 1, 2002, Chiron completed the acquisition of Pulmopharm GmbH, a distributor of
TOBI® products in Germany and Austria by purchasing the remaining 80.1% ownership

15

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that
Chiron did not previously own. Previously, Chiron owned 19.9% of Pulmopharm and accounted for the investment under the equity method. Chiron's acquisition of all of the remaining outstanding
shares of common stock of Pulmopharm, including estimated acquisition costs, resulted in a total purchase price of approximately $3.7 million. The acquisition resulted in the recognition of
$3.8 million of intangible assets relating to the distribution rights, $1.2 million of goodwill, $0.3 million of tangible assets and $1.6 million of deferred tax
liabilities on the acquisition date. In addition, on the acquisition date, the carrying value of the original investment in Pulmopharm, which totaled $0.3 million, was reclassified to goodwill.
Chiron accounted for the acquisition using the purchase method of accounting and included Pulmopharm's operating results in its consolidated operating results beginning on July 1, 2002.
Pulmopharm is part of Chiron's biopharmaceuticals segment.

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 acquisition costs,
resulted in a total purchase price of approximately $67.0 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 from February 20 to 28, 2002,
in its consolidated operating results beginning on March 1, 2002. The components and allocation of the 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 March 31, 2003


6,064Acquisition costs not yet paid as of March 31, 2003


14Total purchase price

$
67,046Allocation of 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


45,181Accounts payable


(2,898
)Reduction of income taxes payable


1,739Accrued liabilities


(8,082
)Total purchase price

$
67,046


16

---

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 defined by their employment agreements.

Chiron
allocated the 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 off $54.8 million in the first quarter 2002. Chiron allocated a portion of the purchase price to a liability for asset disposal and lease
cancellation for the San Diego, California facility closed during the third quarter 2002. In the fourth quarter 2002, Chiron found an assignee for the manufacturing facility lease and revised the
allocation of the purchase price resulting in a $9.6 million decrease to purchased in-process technologies. 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.

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 Pharmaceutical. This payment is reflected on the Condensed Consolidated
Statement of Cash Flows as a component of "Cash paid for acquisitions, net of cash acquired" for the three months ended March 31, 2002.

The
deferred tax asset primarily related to future utilization of net operating loss carryforwards. Chiron acquired federal and state net operating loss carryforwards and business
credits attributed to Matrix Pharmaceutical of approximately $288.7 million and $9.5 million, respectively. The utilization of such net operating loss and business tax credit
carryforwards is limited in any one year under provisions of the Internal Revenue Code. As such, a significant portion of Matrix Pharmaceutical's net operating loss carryforwards is expected to expire
unutilized.

Note 5Restructuring and Reorganization

For the three months ended March 31, 2003, Chiron recorded a restructuring and reorganization charge of $0.2 million. The charge consisted of
termination and other employee-related costs recognized in connection with the elimination of 6 positions in its Amsterdam manufacturing facility. Termination notice has been provided. However, of the
6 positions for elimination, none were terminated as of March 31, 2003.

Previously,
Chiron recorded restructuring and reorganization charges related to (i) the integration of its worldwide vaccines operations, (ii) the closure of its Puerto
Rico and St. Louis, Missouri facilities and (iii) the ongoing restructuring of its business operations. The integration of its worldwide vaccines

17

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operations
consisted of termination and other employee-related costs recognized in connection with the elimination of 28 positions, all of which had terminated as of December 31, 2000, in
Chiron's Italian manufacturing facility and facility-related costs. The closure of its Puerto Rico and St. Louis facilities and the ongoing restructuring of its business operations consisted of
termination and other employee-related costs recognized in connection with the elimination of 371 positions in manufacturing, research, development, sales, marketing and other administrative
functions, and facility-related costs. Employee termination costs included wage continuation, advance notice pay and medical and other benefits. Facility-related costs included losses on disposal of
property, plant and equipment, lease payments and other related costs. For the three months ended March 31, 2003 and 2002, Chiron had no restructuring and reorganization adjustments related to
these items. Of the 371 positions for elimination, 365 were terminated as of March 31, 2003 and 362 had been terminated as of March 31, 2002.

Chiron
expects to substantially settle the restructuring and reorganization accruals within one to six years of accruing the related charges. As of March 31, 2003,
$0.3 million and $0.1 million were included
in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Condensed Consolidated Balance Sheet. As of December 31, 2002, $0.2 million and
$0.1 million were included in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Condensed Consolidated Balance Sheet.

The
activity in accrued restructuring and reorganization for the three months ended March 31, 2003 and 2002 is summarized as follows (in thousands):

|                                                        |  | Accrual at
December 31,
2002 |     | Amount of
Total
Restructuring
Charge |   | Amount
Utilized
Through
March 31, 2003 |  | Amount to
Be Utilized
In Future
Periods
|------------------------------------------------------- |  | ---------------------------- | --- | ------------------------------------ | - | -------------------------------------- |  | ---------------------------------------
|Employee-related costs and
Other facility-related costs |  | $                            | 334 |                                      | $ | 156                                    |  | $                                      
|                                                        |  |                              |     |                                      |   |                                        |  |                                        

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

18

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Note 6Intangible Assets

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Chiron adopted the provisions of SFAS No. 141 immediately, and SFAS No. 142 effective January 1, 2002.

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

|                                                |                               | March 31, 2003 |         | December 31, 2002
|----------------------------------------------- | ----------------------------- | -------------- | ------- | -----------------
|
|Purchased technologies                          |                               | $              | 331,632 |                  
|                                                |                               |                |         |                  
|Patents                                         |                               | $              | 109,020 |                  
|Trademarks                                      |                               |                | 54,466  |                  
|Licenses and technology rights                  |                               |                | 35,858  |                  
|Customer relationships                          |                               |                | 24,776  |                  
|Know how                                        |                               |                | 11,252  |                  
|Databases                                       |                               |                | 7,100   |                  
|Other                                           |                               |                | 15,298  |                  
|                                                |                               |                |         |                  
|                                                | Total other intangible assets |                | $       | 257,770          
|                                                |                               |                |         |                  
|Total intangible assets subject to amortization |                               | $              | 589,402 |                  
|                                                |                               |                |         |                  

Aggregate
amortization expense is as follows (in thousands):

For the three months ended March 31, 2003 (reported)

$
12,577For the remaining nine months in the year ended December 31, 2003 (estimated)


37,895For the year ended December 31, 2003 (estimated)

$
50,472For the year ended December 31, 2004 (estimated)

$
46,987For the year ended December 31, 2005 (estimated)

$
42,572For the year ended December 31, 2006 (estimated)

$
41,020For the year ended December 31, 2007 (estimated)

$
39,857For the year ended December 31, 2008 (estimated)

$
39,046


19

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

|                                          |                                 | Biopharmaceuticals |         | Vaccines |   | Total 
|----------------------------------------- | ------------------------------- | ------------------ | ------- | -------- | - | ------
|Goodwill (including assembled workforce): |                                 |                    |         |          |   |       
|Balance as of December 31, 2002           |                                 | $                  | 199,225 |          | $ | 40,521
|                                          | Effect of exchange rate changes |                    |         |         |   |       
|                                          |                                 |                    |         |          |   |       
|Balance as of March 31, 2003              |                                 | $                  | 199,225 |          | $ | 41,689
|                                          |                                 |                    |         |          |   |       

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 and bacterial infections. Chiron sells these vaccines primarily in Germany, Italy, the United Kingdom, 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 and chemiluminescent instrument systems to automate test performance and data
collection.

Revenues
and expenses associated with Chiron's research and development activities specifically benefit each of the reportable segments and as such, have been included in the results of
operations of the respective reportable segment.

Chiron
views certain other revenues and expenses, particularly certain royalty and license fee revenues primarily related to HIV and hepatitis C virus related 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 SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information."

For
the three months ended March 31, 2002, expenses of approximately $1.8 million, previously allocated to the biopharmaceuticals segment, have been allocated to the
vaccines segment to conform with the current period presentation.

20

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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 for the year ended December 31, 2002. Chiron evaluates the performance of its segments based on each segment's income (loss) from
continuing operations, excluding certain special items, such as restructuring and reorganization charges and the write-off of purchased in-process technologies, which are shown
as reconciling items in the table below.

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

Three Months Ended
March 31,2003

2002RevenuesBiopharmaceuticals

$
137,299

$
116,073Vaccines


74,382


64,521Blood testing, includes equity in earnings of unconsolidated joint businesses of $26,452 and $18,798 for the three months ended March 31, 2003 and 2002, respectively


92,568


56,757Other


16,786


14,846Total revenues

$
321,035

$
252,197Income (loss) from operationsBiopharmaceuticals

$
25,099

$
8,234Vaccines


(5,302
)

(4,303
)Blood testing


50,562


29,483Other


767


(887
)Segment income from operations


71,126


32,527Operating expense reconciling items:Write-off of purchased in-process technologies





(54,781
)Restructuring and reorganization charges


(156
)

Income (loss) from operations


70,970


(22,254
)Interest expense


(3,462
)

(3,155
)Other income, net


14,318


20,147Minority interest


(400
)

(419
)Income (loss) from continuing operations before income taxes

$
81,426

$
(5,681
)


Note 8Commitments and Contingencies

In April 2003, Chiron entered into a 15-year lease to rent an office building in Uxbridge, United Kingdom. The total minimum lease payments
over the term of the lease are approximately 9.8 million

21

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British
Pounds ($15.4 million at March 31, 2003). After 10 years, Chiron has the option to terminate or continue the lease, with one-year prior notice. This lease is
accounted for as an operating lease.

There
were no amounts drawn against any outstanding letters of credit at March 31, 2003. Effective April 1, 2003, the amount of insurance-related letters of credit was
increased by $4.8 million.

Effective
February 2003, Chiron and Baxter Pharmaceutical Solutions LLC executed an eight-year manufacturing and supply agreement. Under this agreement, Baxter agreed
to perform certain manufacturing procedures and supply Chiron with a key component for a certain biopharmaceutical product. Chiron has certain minimum purchase obligations under this agreement and is
required to pay the difference, if any, between the actual quantity purchased and the minimum purchase obligation. Chiron's minimum purchase obligation is effective once regulatory approval is
obtained. Chiron can terminate this agreement in the fifth year with prior notice. Chiron's minimum purchase obligation under this agreement is expected to be approximately $36.0 million over
the next four years.

In
April 2001, Chiron, Rhein Biotech N.V. (now 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 ($28.4 million at March 31, 2003) for the expansion of Chiron's Italian manufacturing facilities, of which Chiron had incurred costs
of 3.1 million Euro ($3.3 million), as of March 31, 2003. This agreement began in the fourth quarter 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 research and development facility
(including a supporting central utility facility) and a parking structure in Emeryville, California. Chiron has committed to $37.0 million in design and construction services, of which Chiron
had incurred costs of $26.8 million, as of March 31, 2003. 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. Construction was completed on the parking structure in December 2002.

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

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

22

---

effect
upon Chiron's consolidated financial position and results of operations or cash flows. Adequate provisions have been made for these tax examinations.

Note 9Subsequent Event

In the first quarter 2003, Chiron was granted a patent in the U.S. directed to nucleic acid testing methods for HIV-1. The issuance of the patent
triggered a milestone payment to Chiron of $10.0 million from F. Hoffmann-La Roche. In April 2003, Chiron received this milestone payment plus interest from F.
Hoffmann-La Roche. As permitted under the terms of its licensing agreement, F. Hoffmann-La Roche has decided to institute arbitration proceedings in regard to the application
of the U.S. patent. Chiron has reserved for this $10.0 million milestone payment and interest as of March, 31, 2003. During the pendancy of any arbitration, F. Hoffmann-La
Roche remains obligated to make all quarterly royalty payments, subject to a right to be reimbursed by Chiron if it is determined in the arbitration that such royalty payments were not due.

23

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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 regarding our expectations, hopes or intentions regarding the future, including
statements relating to sales growth, product development initiatives, new product marketing, acquisitions, competition, in- and out-licensing activities and expected cost
savings that involve risks and uncertainties and are subject to change. 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, 2002. 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 current
expectations. Our actual performance may differ from current expectations due to many factors, including the outcome of clinical trials, regulatory review and approvals, manufacturing capabilities,
intellectual property protections and defenses, stock-price and interest-rate volatility, and marketing effectiveness. In particular, there can be no assurance that we will increase sales
of existing products, successfully develop and receive approval to market new products, or achieve market acceptance for such new products. There can be no assurance that our out-licensing
activity will generate significant revenue, nor that our in-licensing activities will fully protect us from claims of infringement by third parties. In addition, we may engage in business
opportunities, the successful completion of which is subject to certain risks, including stockholder and regulatory approvals and the integration of operations. 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" in this
10-Q. Consistent with SEC Regulation FD, we do not undertake an obligation to update the forward-looking information contained in this 10-Q.

We
are a global pharmaceutical company that participates in three healthcare markets: biopharmaceuticals, vaccines and blood testing. Our revenues consist of product sales, equity in
earnings of unconsolidated joint businesses, collaborative agreement revenues, royalty and license fee revenues and other revenues. 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 of a meningococcal vaccine, flu vaccines, travel vaccines, which include rabies and tick-borne encephalitis vaccines and pediatric vaccines. We sell these vaccines primarily in
Germany, Italy, the United Kingdom and other international markets. Our vaccines segment is also involved in the development of other 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 and chemiluminescent 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.

Critical Accounting Policies and The Use of Estimates

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

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

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed 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 for the year ended December 31, 2002.

On
July 1, 2002, we completed our acquisition of Pulmopharm GmbH, a distributor of TOBI® products in Germany and Austria by purchasing the remaining 80.1% ownership
that we did not previously own. Previously, we owned 19.9% of Pulmopharm and accounted for the investment under the equity method. We accounted for the acquisition of this business under the purchase
method of accounting and included Pulmopharm's operating results in our consolidated operating results beginning on July 1, 2002. Pulmopharm is part of our biopharmaceuticals segment.

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 from February 20 to 28, 2002, in our consolidated operating results beginning on
March 1, 2002. Matrix Pharmaceutical is part of our biopharmaceuticals segment.

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 $101.7 million and $90.5 million for the three months ended
March 31, 2003 and 2002, respectively. Biopharmaceutical product sales in 2003 and 2002 consisted principally of Betaseron®, TOBI® and Proleukin®.

Betaseron®We manufacture interferon beta-1b which is marketed by Schering AG and its affiliates,
including Berlex Laboratories, Inc. (collectively "Schering"), under the trade names Betaseron® (in the U.S and other non-European markets) and Betaferon®
(in Europe). Boehringer Ingelheim also supplies Betaferon® to Schering for sale in Europe. For product manufactured by

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Chiron,
we receive an initial payment upon shipment to Schering and an additional payment calculated as a percentage of sales, both of which we record as product sales. For product manufactured by
Boehringer Ingelheim, we receive royalties calculated at the same percentage of sales less the amount paid to Boehringer Ingelheim, which we record in royalty and license fee revenues. Under our
agreement with Schering, the percentage of sales on which our payments are based will decrease in the fourth quarter 2003, reducing our per unit revenue by approximately 18% per unit (for sales of
Chiron product) and 34% per unit (for royalties from sales of Boehringer Ingelheim product).

In
the first quarter 2003, the U.S. Food and Drug Administration approved new labeling for Betaseron®. The labeling expands the indication for Betaseron® to treat
all relapsing forms of multiple sclerosis to reduce the frequency of clinical exacerbations. Relapsing forms of multiple sclerosis include relapsing-remitting, the most common form, and secondary
progressive multiple sclerosis with relapses.

Betaseron®
product sales were $29.3 million and $21.8 million for the three months ended March 31, 2003 and 2002, respectively. The increase in
Betaseron® product sales in the first quarter 2003 as compared with the first quarter 2002 primarily related to (i) Berlex Laboratories and Schering ordering patterns as they
reduced their inventory levels in the first quarter 2002 in anticipation of a mid-2002 launch of a new room-temperature formulation, (ii) price increases,
(iii) an overall increase in the market for interferon beta-1b products for multiple sclerosis, (iv) increased patient demand attributed to a favorable response in the market
place to the new room-temperature formulation and the addition of nursing support programs and (v) the benefit of the movement in the Euro to U.S. Dollar exchange rate. These
increases were partially offset by incremental revenues recognized in the first quarter 2002 related to the effect of recording revenue based on more current information available from Schering. Prior
to the first quarter 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 became available in 2002, and as a result, we were able to begin recognizing Betaseron® product sales on a current basis. This change
resulted in incremental revenues recognized during the first quarter 2002 of $4.3 million. Inventory ordering patterns as well as foreign currency exchange rates may influence future
Betaseron® sales.

TOBI®We sell TOBI® directly in the U.S. and certain international markets. We recognized
TOBI® sales of $40.7 million and $35.8 million for the three months ended March 31, 2003 and 2002, respectively. Increased TOBI® sales primarily related to
(i) the progress in various European countries, (ii) the benefit of the movement in the Euro to
U.S. Dollar exchange rate, (iii) increased use and improved compliance in the U.S. by patients with cystic fibrosis and (iv) price increases. These increases were partially offset by
wholesale ordering patterns and an increased level of sales adjustments. We continue to pursue the use of TOBI® to treat other serious lung infections and to seek approval in other
countries. Wholesale ordering patterns as well as reimbursement and government pressures, foreign currency exchange rates and the level of rebates may influence future TOBI® sales. In
December 2002, the U.S. Food and Drug Administration tentatively approved an abbreviated new drug application for an inhaled tobramycin for sale in the U.S. following expiration of the orphan
drug status of TOBI® in December 2004. We have a patent in the U.S. covering the formulation of TOBI® that will extend until 2014.

Proleukin®Sales of Proleukin® were $26.0 million and $24.0 million for the three
months ended March 31, 2003 and 2002, respectively. Proleukin® product sales in the first quarter 2003 as compared with the first quarter 2002 increased primarily as a result of
price increases and the benefit of the movement in the Euro to U.S. Dollar exchange rate. Wholesale ordering patterns, reimbursement pressures and foreign currency exchange rates may influence future
Proleukin® sales.

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

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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, 2002.

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 $2.2 million and $3.6 million for the three months ended
March 31, 2003 and 2002, respectively.

Collaborative
agreement revenues for the three months ended March 31, 2003, primarily consisted of our fourth quarter 2002 collaboration agreement and license agreement with
GlaxoSmithKline plc related to certain of our MC-4R compound patents and our first quarter 2001 collaboration agreement with Taisho Pharmaceutical Co., Ltd. to target macrolide mediated gene
discovery. Collaborative agreement revenues for the three months ended March 31, 2002 primarily consisted of our first quarter 2001 collaboration agreement with Taisho Pharmaceutical Co., Ltd.
and our second quarter 2000 agreement with S*Bio (discussed below).

S*BIOIn the second quarter 2000, we invested in a Singapore-based venture, S*BIO Pte Ltd, to research and develop
therapeutic, diagnostic, vaccine and antibody products. We also granted S*BIO certain rights to our gene expression and combinatorial chemistry technology. Under this arrangement, we received
approximately $23.7 million for technology transfer and research services. We recognized collaborative agreement revenues of $3.1 million for the three months ended March 31,
2002, under this arrangement. The technology transfer period and related revenue recognition period ended in the third quarter 2002.

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 and timing 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 related patents, used
by third parties to develop therapeutic products. The biopharmaceuticals segment recognized royalty and license fee revenues of $17.8 million and $17.3 million for the three months ended
March 31, 2003 and 2002, respectively.

Betaferon®We manufacture interferon beta-1b which is marketed by Schering AG and its affiliates,
including Berlex Laboratories, Inc. (collectively "Schering"), under the trade names Betaseron® (in the U.S and other non-European markets) and Betaferon®
(in Europe). Boehringer Ingelheim also supplies Betaferon® to Schering for sale in Europe. For product manufactured by Boehringer Ingelheim, we receive royalties calculated as a percentage
of sales less the amount paid by Schering to Boehringer Ingelheim for the product. Under our agreement with Schering, the percentage

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of
sales on which our royalty is based will decrease in the fourth quarter 2003, reducing our per unit revenue by approximately 34% per unit. For the three months ended March 31, 2003 and 2002,
we recognized $14.0 million and $13.6 million, respectively, under this arrangement. The increase in Betaferon® royalties for the three months ended March 31, 2003
compared with the three months ended March 31, 2002 was due primarily to the benefit of the movement in the Euro to U.S. Dollar exchange rate offset by incremental revenues recognized during
the first quarter 2002 of $3.9 million related to a change in our methodology of recognizing these royalties. 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 was available in 2002, and as
a result, we were able to recognize Betaferon® royalties on a current basis beginning in the first quarter 2002. Foreign currency exchange rates may influence future Betaferon®
royalties.

Novo NordiskWe earn royalty revenues on insulin and glucagon product sales by Novo Nordisk AS. We recognized
$2.0 million for each of the three months ended March 31, 2003 and 2002, under this arrangement. Patents related to the production of insulin and glucagons expire beginning late 2003 and
as a result, significant reductions in royalty revenue recognized under this arrangement are expected.

The
balance of royalty and license fee revenues recognized in our biopharmaceuticals segment consisted of various other agreements, which individually were not material. In the fourth
quarter 2002, we granted GlaxoSmithKline plc rights under certain of our MC-4R compound patents for which we recognized a portion of the license fee in the first quarter 2003. In the first
quarter 2002, we granted Abbott Laboratories rights under certain of our hepatitis C virus related patents for which we recognized a license fee in the first quarter 2002.

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 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 $15.6 million and $4.7 million for
the three months ended March 31, 2003 and 2002, respectively.

Contract manufacturing revenuesOur biopharmaceuticals segment recognized contract manufacturing revenues of
$0.1 million and $4.4 million for the three months ended March 31, 2003 and 2002, respectively. The decrease resulted from the level of activity and the timing of contract
manufacturing activities.

Biogen and Serono settlementsAs previously announced by Schering AG, a U.S. Court of Appeals partially reversed a District
Court ruling in connection with certain patents owned by Chiron and licensed exclusively to Schering's U.S. subsidiary, Berlex Laboratories. As a result of the ruling and prior agreements between
Biogen and Berlex, Biogen was required to make a settlement payment to Schering. In accordance with an earlier contract between Chiron and Berlex, we recognized approximately $13.0 million in
the first quarter 2003 which represented our share of this settlement payment. In addition, there was a similar settlement between Berlex and Serono of which we recognized approximately
$1.4 million in the first quarter 2003.

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Depocyt®In the fourth quarter 2002, we sold U.S. sales and marketing rights for Depocyt® to
SkyePharma plc. In the first quarter 2003, we recognized $1.0 million related to transition services provided to SkyePharma under the acquisition agreement.

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

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

Gross profitBiopharmaceutical gross profit as a percentage of net product sales was 79% and 77% for the three months ended
March 31, 2003 and 2002, respectively. The increase in biopharmaceutical gross profit margins for the three months ended March 31, 2003 as compared with the three months ended
March 31, 2002 primarily resulted from price increases and the benefit of the movement in the Euro to U.S. Dollar exchange rate.

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 $56.3 million
and $57.5 million for the three months ended March 31, 2003 and 2002, respectively.

In
the fourth quarter 2002, we reached an agreement in principle to transfer responsibility for the SILCAAT (referred to also as Proleukin ® for HIV) trial, a Phase III study
for recombinant human interleukin-2 (IL-2, aldeseleukin), to the investigators, as managed by a Scientific Committee comprised of researchers affiliated with the Hospital Henri
Mondor in Paris, the National Institutes Allergy and Infectious Disease (NIAID), the University of Minnesota, and other research institutions. Responsibility for the SILCAAT study was transferred to
NIAID and University of Minnesota effective February 14, 2003. Our research and development expenses related to the SILCAAT trial are expected to decrease in 2003 as a result of transferring
responsibility for the trial. However, under the agreement, we are obligated to fund a maximum of $18.0 million over the term of the trial and to supply clinical materials and certain other
support services.

In
April 2003, we acquired exclusive worldwide development and commercial rights from Novartis for aerosolized cyclosporine (ACsA), a therapy under evaluation for treatment of
acute rejections in lung transplant recipients.

The
decrease in research and development spending in the first quarter 2003 as compared with the first quarter 2002 primarily related to the timing of various clinical trials, including
(i) expenses in the first quarter 2002 related to the conclusion of the clinical trial for tifacogin (recombinant Tissue Factor Pathway Inhibitor) for severe sepsis in the fourth quarter 2001,
(ii) transfer of the responsibility of the SILCAAT trial, a Phase III study for recombinant human interleukin-2 (IL-2, aldeseleukin), to the investigators in the fourth
quarter 2002 (discussed above) and (iii) termination of our trials for fibroblast growth factor (FGF), a compound for treatment of patients with peripheral arterial disease,
HBV-MF59, an immunotherapy for patients with chronic hepatitis B infection, and PA-1806, a compound for gram negative infections in cystic fibrosis patients. These decreases
were partially offset by the investment in other development projects, including those activities related to (i) the development of tezacitabine, obtained as a part of the acquisition of Matrix
Pharmaceutical in the first quarter 2002 and (ii) the development of interleukin-2 in combination with various monoclonal antibodies. In addition, we are required to make capital
improvements to our existing manufacturing facilities to support the supply of Betaferon® to Schering. In connection with this project, we are continuing to incur expenses relating to the
development of new processes and the performance of test runs related to the installed equipment.

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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 $26.2 million and $20.0 million for the three months ended March 31, 2003 and 2002, respectively. The increase in selling, general and administrative expenses in the first
quarter 2003 as compared with the first quarter 2002 related to (i) sales and marketing costs for various biopharmaceutical post-market approval commitments, (ii) support for
continued market penetration of TOBI® in Europe, (iii) costs following the acquisition of Pulmopharm in the third quarter 2002, (iv) additional costs associated with the
enhancement of current business processes and (v) the Euro to U.S. Dollar exchange rate fluctuation.

Amortization expenseOur biopharmaceuticals segment recognized amortization expense of $6.2 million and
$5.9 million for the three months ended March 31, 2003 and 2002, respectively. The increase in amortization expense in the first quarter 2003 as compared with the first quarter 2002
related to the distribution rights acquired in the acquisition of Pulmopharm in the third quarter 2002.

Vaccines

Product salesWe sell meningococcal, flu, travel and pediatric vaccines in Germany, Italy, the United Kingdom and other
international markets. Vaccine product sales were $68.4 million and $57.9 million for the three months ended March 31, 2003 and 2002, respectively.

Menjugate,
our conjugate vaccine against meningococcal meningitis caused by the bacterium N. meningitidis serogroup C, sales were $7.5 million and
$5.8 million for the three months ended March 31, 2003 and 2002, respectively. The increase in the first quarter 2003 as compared with the first quarter 2002 primarily related to
increased sales to the Italian market and the benefit of the movement in the Euro to U.S. Dollar exchange rate.

Sales
of our flu vaccines were $4.3 million and $2.3 million for the three months ended March 31, 2003 and 2002, respectively. The increase in flu vaccine sales for
the three months ended March 31, 2003 as compared with the three months ended March 31, 2002 resulted from a one-time agreement with The Netherlands and the benefit of the
movement in the Euro to U.S. Dollar exchange rate.

Sales
of our travel vaccines, comprised of tick-borne encephalitis and rabies vaccines, were $25.7 million and $18.4 million for the three months ended
March 31, 2003 and 2002, respectively. The increase in travel vaccine sales in the three months ended March 31, 2003 as compared with the three months ended March 31, 2002,
primarily related to increased tick-borne encephalitis vaccine sales in the German market driven by the new adult and pediatric formulations launched in the first quarter 2002. Also
contributing to the increase was the benefit of the movement in the Euro to U.S. Dollar exchange rate.

Sales
of our pediatric vaccines were $30.9 million and $31.4 million for the three months ended March 31, 2003 and 2002, respectively. The decrease in pediatric
vaccines sales in the three months ended March 31, 2003 as compared with the three months ended March 31, 2002 primarily resulted from decreased sales of our polio vaccines, partially
offset by the benefit of the movement in the Euro to U.S. Dollar exchange rate.

Certain
of our vaccine products, particularly our flu vaccines, are seasonal and typically have higher sales in the third and fourth quarters of the year. In addition, we expect
Menjugate sales to continue to fluctuate as public health authorities consider adoption of broad vaccination programs. We have initiated a Phase III trial in the U.S. for
Menjugate. The study, which is being conducted in conjunction with the Northern California Kaiser Permanente Vaccines Research Center, will expand the vaccine's safety database for a U.S.
population relative to the safety profile of the current U.S.-licensed

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meningococcal
polysaccharide vaccine Menomune® (A, C, Y, W-135). We are exploring opportunities for additional Menjugate sales in other countries.

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, 2002.

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 $3.2 million and $2.6 million for the three months ended March 31, 2003 and 2002, respectively.

GlaxoSmithKlineAn agreement with GlaxoSmithKline plc provides for royalties on sales of certain vaccine products. Under this
agreement, we recognized $1.8 million and $1.9 million of such royalties for the three months ended March 31, 2003 and 2002, respectively.

OtherFor the three months ended March 31, 2003 and 2002, we recognized $1.4 million and $0.7 million,
respectively, of royalty revenues primarily on third party sales of hepatitis B virus vaccine products. The increase in the three months ended March 31, 2003 as compared with the three months
ended March 31, 2002 primarily resulted from increased availability of the pediatric formulation in Germany, partially offset by increased competition from multivalent hepatitis B virus vaccine
products. Certain patents related to the production of hepatitis B vaccine products expire beginning in 2004, which will result in reductions in royalty revenues recognized under one arrangement.

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 $2.8 million and $4.0 million for the three
months ended March 31, 2003 and 2002, respectively.

Grant and contract revenuesOur vaccines segment other revenues included grant and contract revenues of $2.2 million
and $3.1 million for the three months ended March 31, 2003 and 2002, respectively. In 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 supplemental arrangements, we may perform other work
related to the National Institutes of Health's HIV vaccine program on a grant or contract-by-contract basis. A majority of the grant and contract revenues, $1.8 million
and $2.1 million for the three months ended March 31, 2003 and 2002, respectively, were recognized under these arrangements.

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

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

Gross profitVaccines gross profit as a percentage of net product sales was 49% and 48% for the three months ended
March 31, 2003 and 2002, respectively. The vaccine gross profit margin in the first quarter 2003 was negatively impacted by an expected temporary shutdown of certain facilities to ensure
compliance with regulatory requirements. The vaccine gross profit margin in the first quarter 2002 was

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negatively
impacted by product reserves due to various issues, including seasonality patterns, excess and obsolete inventory and production yields.

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 $20.6 million and
$17.1 million for the three months ended March 31, 2003 and 2002, respectively. The increase in research and development spending for the three months ended March 31, 2003
compared with the three months ended March 31, 2002 primarily related to the development of our meningococcal franchise and flu cell culture.

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
$22.2 million and $20.0 million for the three months ended March 31, 2003 and 2002, respectively. The increase in selling, general and administrative expenses for the three months
ended March 31, 2003 as compared with the three months ended March 31, 2002 primarily resulted from additional costs associated with the enhancement of current business processes and
headcount and the impact of the movement in the Euro to U.S. Dollar exchange rate. These increases were partially offset by (i) a payment made 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 that was expensed in the first quarter 2002 and (ii) increased
sales and marketing costs associated with the 2002 launch of our newly formulated tick-borne encephalitis vaccine.

Amortization expenseOur vaccines segment recognized amortization expense of $1.4 million for each of the three months
ended March 31, 2003 and 2002.

Blood testing

Product salesOur blood testing segment recognized product sales of $48.5 million and $25.2 million for the
three months ended March 31, 2003 and 2002, 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. In addition to selling directly in the U.S., we also sell in
various European and Asia / Pacific markets, directly and through distributors. We recognize product revenues based on the details of each contract.

Worldwide
product sales related to tests, instruments and the provision of services were $42.1 million and $18.0 million for the three months ended March 31, 2003
and 2002, respectively. The three months ended March 31, 2003 include a full quarter of commercial pricing for the Procleix®HIV-1/ HCV Assay in the U.S. following the U.S. Food and Drug Administration approval in February 2002. Subsequent to the first quarter 2002, we signed new commercial contracts
including those with existing America's Blood Centers customers, the American Red Cross, the U.S. military and the Association of Independent Blood Centers to provide the
Procleix®HIV-1/ HCV Assay. Also contributing to the increase in the first quarter 2003 as compared with the first quarter 2002
was continued penetration into several markets abroad. Slightly offsetting the increase was a one-time positive adjustment recognized in the first quarter 2002 under contracts with all our
U.S. customers for increased donations exceeding contractual minimums.

In
March 2003, the U.S. Food and Drug Administration accepted an investigational new drug (IND) for the West Nile virus assay. The new assay will run on the same instrumentation
platform as the currently approved Procleix®HIV-1/HCV assay, increasing use and adaptability for customers.

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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 $6.4 million and $7.2 million for the three months ended
March 31, 2003 and 2002, respectively. The decrease in the first quarter 2003 as compared with the first quarter 2002 primarily related to the timing of manufacturing services. In addition,
Chiron supplies 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, 2002.

Equity in earnings of unconsolidated joint businessesOur share of earnings from our joint business with Ortho-Clinical
Diagnostics, Inc. was $26.5 million and $18.8 million for the three months ended March 31, 2003 and 2002, respectively. The increase in the first quarter 2003 as compared
with the first quarter 2002 primarily resulted from (i) a one-time benefit in the first quarter 2003 due to a change in estimate relating to Ortho Clinical Diagnostics'
non-U.S. affiliate sales, (ii) the timing of Ortho Clinical Diagnostics' shipments to third parties and (iii) increased profitability of Ortho-Clinical Diagnostics' foreign
affiliates. Prior to the first quarter 2003, we had accounted for non-U.S. affiliate sales on a one-quarter lag. More current information is now available to us and as such, we
now recognize non-U.S. affiliate sales on a one-month lag, consistent with the method of recognizing the rest of Ortho Clinical Diagnostics' business.

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 total collaborative agreement revenues of $1.9 million and $2.6 million for the three months ended March 31, 2003 and 2002, respectively. The majority
of collaborative agreement revenues recognized by our blood testing segment related to immunodiagnostic products. The fluctuations between the first quarter 2003 and the first quarter 2002 primarily
related to the timing of research services.

Collaborative
agreement revenues tend to fluctuate based on the amount and timing 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 related patents for use in blood screening based on third party sales of hepatitis C virus and HIV immunodiagnostic and probe diagnostic products for use in blood screening. The blood
testing segment recognized royalty and license fee revenues of $15.6 million and $10.2 million for the three months ended March 31, 2003 and 2002, 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 vitrodiagnostic products. See "OtherRoyalty and license fee revenues"
below. The third agreement for blood screening was superseded in May 2001 by

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two
new agreements, one for each of hepatitis C virus and HIV. Revenues under these agreements were $14.4 million and $8.9 million for the three months ended March 31, 2003 and
2002, respectively. The increase in the first quarter 2003 as compared with the first quarter 2002 primarily related to a contractual increase in the royalty rates. Royalties will continue under these
new agreements through the lives of the hepatitis C virus and HIV related patents covering F. Hoffmann-La Roche's nucleic acid testing products. Currently, the applicable issued hepatitis
C virus related patents begin to expire in 2015 for the U.S. and in 2008 for Europe. Currently, the applicable issued HIV related patent in Europe expires in 2005. An HIV related patent was issued in
the U.S. on March 13, 2003. The HIV related patent life in the U.S. is seventeen years from the date of issuance. As permitted under the terms of its licensing agreement, F.
Hoffmann-La Roche has decided to institute arbitration proceedings in regard to the application of the U.S. patent. During the pendancy of any arbitration,
F. Hoffmann-La Roche remains obligated to make all quarterly royalty payments, subject to a right to be reimbursed by Chiron if it is determined in the arbitration that such royalty
payments were not due.

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

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

Gross profitBlood testing gross profit as a percentage of net product sales was 40% and 37% for the three months ended
March 31, 2003 and 2002, respectively. The increase in blood testing gross profit margins in the first quarter 2003 as compared with the first quarter 2002 related to (i) the increase in
Procleix®HIV-1/ HCV 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.

Research and developmentOur blood testing segment recognized research and development expenses of $5.2 million and
$4.2 million for the three months ended March 31, 2003 and 2002, respectively. The increase in research and development spending in the first quarter 2003 as compared with the first
quarter 2002 primarily related to the continued development of nucleic acid testing products.

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
$7.8 million and $7.2 million for the three months ended March 31, 2003 and 2002, respectively. The increased selling, general and administrative expenses in the first quarter
2003 as compared with the first quarter 2002 related to the expansion of our customer base for the Procleix®HIV-1/HCV Assay in
the U.S., Europe and other international markets. We expect continued growth in selling, general and administrative expenses related to nucleic acid testing technology and products as we expand our
sales opportunities in new markets through additional nucleic acid testing adoption.

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Other

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 $16.8 million and $14.8 million for the three months ended March 31, 2003 and 2002, respectively. The
majority of royalty and license fee revenues related to the use of our hepatitis C virus and HIV related patents by various third parties.

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
related 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 related patent in itsin vitrodiagnostic products, which commenced in the first quarter 2001. Royalty revenues
decreased in the first quarter 2003 as compared with the first quarter 2002, primarily as a result of decreased sales recognized by F. Hoffmann-La Roche.

The
HIV agreement provides for royalties on future sales related to F. Hoffmann-La Roche's use of our HIV related patent in itsin
vitrodiagnostic products, which commenced in the first quarter 2001 when the European Patent Office Board of Technical Appeals upheld our HIV related patent. Royalty revenues
recognized under this agreement in the first quarter 2003 were consistent with the first quarter 2002.

Such
royalties will continue through the lives of the hepatitis C virus and HIV related patents covering F. Hoffmann-La Roche's nucleic acid testing products. Currently, the
applicable issued hepatitis C virus related patents expire in 2015 for the U.S. and in 2008 for Europe. Currently, the applicable issued HIV related patent in Europe expires in 2005. An HIV related
patent directed to nucleic acid testing methods for HIV-1 was issued in the U.S. on March 13, 2003. The HIV related patent life in the U.S. is seventeen years from the date of
issuance. The issuance of the patent triggered a milestone payment to Chiron of $10.0 million from F. Hoffmann-La Roche, which was received in April 2003. As permitted under
the terms of its licensing agreement, F. Hoffmann-La Roche has decided to institute arbitration proceedings in regard to the application of the U.S. patent. We have reserved for this
$10.0 million milestone payment and interest as of March 31, 2003. During the pendancy of any arbitration, F. Hoffmann-La Roche remains obligated to make all quarterly
royalty payments, subject to a right to be reimbursed by Chiron if it is determined in the arbitration that such royalty payments were not due.

BayerA cross-license agreement provides for royalties to us on HIV and hepatitis C virus products sold by Bayer, which
increased in the first quarter 2003 as compared with the first quarter 2002.

The
balance of royalty and license fee revenues 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. In addition, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to
market and capitalize

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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 March 31, 2003 and 2002, our other segment recognized
selling, general and administrative expenses of $16.8 million and $15.6 million, respectively. The increase in selling, general and administrative expenses in the first quarter 2003 as
compared with the first quarter 2002 primarily resulted from increased consulting, severance and employee related expenses partially offset by higher litigation costs in the first quarter 2002 due to
our continued investment in and defense of our patents and technology.

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

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 off $54.8 million in the first
quarter 2002. We allocated a portion of the purchase price to a liability for asset disposal and lease cancellation for the San Diego, California facility closed during the third quarter 2002. In the
fourth quarter 2002, we found an assignee for the manufacturing facility lease and revised the allocation of the purchase price resulting in a $9.6 million decrease to purchased
in-process technologies. We do not anticipate that there will be any alternative future use for the in-process technologies that were written off. In valuing the purchased
in-process technologies, we used probability-of-success-adjusted cash flows and a 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 reorganizationFor the three months ended March 31, 2003, we recorded a restructuring and
reorganization charge of $0.2 million. The charge consisted of termination and other employee-related costs recognized in connection with the elimination of 6 positions in our Amsterdam
manufacturing facility.

Interest expenseFor the three months ended March 31, 2003 and 2002, we recognized interest expense of
$3.5 million and $3.2 million, respectively. The increase primarily was related to higher average borrowings during the first quarter 2003.

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 March 31, 2003 and 2002, we recognized interest income of $7.0 million and $9.8 million, respectively. The
decrease in interest income in the first quarter 2003 as compared with the first quarter 2002 primarily was due to lower average interest rates and lower average cash and investment balances.

For
the three months ended March 31, 2003 and 2002, we recognized gains of $4.6 and $6.5 million, respectively, related to the sale of certain equity securities.

We
did not recognize any losses attributable to the other-than-temporary impairment of equity securities for the three months ended March 31, 2003. For the
three months ended March 31, 2002, we recognized losses attributable to the other-than-temporary impairment of certain equity securities of $1.8 million.

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
three months ended March 31, 2002.

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On
December 31, 1998, we completed the sale of our 30% interest in General Injectibles & Vaccines, Inc., a distribution business, to Henry Schein, Inc. and
received payment in full of certain advances we made to General Injectibles & Vaccines. The agreement also provided for us to receive additional payments, calculated as a
pre-determined percentage of Henry Schein's gross profit, through 2003. We received $2.0 million for 2002 and $5.4 million for 2001 during the three months ended
March 31, 2003 and 2002, respectively.

Income taxesThe reported effective tax rate for the three months ended March 31, 2003 was 25% of pretax income from
continuing operations. The reported effective tax rate for the three months ended March 31, 2002 was 27% of pretax income from continuing operations, excluding the write-off of
purchased in-process technologies related to the Matrix Pharmaceutical acquisition. The write-off of purchased in-process technologies in 2002 is not tax
deductible. The 2003 effective tax rate is lower than the 2002 effective
tax rate due to increased benefits associated with Chiron's research and development activities and tax planning initiatives. 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 our core businesses of biopharmaceuticals, vaccines and blood
testing, we completed the sale of Chiron Diagnostics and Chiron Vision in 1998 and 1997, respectively.

In
the first quarter 2003, Chiron and Bayer Corporation reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase Agreement dated
September 17, 1998, between Chiron and Bayer. Under this settlement agreement, we made a payment to Bayer during the first quarter 2003. We utilized an amount previously reserved for indemnity
obligations, based upon the settlement agreement with Bayer. These amounts resulted in a net charge of $7.6 million, offset by an income tax benefit of $9.0 million, resulting in a net
gain of $1.4 million which was recorded as a "Gain on disposal of discontinued operations" for the three months ended March 31, 2003.

In
connection with the sale of Chiron Diagnostics and Chiron Vision, we recorded cumulative net deferred tax assets of $0.4 million and $8.5 million at March 31,
2003 and December 31, 2002, respectively, principally attributable to the timing of the deduction of certain expenses associated with these sales. We also recorded corresponding valuation
allowances of $0.4 million and $8.5 million at March 31, 2003 and December 31, 2002, respectively, to offset these deferred tax assets, as management believes that it is
more likely than not that the deferred tax assets to which the valuation allowance relates will not be realized. The future recognition of these deferred tax assets will be reported as a component of
"Gain (loss) on disposal of discontinued operations."

New Accounting Standards

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (referred to as FIN No. 46), "Consolidation of
Variable Interest Entities" which address the accounting for certain off-balance sheet lease financing. FIN No. 46 will be effective for Chiron for the interim period ended
September 30, 2003. In June 1996, we entered into a seven-year agreement with a group of financial institutions (the "lessors") to lease a research and development facility.
On or before August 1, 2003, we can choose to either purchase the facility from the lessors or sell the facility to a third party. If we purchase the facility, we must pay the lessors
$172.6 million. This lease financing is described further in Note 13 "Commitments and Contingencies," in our Annual Report on Form 10-K for the year ended
December 31, 2002. As we finalize the options related to our June 1996 lease financing by August 1, 2003, we will continue to monitor the impact of FIN No. 46 on our
Consolidated Financial Statements.

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In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (referred to as FIN No. 45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of Financial Accounting Standards Board Statements No. 5, 57, and 107 and Rescission of Financial
Accounting Standards Board Interpretation No. 34." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. The initial recognition
and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

We
enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, clinical sites,
insurers and customers. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities.
These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments we could be required to make under these
indemnification provisions is unlimited. The estimated fair value of the indemnity obligations of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of
March 31, 2003. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

In
November 2002, the Financial Accounting Standards Board issued Emerging Issues Task Force (referred to as EITF) Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating
activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue
No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of
accounting. EITF Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration
that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain
deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on our Consolidated Financial Statements.

In
June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue 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 No. 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 Issue No. 94-3. The adoption of
SFAS No. 146 affects the timing of recognizing future restructuring costs as well as the amount recognized under such costs. The provisions of SFAS No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. Chiron adopted the provisions of SFAS No. 146 effective January 1, 2003.

In
June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires liability
recognition for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We adopted the provisions of SFAS No. 143
effective January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on our Consolidated Financial Statements.

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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 $1,279.6 million at March 31, 2003, 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.

We
believe that our cash, cash equivalents and short-term investments, together with funds provided by operations and leasing arrangements, will be sufficient to meet our
foreseeable operating cash requirements including any cash utilized under our stock repurchase program. In addition, we believe we could access additional funds from the debt and, under certain
circumstances, capital markets.

Sources and uses of cashWe had cash and cash equivalents of $245.5 million and $309.0 million at
March 31, 2003 and 2002, respectively.

Operating activitiesFor the three months ended March 31, 2003, net cash provided by operating activities was
$66.2 million as compared with $17.1 million for the three months ended March 31, 2002. The increase in cash provided by operating activities primarily was due to higher income
from continuing operations before depreciation and amortization and other non-cash charges. The net cash provided by operating activities for the three months ended March 31, 2003,
was higher as compared to the three months ended March 31, 2002, due to the write-off of purchased in-process technologies of $54.8 million related to the Matrix
Pharmaceutical acquisition during the three months ended March 31, 2002. In addition, cash provided by operating activities increased as a result of (i) the timing of royalty payments
received under the Roche royalty arrangements and (ii) $14.4 million of cash received as a result of the Biogen and Serono settlements in connection with the McCormick patents (see
"BiopharmaceuticalsOther revenues" above). These increases were partially offset by higher payments made in the first quarter 2003 as compared with the first quarter 2002. Increased
payments in the first quarter 2003 as compared with the first quarter 2002, included a payment made to Bayer Corporation as a result of a settlement agreement relating to certain claims raised by
Bayer in connection under the Stock Purchase Agreement dated September 17, 1998.

At
March 31, 2003, we had foreign net operating loss carryforwards of approximately $13.2 million, of which approximately $3.6 million begin expiring over the period
2008 to 2018. The remaining foreign net operating loss carryforwards of $9.6 million are available to offset future taxable income without limitation.

At
March 31, 2003, we had unutilized federal net operating loss carryforwards attributable to the acquisition of Matrix Pharmaceutical of approximately $56.7 million, which
are available to offset future domestic taxable income ratably through 2022.

At
March 31, 2003, we had $34.0 million of state net operating loss carryforwards, which expire between 2003 and 2022, and state net operating loss carryforwards
attributable to the acquisition of Matrix Pharmaceutical, Inc. of approximately $28.4 million, which are available to offset taxable income ratably through 2012.

At
March 31, 2003, we had $2.2 million of federal business tax credit carryforwards attributed to the acquisition of PathoGenesis Corporation, which expire in 2012. At
March 31, 2003, we had $3.6 million of federal business tax credit carryovers, which expire in 2007, and state business tax credit carryovers of $23.0 million, which are available
to offset future state tax liabilities without limitation.

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We
anticipate that research and development expenditures in 2003 will primarily be driven by (i) those activities under our December 2001 and June 2002 collaboration
agreements with Nektar Therapeutics (formerly Inhale Therapeutic Systems, Inc.) related to, among other things, the development of a dry
powder formulation of our inhaled TOBI® product for the treatment ofpseudomonas 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, (iii) those activities related to the development of interleukin-2 in combination with various monoclonal
antibodies, (iv) expansion of our meningococcal franchise, (v) development of a flu cell culture system and (vi) research activities focused on identifying several novel vaccines
and therapeutics for clinical development in the areas of oncology and infectious disease. In addition, we are required to make capital improvements to our existing manufacturing facilities to support
the supply of Betaferon® to Schering. In connection with this project, we are continuing to incur expenses relating to the development of new processes and the performance of test runs
related to installed equipment. Net cash from operating activities are expected to fund these research and development activities.

Investing activitiesFor the three months ended March 31, 2003, net cash used in investing activities consisted of
purchases of investments in marketable debt securities of $190.6 million, capital expenditures of $33.9 million, purchases of equity securities and interests in affiliated companies of
$1.4 million, cash paid for acquisitions, net of cash acquired of $0.2 million and other uses of cash of $5.1 million. Cash used in investing activities was offset by proceeds
from the sale and maturity of investments in marketable debt securities of $192.8 million and proceeds from sale of equity securities and interests in affiliates companies of
$2.0 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 ($28.4 million at March 31, 2003) for the expansion of our Italian manufacturing facilities, of which we paid 3.1 million Euro
($3.3 million), as of March 31, 2003. This agreement began in the fourth quarter 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 research and development facility
(including a supporting central utility facility) and a parking structure in Emeryville, California. We had committed to $37.0 million in design and construction services, under which we had
incurred costs of $26.8 million, as of March 31, 2003. We may cancel these remaining 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 $1.4 million capital contribution under a 2000 limited partnership agreement. Chiron is a
limited partner of several venture capital funds. We will pay $45.0 million over ten years, of which $27.0 million was paid through March 31, 2003. We account for these
investments under the equity method of accounting in accordance with the provisions of EITF Topic No. D-46, "Accounting for Limited Partnership Interests."

For
the three months ended March 31, 2002, net cash used in investing activities consisted of purchases of investments in marketable debt securities of $164.0 million, cash
paid for acquisitions, net of cash acquired of $44.0 million, capital expenditures of $27.0 million and purchases of equity securities and interests in affiliated companies of
$0.5 million. Cash used in investing activities was offset by proceeds from the sale and maturity of investments in marketable debt securities of

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$192.8 million,
proceeds from the sale of assets of $0.1 million, proceeds from the sale of equity securities and interests in affiliated companies of $2.1 million and other uses
of cash of $2.3 million. The purchases of equity securities and interests in affiliated companies consisted of a $0.5 million capital contribution under a 2001 limited partnership
agreement.

Financing activitiesFor the three months ended March 31, 2003, net cash used in financing activities consisted of
$37.1 million for the acquisition of treasury stock, $0.1 million for the net repayment of short-term borrowings and $0.02 million for the repayment of debt. Cash used
in financing activities was offset by $3.5 million in proceeds from the reissuance of treasury stock (related to stock option exercises) and $1.4 million in proceeds from put options.

Our
Board of Directors has authorized the repurchase of our common stock on the open market. In December 2002, our Board of Directors approved an additional 5.0 million
share increase and authorized such repurchases through December 31, 2003. As of March 31, 2003, we may repurchase up to an additional 4.0 million shares of our common stock.

In
January 2001, we initiated a put option program to reduce the effective costs of repurchasing our common stock. Under this program, we enter into contracts with third parties
to sell put options on Chiron stock, entitling the holders to sell us a specified number of shares at a specified price on a specified date. As of March 31, 2003, we had an outstanding put
option contract with a third party, entitling the holder to sell to us 0.5 million shares. In connection with the sale, we collected a $1.4 million premium. The option expires in
May 2003, and has an exercise price of $36.79 per share. The amount of our obligation to repurchase such shares upon exercise of the outstanding put options, totaling $18.4 million, was
reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the Condensed Consolidated Balance Sheet at March 31, 2003.

As
of December 31, 2002, we had an outstanding put option contract with a third party entitling the holder to sell to us 0.5 million shares. The option expired on
January 29, 2003 and had an exercise price of $38.11 per share. The amount of our obligation to repurchase such shares upon exercise of the outstanding put options, totaling
$19.1 million, was reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the Condensed Consolidated Balance Sheet at December 31, 2002. On
January 29, 2003, our closing stock price was $37.94. Although the closing stock price was below the stipulated $38.11, the third party elected not to exercise the options. As a result, the
temporary equity of $19.1 million was reclassified to permanent equity in the first quarter 2003.

For
the three months ended March 31, 2002, net cash provided by financing activities consisted of $14.1 million in proceeds from the reissuance of treasury stock (related
to stock option exercises) and $1.1 million in proceeds from put options. Cash provided by financing activities was offset by $5.7 million for the acquisition of treasury stock and
$0.1 million for the net 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, incurring additional debt or may cause us to issue Chiron shares.

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 2006. There were no borrowings outstanding under this credit facility at March 31, 2003 and December 31, 2002. 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.

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We
also have various credit facilities available outside the U.S. There were no outstanding borrowings under these facilities at March 31, 2003. Borrowings under these facilities
totaled $0.1 million at December 31, 2002. One facility is maintained for general corporate use including 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 ($4.2 million at March 31, 2003) under this facility.
There were no outstanding borrowings under this facility at March 31, 2003. At December 31, 2002, $0.1 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 ($11.7 million at March 31, 2003). There were no outstanding borrowings under
these facilities at March 31, 2003 and December 31, 2002.

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.

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 Annual Report on Form 10-K for the year ended December 31, 2002. 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, or accept additional risks that our products will not maintain market acceptance or be eligible for third party
insurance coverage. Increased regulatory scrutiny and restrictions regarding marketing practices for products that are subject to government reimbursement may impact

44

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the
sales of such products. 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. Additionally, 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. For some of our products we rely on others to supply raw materials and to manufacture those products according to regulatory requirements.

In
addition, any prolonged interruption in our operations or those of our partners could result in our inability to satisfy the product demands of our customers. A number of factors
could cause interruptions, including equipment malfunctions or failures, damage to a facility due to natural disasters, such as an earthquake, suspension of power supplied to these facilities arising
out of regional power shortages or terrorist activities and armed conflict, including as a result of the disruption of operations of our subsidiaries and our customers, suppliers, distributors,
couriers, collaborative partners and clinical trial sites.

Mishandling of Hazardous Materials Could Result in Substantial Costs

In connection with our research and manufacturing activities, we utilize some hazardous materials. Great care is taken to ensure we have appropriate procedures
and permits in place for storing and handling such hazardous materials. We could be subject to loss of our permits, government fines or penalties and/or other adverse governmental action if such
hazardous materials are stored, handled or released into the environment in violation of law or any permit. A substantial fine or penalty, the payment of significant environmental remediation costs or
the loss of a permit or other authorization to operate or engage in our ordinary course of business could result in material, unanticipated expenses and the possible inability to satisfy customer
demand.

Reliance on Third Party Manufacturers

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 are difficult for the supplier to produce and certify in accordance with our specifications. From time to time, concerns are
raised with respect to potential contamination of biological materials that are supplied to us. These concerns can further tighten market conditions for materials that may be in short supply or
available from limited sources. Moreover, regulatory approvals to market our products may be conditioned upon obtaining certain materials from specified sources. Our ability to substitute material
from an alternate source may be delayed pending regulatory approval of such alternate source. Although we work to mitigate the risks associated with relying on sole suppliers, there is a possibility
that material shortages could impact production.

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

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

We
are a key provider for the blood screening field of nucleic acid testing and immunodiagnostics. In nucleic acid testing, we rely on our collaborative partner, Gen-Probe,
to manufacture the Procleix®HIV-1/ HCV Assay; we currently source the related instrument system from third party suppliers.
Currently, Gen-Probe is the only manufacturer of nucleic acid testing products using Transcription-Mediated Amplification technology. In immunodiagnostics, under the Ortho-Clinical
Diagnostics, Inc. contract, we manufacture bulk reagents and antigens and confirmatory test kits sold in the clinical diagnostics and blood screening fields. While we and our partners work to
mitigate the risks associated with being a key provider, there can be no assurance that our partner, Gen-Probe, will be able to provide sufficient quantities of the Procleix®
HIV-1/ HCV Assay or that we will be able to manufacture sufficient bulk reagents and antigens and confirmatory test kits for immunodiagnostic products. Our difficulties or delays or those
of our partners' could cause a public health concern for the blood supply, as well as increase costs and cause loss of revenue or market share.

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 or cannot 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, or 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).

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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. It
is not feasible to obtain adequate insurance coverage for certain products and 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.

As
we are a key provider for the blood screening field of nucleic acid testing and immunodiagnostics, we may have product liability in addition to contract exposure, in the event that
our difficulties or delays or those of our partners could cause a public health concern for the blood supply.

Competition

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



The
technologies applied by our competitors and us are rapidly evolving, and new developments frequently result in price competition and product obsolescence. In addition, we may be
impacted by competition from generic forms of our products or substitute products. Specific to one product, TOBI®, a generic form of this product may be available from our competitors,
which may cause loss of revenue or market share. In December 2002, the U.S. Food and Drug Administration
tentatively approved an abbreviated new drug application for an inhaled tobramycin for sale in the U.S. following expiration of the orphan drug status of TOBI® in December 2004. We
have a patent in the U.S. covering the formulation of TOBI® that will extend until 2014.

Chiron's Patents May Not Prevent Competition or Generate Revenues

We seek to obtain patents on many of 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.

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An
adverse outcome of litigation could result in the reduction or loss of royalty revenues. Engaging in patent litigation against one party may place significant royalty revenues received or to be
received from other parties at risk. 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. In addition, royalty revenues will decline as patents
expire.

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, the cost of amortizing intangibles and
impairment of goodwill. Some transactions may require the consent of our stockholders or a third party, or the approval by various regulatory authorities. We have no assurance that such
in-licensing, collaborations or acquisitions will be successful.

Other New Products and Sources of Revenue

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

Interest Rate and Foreign Currency Exchange Rate Fluctuations

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

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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.

Our Relationship With Novartis AG Could Limit Our Ability to Enter into Transactions, Pursue Opportunities in Conflict With Novartis and Cause the Price of Our Common Stock to
Decline

We have an alliance with Novartis AG, a life sciences company headquartered in Basel, Switzerland. Under a series of agreements between Chiron and Novartis, and
as a result of subsequent stock issuances by Chiron, Novartis' ownership interest in Chiron is approximately 42.6% as of March 31, 2003. The Governance Agreement between Chiron and Novartis
contains provisions that require the approval of Novartis before we enter into certain corporate transactions. These transactions generally include significant debt or equity issuances, debt or equity
repurchases, most mergers and acquisitions, the payment of cash dividends, amendments to Chiron's Certificate of Incorporation or By-laws, and other transactions that would adversely
impact the rights of Novartis, or discriminate against Novartis, as a Chiron stockholder. In addition, a majority of the independent directors must approve any material transactions between Chiron and
Novartis. These provisions may limit our ability to enter into transactions with third parties otherwise viewed as beneficial to Chiron. All of our shares owned by Novartis are eligible for sale in
the public market subject to compliance with the applicable securities laws. We have agreed that, upon Novartis' request, we will file one or more registration statements under the Securities Act in
order to permit Novartis to offer and sell shares of our common stock. Sales of a substantial number of shares of our common stock by Novartis in the public market could adversely affect the market
price of our common stock. For more information on our relationship with Novartis, see Note 9 "Related Party Transactions," in our Annual Report on Form 10-K for
the year ended December 31, 2002.

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 and The Netherlands. 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 may be subject to further audits in the future, 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 and Corporate Governance Requirements and Tax Laws

We must follow accounting standards, financial reporting and corporate governance 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

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and
laws. These new and revised accounting standards, financial reporting and corporate governance requirements and tax laws may require changes to our financial statements, the composition of our
board of directors, the composition, the responsibility and manner of operation of various board-level committees, the information filed by us with the governing bodies and enforcement of tax laws
against us. Implementing changes required by such new standards, requirements or laws likely will require a significant expenditure of time, attention and resources, especially by our senior
management. It is impossible to predict the impact, if any, on Chiron of future changes to accounting standards, financial reporting and corporate governance 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.

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 quarter 2003. 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, 2002.

Item 4. Controls and Procedures

(a)    Evaluation of disclosure controls and proceduresWithin the ninety days prior to the date of this Quarterly
Report, Chiron carried out an evaluation under the supervision and with the participation of Chiron's management, including Chiron's CEO and CFO, of the effectiveness of the design and operation of
Chiron's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 or 15d-14. Based on that evaluation, Chiron's management, including the CEO and CFO,
concluded that Chiron's disclosure controls and procedures were effective in timely alerting them to material information relating to Chiron, required to be included in Chiron's periodic SEC filings.

(b)    Changes in internal controlsThere have been no significant changes in Chiron's internal controls or in
other factors that could significantly affect internal controls subsequent to the date of their evaluation.

(c)    Limitations on the effectiveness of controlsIt should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.

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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, 2002. 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 for the year ended December 31, 2002.

Average Wholesale Pricing

In December 2001, Citizens for Consumer Justice and 13 other named plaintiffs filed a class action lawsuit in the United States District Court for the
District of Massachusetts against 29 biotechnology and pharmaceutical companies, including Chiron, in connection with setting average wholesale prices for various products, including
DepoCyt®, which are reimbursed by Medicare. Plaintiffs alleged that defendants violated federal antitrust and racketeering laws by devising and implementing a fraudulent pricing scheme
against Medicare and Medicaid beneficiaries, and sought declaratory relief, as well as compensatory and punitive damages. In March 2002, Plaintiffs filed an amended complaint that eliminated
the antitrust allegations and changed the subject drug from DepoCyt® to Mitomycin®, a generic oncology drug sold by the Cetus-Ben Venue Therapeutics partnership. In
September 2002, plaintiffs filed a Master Consolidated Class Action Complaint, which did not name Chiron as a defendant.

In
February 2002, the State of Montana, through its Attorney General, filed a complaint in the First Judicial District Court in Lewis and Clark County against 18 biotechnology and
pharmaceutical companies, including Chiron, in connection with setting average wholesale prices for various products, including DepoCyt®, that are reimbursed by Medicare and Medicaid. The
Attorney General alleges that the Defendants violated Montana state and common laws on unfair trade practices
and consumer protection, deceptive trade practices, Medicaid fraud, breach of contract and false claims, and seeks both compensatory and punitive damages.

In
March 2002, the State of Nevada, through its Attorney General, filed a complaint in the Second Judicial District Court in Washoe County against 10 biotechnology and
pharmaceutical companies, including Chiron, concerning setting average wholesale prices for various products, including DepoCyt®, that are reimbursed by Medicare and Medicaid. The Attorney
General alleges that Defendants violated Nevada state and common laws on unfair and deceptive trade practices and consumer protection, Medicaid fraud, racketeering, and seeks both compensatory and
punitive damages.

Between
July and September 2002, three separate class action lawsuits were filed in two California Superior Courts against Chiron, Cetus Oncology, and numerous other biotechnology
and pharmaceutical companies. Plaintiff's claims are based upon alleged violations of the California Business and Professions Codes. These matters seek compensatory and punitive damages, plus
injunctive relief, against Chiron in connection with setting the average wholesale prices for various oncology drugs, including DepoCyt®.

In
October 2002 and February 2003, the Montana, Nevada and certain California actions were coordinated and consolidated to theIn re Pharmaceutical
Industry Average Wholesale Price Litigationpre-trial proceedings.

In
January 2003, the County of Suffolk filed a complaint in the United States District Court for the Eastern District of New York against 29 biotechnology and pharmaceutical
companies, including Chiron, in connection with setting average wholesale prices for various products, including TOBI®, which are reimbursed by Medicaid. Plaintiffs allege that defendants
violated federal racketeering laws,

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federal
and state laws on Medicaid fraud, and state laws on unfair trade practice, breach of contract, fraud and unjust enrichment by devising and implementing a fraudulent pricing scheme against
Medicaid beneficiaries, and seeks declaratory relief, as well as compensatory and punitive damages. In March 2003, the matter was consolidated with theIn re
Pharmaceutical Industry Average Wholesale Price Litigationfor pre-trial proceedings.

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

Bayer Corporation

In January 2002, Bayer Corporation filed a complaint in the United States District Court for the District of Delaware against Chiron relating to the Stock
Purchase Agreement dated September 17, 1998 between Chiron, Bayer Corporation and Chiron Diagnostics Corporation. Bayer Corporation alleges that Chiron violated certain representations and
warranties made in the Stock Purchase Agreement and additionally seeks damages for alleged misrepresentation and fraud made in connection with the sale of Chiron Diagnostics Corporation. Based on
these allegations, Bayer Corporation sought both compensatory and punitive damages. In April 2003, the parties settled the dispute and dismissed the case with prejudice except for Bayer's claim
to indemnity for certain tax payments and exposures to certain asserted claims.

F. Hoffmann-La Roche Ltd.

On March 11, 2003, the U.S. Patent and Trademark Office issued Chiron's U.S. Patent No. 6,531,276 (addressed to Methods For Detecting Human
Immunodeficiency Virus Nucleic Acid) (the "'276 Patent"). Chiron contends that under the October 2000 HIV Probe License Agreement (the "Roche HIV Agreement") between Chiron, F.
Hoffman-La Roche Ltd. and Roche Molecular Systems (collectively, "Roche"), Roche is obligated to pay certain licensing fees and ongoing royalties under the '276 Patent for the sale
of certain Roche HIV nucleic acid testing tests. Roche disputes these obligations on a variety of grounds including non-infringement. Roche further contests the rate at which royalties
must be paid if in fact claims within the '276 patent are infringed by its products. Pursuant to the Roche HIV Agreement on April 21, 2003, the parties have triggered alternative dispute
resolution procedures to address these and potentially other disputes under the Roche HIV Agreement.

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

Institut Pasteur

In April 2003, Institut Pasteur filed a complaint in the United States District Court for the District of Columbia against Chiron seeking reversal of
certain judgments entered by the Board of Patent Appeals and Interferences (the "Board") of the United States Patent and Trademark Office in Patent Interference No. 103,659 (the "'659
Interference"). The '659 Interference involved claims in Chiron's U.S. Patent No. 5,156,949 (the "'949 patent") and in certain U.S. patent applications assigned to Institut Pasteur (the "Chang
applications"), relating to HIV immunodiagnostic methods. In the '659 Interference, the Board issued a decision stating that the inventors of Chiron's '949 patent were the first to invent the
technology at issue in the interference. Institut Pasteur asks the Court to reverse the Board's decisions.

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

Laboratory Corporation of America Holdings

In April 2003, Chiron filed a complaint in the United States District Court for the Northern District of California against Laboratory Corporation of
America Holdings, Laboratory Corporation of America and National Genetics Institute (collectively, the "Defendants"), seeking damages and an

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injunction
against Defendants manufacture, use and sale of the UltraQual HCV RT-PRC Assay for infringing Chiron's U.S. Patent No. 6,074,816 (the "'816 patent"). The
Defendants also filed a complaint in the United States District Court for the District of Delaware against Chiron seeking declaratory judgment that Defendants infringe neither the '816 patent, nor
U.S. Patent Nos. 5,712,088 (the "'088 patent"), 5,863,719 (the "'719 patent"), the '816 patent, and 5,714,596 (the "'596 patent") (collectively, the "Chiron HCV patents"), and that the Chiron HCV
related patents are invalid.

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

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

None.

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.                                                                                                                                                                                                                                                                                                                                                                                           
|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 hereto), 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.                                                                                                                                                                                                                                                                                                                                                                                                               
|10.102         |  | Amended and Restated Revolving Credit Agreement, dated as of August 13, 2002 (the "Credit Agreement"), by and between Chiron and Bank of America, N.A. (the "Bank"), and exhibits thereto, incorporated by reference to Exhibit 10.102 of Chiron's report
on Form 10-Q for September 30, 2002.                                                                                                                          
|10.211         |  | Side Letter Agreement dated as of December 20, 2002, between Chiron and Schering Berlin, Inc. (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".) 
|10.320         |  | Amendment No. 4 to Agreement with Gen-Probe Incorporated entered into effective March 5, 2003. (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".)
|10.517         |  | Chiron Supplemental Executive Retirement Plan, as amended and restated effective March 1, 2003.*                                                                                                                                                                                                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                         

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|10.621 |  | Letter Agreement dated March 19, 2003, between Chiron and Howard H. Pien.*                                                                                              
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.622 |  | Letter Agreement dated February 16, 2001, between Chiron and John A. Lambert.*                                                                                          
|10.726 |  | Amendment dated February 21, 2003 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG, as successor-in-interest to Ciba-Geigy Limited.
|10.727 |  | Amendment dated March 11, 2003 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG, as successor-in-interest to Ciba-Geigy Limited.   

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On
February 21, 2003, Chiron filed a Current Report on Form 8-K, reporting under Item 5, the appointment of J. Richard Fredericks to Chiron's Board of
Directors, effective that date, thereby increasing the number of directors from eleven to twelve. Mr. Fredericks will serve until the next annual meeting of stockholders in May 2003, and
thereafter until his successor is duly elected and qualified, or until his earlier resignation or removal.

On
March 19, 2003, Chiron filed a Current Report on Form 8-K, reporting under Item 5, the appointment of Howard Pien to Chiron's Board of Directors, effective
that date, thereby increasing the number of directors from twelve to thirteen. Mr. Pien will serve until the next annual meeting of stockholders in May 2003, and thereafter until his
successor is duly elected and qualified, or until his earlier resignation or removal.

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CHIRON CORPORATION
March 31, 2003

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: May 5, 2003 |  | BY:               
|DATE: May 5, 2003 |  | BY:               

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CERTIFICATIONS

I,
Howard H. Pien, certify that:

DATE:
May 5, 2003

| |  |                                                                       |  | 
| |  | --------------------------------------------------------------------- |  | 
| |  | /s/HOWARD H. PIENHoward H. Pien
President and Chief Executive Officer |  | 

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I,
David V. Smith, certify that:

DATE:
May 5, 2003

| |  |                                                                                            |  | 
| |  | ------------------------------------------------------------------------------------------ |  | 
| |  | /s/DAVID V. SMITHDavid V. Smith
Vice President, Finance and
Acting Chief Financial Officer |  | 

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