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 September 30, 2004            
|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 October 29, 2004 |  | 
| |  | ----------------------------- |  | ------------------------------- |  | 
| |  | Common Stock, $0.01 par value |  | 186,839,927                     |  | 



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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 September 30, 2004 and December 31, 2003                                        
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003          
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2004 and 2003
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003                    
|                              |                                                                                               | 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 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |                                                                                                                          
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                          
|                              | ITEM 6. Exhibits                                                                              |                                                                                                                          
|SIGNATURES                    |                                                                                               | 72                                                                                                                       

2

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Item 1. Financial Statements

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

|                                                                |                                                      | September 30,
2004                                         |           | December 31,
2003 |          
|--------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------------- | --------- | ----------------- | ---------
|ASSETS                                                          |                                                     
|Current assets:                                                 |                                                      |                                                            |           |                   |          
|                                                                | Cash and cash equivalents                            |                                                            | $         | 200,983           |          
|                                                                | Short-term investments in marketable debt securities |                                                            |           | 343,507           |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Total cash and short-term investments                      |           |                   | 544,490  
|                                                                | Accounts receivable, net of allowances               |                                                            |           | 397,802           |          
|                                                                | Current portion of notes receivable                  |                                                            |           |                  |          
|                                                                | Inventories, net of reserves                         |                                                            |           | 218,589           |          
|                                                                | Assets held for sale                                 |                                                            |           | 2,754             |          
|                                                                | Current net deferred income tax assets               |                                                            |           | 60,232            |          
|                                                                | Derivative financial instruments                     |                                                            |           | 7,599             |          
|                                                                | Other current assets                                 |                                                            |           | 65,229            |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Total current assets                                       |           |                   | 1,296,695
|Noncurrent investments in marketable debt securities            |                                                      |                                                            | 467,813   |                   |          
|Property, plant, equipment and leasehold improvements, at cost: |                                                      |                                                            |           |                   |          
|                                                                | Land and buildings                                   |                                                            |           | 371,382           |          
|                                                                | Laboratory, production and office equipment          |                                                            |           | 644,087           |          
|                                                                | Leasehold improvements                               |                                                            |           | 116,602           |          
|                                                                | Construction-in-progress                             |                                                            |           | 186,310           |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      |                                                            | 1,318,381 |                   |          
|                                                                | Less accumulated depreciation and amortization       |                                                            |           | (566,988          | )        
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Property, plant, equipment and leasehold improvements, net |           |                   | 751,393  
|Purchased technologies, net                                     |                                                      |                                                            | 221,122   |                   |          
|Goodwill                                                        |                                                      |                                                            | 820,086   |                   |          
|Other intangible assets, net                                    |                                                      |                                                            | 447,608   |                   |          
|Investments in equity securities and affiliated companies       |                                                      |                                                            | 113,325   |                   |          
|Equity method investments                                       |                                                      |                                                            | 709       |                   |          
|Noncurrent notes receivable                                     |                                                      |                                                            | 7,500     |                   |          
|Noncurrent derivative financial instruments                     |                                                      |                                                            |          |                   |          
|Other noncurrent assets                                         |                                                      |                                                            | 57,080    |                   |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | $                                                          | 4,183,331 |                   | $        
|                                                                |                                                      |                                                            |           |                   |          

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)

|                                               |                                                                                                            | September 30,
2004        |           | December 31,
2003 |        
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------- | --------- | ----------------- | -------
|LIABILITIES AND STOCKHOLDERS' EQUITY           |                                                                                                           
|Current liabilities:                           |                                                                                                            |                           |           |                   |        
|                                               | Accounts payable                                                                                           |                           | $         | 113,045           |        
|                                               | Accrued compensation and related expenses                                                                  |                           |           | 78,470            |        
|                                               | Current portion of capital lease                                                                           |                           |           | 944               |        
|                                               | Current portion of unearned revenue                                                                        |                           |           | 30,231            |        
|                                               | Income taxes payable                                                                                       |                           |           | 6,674             |        
|                                               | Other current liabilities                                                                                  |                           |           | 159,886           |        
|                                               |                                                                                                            |                           |           |                   |        
|                                               |                                                                                                            | Total current liabilities |           |                   | 389,250
|Long-term debt                                 |                                                                                                            |                           | 940,295   |                   |        
|Capital lease                                  |                                                                                                            |                           | 157,014   |                   |        
|Noncurrent derivative financial instruments    |                                                                                                            |                           | 4,928     |                   |        
|Noncurrent net deferred income tax liabilities |                                                                                                            |                           | 101,288   |                   |        
|Noncurrent unearned revenue                    |                                                                                                            |                           | 30,525    |                   |        
|Other noncurrent liabilities                   |                                                                                                            |                           | 86,462    |                   |        
|Minority interest                              |                                                                                                            |                           | 8,498     |                   |        
|                                               |                                                                                                            |                           |           |                   |        
|                                               | Total liabilities                                                                                          |                           |           | 1,718,260         |        
|                                               |                                                                                                            |                           |           |                   |        
|Commitments and contingencies                  |                                                                                                            |                           |           |                   |        
|Stockholders' equity:                          |                                                                                                            |                           |           |                   |        
|                                               | Common stock                                                                                               |                           |           | 1,917             |        
|                                               | Additional paid-in capital                                                                                 |                           |           | 2,527,877         |        
|                                               | Deferred stock compensation                                                                                |                           |           | (15,572           | )      
|                                               | Retained earnings (Accumulated deficit)                                                                    |                           |           | 22,051            |        
|                                               | Accumulated other comprehensive income                                                                     |                           |           | 171,321           |        
|                                               | Treasury stock, at cost (4,999,000 shares at September 30, 2004 and 4,567,000 shares at December 31, 2003) |                           |           | (242,523          | )      
|                                               |                                                                                                            |                           |           |                   |        
|                                               | Total stockholders' equity                                                                                 |                           |           | 2,465,071         |        
|                                               |                                                                                                            |                           |           |                   |        
|                                               |                                                                                                            | $                         | 4,183,331 |                   | $      
|                                               |                                                                                                            |                           |           |                   |        

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
September 30, |        | Nine Months Ended
September 30, |        
|----------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------- | ------ | ------------------------------- | -------
|
|Revenues:                                             |                                                                                      |                                  |        |                                 |        
|                                                      | Product sales, net                                                                   |                                  | $      | 369,980                         |        
|                                                      | Revenues from joint business arrangement                                             |                                  |        | 34,017                          |        
|                                                      | Collaborative agreement revenues                                                     |                                  |        | 4,124                           |        
|                                                      | Royalty and license fee revenues                                                     |                                  |        | 111,396                         |        
|                                                      | Other revenues                                                                       |                                  |        | 4,450                           |        
|                                                      |                                                                                      |                                  |        |                                 |        
|                                                      |                                                                                      | Total revenues                   |        |                                 | 523,967
|                                                      |                                                                                      |                                  |        |                                 |        
|Operating expenses:                                   |                                                                                      |                                  |        |                                 |        
|                                                      | Cost of sales (excludes amortization expense related to acquired developed products) |                                  |        | 237,622                         |        
|                                                      | Research and development                                                             |                                  |        | 103,000                         |        
|                                                      | Selling, general and administrative                                                  |                                  |        | 114,531                         |        
|                                                      | Amortization expense                                                                 |                                  |        | 20,566                          |        
|                                                      | Purchased in-process research and development                                        |                                  |        | 9,629                           |        
|                                                      | Other operating expenses                                                             |                                  |        | 1,281                           |        
|                                                      |                                                                                      |                                  |        |                                 |        
|                                                      |                                                                                      | Total operating expenses         |        |                                 | 486,629
|                                                      |                                                                                      |                                  |        |                                 |        
|Income from operations                                |                                                                                      |                                  | 37,338 |                                 |        
|Interest expense                                      |                                                                                      |                                  | (7,063 | )                               |        
|Interest and other income, net                        |                                                                                      |                                  | 5,369  |                                 |        
|Minority interest                                     |                                                                                      |                                  | (504   | )                               |        
|                                                      |                                                                                      |                                  |        |                                 |        
|Income from continuing operations before income taxes |                                                                                      |                                  | 35,140 |                                 |        
|Provision for income taxes                            |                                                                                      |                                  | 11,192 |                                 |        
|                                                      |                                                                                      |                                  |        |                                 |        
|Income (loss) from continuing operations              |                                                                                      |                                  | 23,948 |                                 |        
|Gain (loss) from discontinued operations              |                                                                                      |                                  | (450   | )                               |        
|                                                      |                                                                                      |                                  |        |                                 |        
|Net income (loss)                                     |                                                                                      | $                                | 23,498 |                                 | $      
|                                                      |                                                                                      |                                  |        |                                 |        
|Basic earnings (loss) per share:                      |                                                                                      |                                  |        |                                 |        
|                                                      | Income (loss) from continuing operations                                             |                                  | $      | 0.13                            |        
|                                                      |                                                                                      |                                  |        |                                 |        
|                                                      | Net income (loss)                                                                    |                                  | $      | 0.13                            |        
|                                                      |                                                                                      |                                  |        |                                 |        
|Diluted earnings (loss) per share:                    |                                                                                      |                                  |        |                                 |        
|                                                      | Income (loss) from continuing operations                                             |                                  | $      | 0.13                            |        
|                                                      |                                                                                      |                                  |        |                                 |        
|                                                      | Net income (loss)                                                                    |                                  | $      | 0.12                            |        
|                                                      |                                                                                      |                                  |        |                                 |        

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        (Unaudited)        (In thousands)

|                                   |                                                                     | Three Months Ended
September 30,                                                                                                                                                                                                                                                             |        | Nine Months Ended
September 30, |       
|---------------------------------- | ------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------------------------------- | ------
|
|Net income (loss)                  |                                                                     | $                                                                                                                                                                                                                                                                                            | 23,498 |                                 | $     
|                                   |                                                                     |                                                                                                                                                                                                                                                                                              |        |                                 |       
|Other comprehensive income (loss): |                                                                     |                                                                                                                                                                                                                                                                                              |        |                                 |       
|                                   | Change in foreign currency translation adjustment during the period |                                                                                                                                                                                                                                                                                              |        | 2,847                           |       
|                                   | Unrealized gains (losses) from investments:                         |                                                                                                                                                                                                                                                                                              |        |                                 |       
|                                   |                                                                     | Net unrealized holding gains (losses) arising during the period, net of tax (provision) benefit of ($5,977) and ($1,984) for the three months ended September 30, 2004 and 2003, respectively, and ($3,865) and ($3,268)
for the nine months ended September 30, 2004 and 2003, respectively |        |                                 | (2,680
|                                   |                                                                     | Reclassification adjustment for net gains included in net income, net of tax (provision) of ($400) for the three months ended September 30, 2004, and ($9,753) and ($3,626) for the nine months ended September 30, 2004 and
2003, respectively                                              |        |                                 | (625  
|                                   |                                                                     |                                                                                                                                                                                                                                                                                              |        |                                 |       
|                                   |                                                                     | Net unrealized gains (losses) from investments                                                                                                                                                                                                                                               |        |                                 | (3,305
|                                   |                                                                     |                                                                                                                                                                                                                                                                                              |        |                                 |       
|                                   | Other comprehensive income (loss)                                   |                                                                                                                                                                                                                                                                                              |        | (458                            | )     
|                                   |                                                                     |                                                                                                                                                                                                                                                                                              |        |                                 |       
|Comprehensive income               |                                                                     | $                                                                                                                                                                                                                                                                                            | 23,040 |                                 | $     
|                                   |                                                                     |                                                                                                                                                                                                                                                                                              |        |                                 |       

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)

|                                                     |                                                                               | Nine Months Ended
September 30,                      |        
|---------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------------------------- | -------
|
|Net cash provided by operating activities            |                                                                               | $                                                    | 132,633
|                                                     |                                                                               |                                                      |        
|Cash flows from investing activities:                |                                                                               |                                                      |        
|                                                     | Purchases of investments in marketable debt securities                        |                                                      |        
|                                                     | Proceeds from sales of investments in marketable debt securities              |                                                      |        
|                                                     | Proceeds from maturities of investments in marketable debt securities         |                                                      |        
|                                                     | Capital expenditures                                                          |                                                      |        
|                                                     | 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 and capital leases                                          |                                                      |        
|                                                     | Payments to acquire treasury stock                                            |                                                      |        
|                                                     | Proceeds from re-issuance of treasury stock                                   |                                                      |        
|                                                     | Proceeds from issuance of debt                                                |                                                      |        
|                                                     | Payment of bond issuance costs                                                |                                                      |        
|                                                     | Proceeds from issuance of convertible debentures                              |                                                      |        
|                                                     | Proceeds from put options                                                     |                                                      |        
|                                                     |                                                                               |                                                      |        
|                                                     |                                                                               | Net cash (used in) provided by financing activities  |        
|                                                     |                                                                               |                                                      |        
|                                                     | Effect of exchange rate changes on cash and cash equivalents                  |                                                      |        
|                                                     |                                                                               |                                                      |        
|                                                     |                                                                               | Net (decrease) increase in cash and cash equivalents |        
|Cash and cash equivalents at beginning of the period |                                                                               |                                                      | 364,270
|                                                     |                                                                               |                                                      |        
|Cash and cash equivalents at end of the period       |                                                                               | $                                                    | 200,983
|                                                     |                                                                               |                                                      |        

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

7

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CHIRON CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        September 30, 2004        (Unaudited)

Note 1Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The information presented in the Condensed Consolidated Financial Statements at September 30, 2004, and for the three and nine months ended
September 30, 2004 and 2003, is unaudited but includes adjustments, consisting only of 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, 2003, 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 as
of and for the year ended December 31, 2003, 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
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 8, 2003, Chiron acquired PowderJect Pharmaceuticals plc, a company based in Oxford, England that develops and commercializes vaccines. Chiron included PowderJect
Pharmaceuticals' operating results in its consolidated operating results beginning July 8, 2003. PowderJect Pharmaceuticals is part of Chiron's vaccines segment.

Chiron
is a limited partner in several venture capital funds. Chiron is obligated to pay up to $60.0 million over ten years in equity contributions to these venture capital funds,
of which approximately $38.4 million was paid through September 30, 2004. Chiron accounts for these investments under the equity method of accounting.

New Accounting Pronouncements

In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8 "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share, "that the dilutive effect of contingent convertible debt instruments ("CoCo's") must be included in diluted earnings per share regardless of
whether the triggering contingency has been satisfied, if dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would require restatement of prior period diluted
earnings per share, subject to certain transition provisions. It is effective for all periods

8

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ending
after December 15, 2004. Accounting pursuant to this Issue would not result in additional dilution to Chiron's diluted earnings per share for the three and nine months ended
September 30, 2004 from Chiron's $500.0 million convertible debentures due 2033 ("2033 Debentures") nor from Chiron's $385.0 million convertible debentures due 2034 ("2034
Debentures").

Financial
Accounting Standards Board (or FASB) Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" as revised, requires a variable interest entity (or VIE) to be consolidated by a company if that company absorbs a majority of the VIE's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership, contractual or other financial interest in the VIE. Prior to the adoption of FIN 46, VIEs were generally consolidated by
companies owning a majority voting interest in the VIE. The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003; however, the FASB deferred the
effective date for VIEs created before February 1, 2003 to the quarter ended March 31, 2004 for calendar year companies. Adoption of the provisions of FIN 46 prior to the deferred
effective date was permitted.

Chiron
adopted the remaining provisions of FIN 46 in the first quarter of 2004. The adoption of these provisions did not have a material effect on Chiron's condensed consolidated
financial statements.

On
March 31, 2004, the FASB issued an Exposure Draft (ED), "Share-Based PaymentAn Amendment of FASB Statements No. 123 and 95." The proposed Statement
addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees," and generally would require instead that such transactions
be accounted for using a fair-value based method. As proposed, companies would be required to recognize an expense for compensation cost related to share-based payment arrangements
including stock options and employee stock purchase plans. As proposed, the new rules would be applied on a modified prospective basis as defined in the ED, and would be effective for Chiron beginning
July 1, 2005. Chiron is currently evaluating option valuation methodologies and assumptions in light of the evolving accounting standards related to employee stock options. Current estimates of
option values using the Black-Scholes method may not be indicative of results from valuation methodologies ultimately adopted in the final rules.

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; capital leases; intangible assets; goodwill; purchased in-process research and development; 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

9

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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 includes Chiron's one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical
Diagnostics, Inc., a Johnson & Johnson company. Chiron accounts separately for research and development and manufacturing cost reimbursements and certain product sale revenues received
from Ortho-Clinical Diagnostics, but relating to the joint business contractual arrangement. Chiron's joint business arrangement with Ortho-Clinical Diagnostics is a contractual arrangement and is not
a separate and distinct legal entity. Through Chiron's joint business contractual arrangement with Ortho-Clinical Diagnostics, Chiron 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
accounted for revenues relating to 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 of Chiron's joint business contractual arrangement became available in the first quarter 2003, and as a result, Chiron is able to recognize revenues
relating to 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 revenue from the joint
business contractual arrangement for the nine months ended September 30, 2003.

Chiron
currently owns a facility in London, England for international operations. This facility became available for sale in the fourth quarter of 2003. Chiron has committed to a plan to
sell this facility and is actively marketing this facility. This facility is classified as "Assets held for sale" in the Condensed Consolidated Balance Sheet at September 30, 2004.

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 Form 10-Q, reclassifications may be required. These reclassifications, when made, have no effect on income from continuing operations, net income or
earnings per share. There has been no such reclassification in the third quarter of 2004.

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

Inventories

Inventories, net of reserves, are stated at the lower of cost or market using the moving weighted-average cost method. Chiron maintains inventory reserves
primarily for product failures, expiration and obsolescence. Inventory that is obsolete (inventory that will no longer be used in the manufacturing process), expired, or in excess of forecasted usage
is written down to its market value, if lower than cost.

10

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Subsequent
to the third quarter of 2004, the UK regulatory body, the Medicines and Healthcare products Regulatory Agency (MHRA), sent Chiron a letter prohibiting Chiron from releasing
any Fluvirin doses manufactured at Chiron's Liverpool facility since March 2, 2004. In that letter, the MHRA asserted that Chiron's manufacturing process did not comply with U.K. good
manufacturing practices regulations. In addition to prohibiting release of existing Fluvirin doses, the MHRA letter also suspended Chiron's license to manufacture further influenza virus vaccine in
its Liverpool facility for three months. Chiron has not released any Fluvirin into any territory. Chiron wrote-off the entire inventory of Fluvirin product in the third quarter 2004,
resulting in a $91.3 million charge to cost of sales.

Inventories,
net of reserves consisted of the following:

September 30,
2004

December 31,
2003Finished goods

$
55,153

$
38,640Work-in-process


116,596


105,359Raw materials


46,840


55,626$
218,589

$
199,625


Income Taxes

The effective tax rate for the three and nine months ended September 30, 2004 was 31.9% and 27.1% respectively, of pretax income from continuing
operations, including the charge for purchased in-process research and development related to the Sagres acquisition. See discussion in "Note 4Acquisitions". The
effective tax rate for the three and nine months ended September 30, 2003 was 243.6% and 42.3% respectively, of pretax income from continuing operations, including the charge for purchased
in-process research and development related to the PowderJect acquisition. The charges for the purchased in-process research and development in 2003 and 2004 are not tax
deductible. The effective tax rate for the three and nine months ended September 30, 2004 and 2003 was 25% of pretax income from continuing operations, after excluding the impact of the
purchased in-process research and development charges. 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.

Stock-Based Compensation

Chiron measures compensation expense for its stock-based employee compensation plans using the intrinsic value method. 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.

11

---



The
following table illustrates the effect on net income (loss) and related net income (loss) per share, had compensation cost for stock-based compensation plans been determined based
upon the fair value method:

|                                     |             |                                                                                                                                     |   | Three Months Ended
September 30, |        | Nine Months Ended
September 30,
|------------------------------------ | ----------- | ----------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------- | ------ | -------------------------------
|
|
|Net income (loss):                   |             |                                                                                                                                     |   |                                  |        |                                
|                                     | As reported |                                                                                                                                     | $ | 23,498                           |        | $                              
|Add:                                 |             | Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                        |   |                                  | 1,118  |                                
|Less:                                |             | Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |   |                                  | 23,778 |                                
|                                     |             |                                                                                                                                     |   |                                  |        |                                
|                                     |             | Pro forma                                                                                                                           |   | $                                | 838    |                                
|                                     |             |                                                                                                                                     |   |                                  |        |                                
|Basic net income (loss) per share:   |             |                                                                                                                                     |   |                                  |        |                                
|                                     | As reported |                                                                                                                                     | $ | 0.13                             |        | $                              
|                                     | Pro forma   |                                                                                                                                     | $ |                                 | *      | $                              
|Diluted net income (loss) per share: |             |                                                                                                                                     |   |                                  |        |                                
|                                     | As reported |                                                                                                                                     | $ | 0.12                             |        | $                              
|                                     | Pro forma   |                                                                                                                                     | $ |                                 | *      | $                              

---

*less
than $0.01 per share.

Comprehensive Income

For the three and nine months ended September 30, 2004 and 2003, the foreign currency translation component of comprehensive income relates to permanent
investments in non-U.S. subsidiaries, and accordingly, was not adjusted for income taxes.

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 "Retained earnings"/ "Accumulated
deficit." Chiron charged losses of $9.0 million and $39.1 million for the three and nine months ended September 30, 2004, respectively, and $8.9 million and
$40.3 million for the three and nine months ended September 30, 2003, respectively, to "Retained earnings"/ "Accumulated deficit" in the Condensed Consolidated Balance Sheets.

12

---



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, if applicable.
Due to rounding, quarterly amounts may not sum fully to yearly amounts.

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
September 30, |      | Nine Months Ended
September 30,
|--------------------------------- | -------------------------------------------------------------------------------- | -------------------------------- | ---- | -------------------------------
|
|Income (loss) (Numerator):        |                                                                                  |                                  |      |                                
|                                  | Income (loss) from continuing operations                                         |                                  | $    | 23,948                         
|                                  |                                                                                  |                                  |      |                                
|Shares (Denominator):             |                                                                                  |                                  |      |                                
|                                  | Weighted-average common shares outstanding                                       |                                  |      | 187,368                        
|                                  | Effect of dilutive securities:                                                   |                                  |      |                                
|                                  |                                                                                  | Stock options and equivalents    |      |                                
|                                  |                                                                                  | Put options                      |      |                                
|                                  |                                                                                  |                                  |      |                                
|                                  | Weighted-average common shares outstanding, plus impact from assumed conversions |                                  |      | 190,014                        
|                                  |                                                                                  |                                  |      |                                
|Basic earnings (loss) per share   |                                                                                  | $                                | 0.13 |                                
|                                  |                                                                                  |                                  |      |                                
|Diluted earnings (loss) per share |                                                                                  | $                                | 0.13 |                                
|                                  |                                                                                  |                                  |      |                                

13

---



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
September 30, |      | Nine Months Ended
September 30,
|--------------------------------- | -------------------------------------------------------------------------------- | -------------------------------- | ---- | -------------------------------
|
|Income (loss) (Numerator):        |                                                                                  |                                  |      |                                
|                                  | Net income (loss)                                                                |                                  | $    | 23,498                         
|                                  |                                                                                  |                                  |      |                                
|Shares (Denominator):             |                                                                                  |                                  |      |                                
|                                  | Weighted-average common shares outstanding                                       |                                  |      | 187,368                        
|                                  | Effect of dilutive securities:                                                   |                                  |      |                                
|                                  |                                                                                  | Stock options and equivalents    |      |                                
|                                  |                                                                                  | Put options                      |      |                                
|                                  |                                                                                  |                                  |      |                                
|                                  | Weighted-average common shares outstanding, plus impact from assumed conversions |                                  |      | 190,014                        
|                                  |                                                                                  |                                  |      |                                
|Basic earnings (loss) per share   |                                                                                  | $                                | 0.13 |                                
|                                  |                                                                                  |                                  |      |                                
|Diluted earnings (loss) per share |                                                                                  | $                                | 0.12 |                                
|                                  |                                                                                  |                                  |      |                                

For
the three and nine months ended September 30, 2004, stock options to purchase 11.7 million and 10.1 million shares with exercise prices greater than the average
market prices of common stock were excluded from the respective computations of diluted earnings per share as their inclusion would be antidilutive. For the three and nine months ended
September 30, 2003, stock options to purchase 4.2 million and 10.7 million shares 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.

For
the three and nine months ended September 30, 2004, 0.6 million and 4.3 million shares of common stock that would be issued upon conversion of the Liquid Yield
Option Notes (LYONs) were excluded from the computations of diluted earnings per share, as their inclusion would be antidilutive. For each of the three and nine months ended September 30, 2003,
5.2 million shares of common stock that would be issued upon conversion of the LYONs were excluded from the computation of diluted earnings (loss) per share, as their inclusion would be
antidilutive. During the second quarter of 2004, Chiron was required to purchase a significant portion of the LYONs as discussed in Note 8 "Debt Obligations".

On
June 22, 2004, Chiron issued $385.0 million aggregate principal amount of convertible debentures, which mature on June 30, 2034, as discussed in Note 8
"Debt Obligations". The terms of the conversion features of these debentures are substantive and therefore, the shares of common stock issuable upon conversion of the convertible debentures are not
included in the computation of diluted earnings per share until such time as the terms of the conversion features are met. The conversion features were not met during the third quarter of 2004. If the
conversion features were met and if

14

---



dilutive,
common shares to be added to the diluted shares outstanding would be determined by the net share settlement of the debentures as discussed in "Note 8Debt Obligations".

On
July 30, 2003, Chiron issued $500.0 million aggregate principal amount of convertible debentures, which mature on August 1, 2033. The terms of the conversion
features of these debentures are substantive and therefore, the shares of common stock issuable upon conversion of the convertible debentures are not included in the computation of diluted earnings
per share until such time as the terms of the conversion features are met. The conversion features were not met during the third quarter of 2004. If the conversion features were met and if dilutive,
an additional 7.3 million common shares would be added to diluted shares outstanding.

Note 3Discontinued Operations

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

Chiron
and Bayer Corporation, or Bayer, were involved in a dispute with respect to their respective rights to certain royalty refunds receivable for which a settlement was reached in
2004. Under this settlement agreement, Chiron made a settlement payment to Bayer in 2004. This settlement includes an agreement that all outstanding items with Bayer related to the sale of Chiron
Diagnostics are resolved and no future indemnity obligations are required. Chiron released previously established reserves deemed to be excess following this settlement. This settlement resulted in a
net gain of $12.8 million, which was included in "Gain (loss) from discontinued operations" for the nine months ended September 30, 2004. This net gain primarily relates to a tax benefit
as a result of the settlement payment to Bayer.

In
the second quarter 2004, Chiron and the IRS entered into a settlement agreement closing the open tax years 1996 to 1998. Pursuant to this settlement agreement Chiron recognized a tax
benefit of approximately $12.5 million, which was included in "Gain (loss) from discontinued operations" for the nine months ended September 30, 2004.

In
the third quarter 2003, Chiron reversed approximately $1.2 million, net of tax, related to unutilized reserves for Chiron Diagnostics, which was included in "Gain (loss) from
discontinued operations" for the three and nine months ended September 30, 2003.

In
the first quarter 2003, Chiron and Bayer reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase Agreement dated September 17, 1998,
between Chiron and Bayer for Chiron Diagnostics. Under this settlement agreement, Chiron was required to make a payment to Bayer during the first quarter 2003. Pursuant to this settlement, Chiron
recorded a charge, net of adjustment to its previously provided reserve for indemnity obligations, 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 included in "Gain (loss) from discontinued operations" for the nine months ended September 30, 2003.

15

---



Note 4Acquisitions

Sagres DiscoveryOn July 2, 2004, Chiron acquired Sagres Discovery (Sagres), a privately held company headquartered in
Davis, California, which focuses on the discovery and validation of targets with potential application to the development of cancer therapeutics. Chiron acquired Sagres for a preliminary purchase
price of $12.0 million.

Sagres
is part of Chiron's biopharmaceuticals segment. Chiron accounted for the acquisition as an asset purchase and included Sagres's operating results in its consolidated operating
results beginning on July 2, 2004. The components of the preliminary purchase price and allocation thereof based on estimated fair values are summarized in the following table (in thousands).
The preliminary purchase price reflects acquisition costs, which include contractual severance, direct acquisition costs and facility exit costs. Chiron is in the process of finalizing certain
estimates including those for severance and facility exit costs for certain research facilities; thus both the preliminary purchase price and the allocation of the preliminary purchase price are
subject to change.

Consideration and acquisition costs:Cash paid for asset purchase

$
10,057Cash payable for asset purchase


837Acquisition costs paid as of September 30, 2004


1,082Acquisition costs not yet paid as of September 30, 2004


47Total preliminary purchase price

$
12,023Allocation of preliminary purchase price:Assets acquired

$
1,698Liabilities assumed


(724
)Deferred tax assets


1,420Purchased in-process research and development


9,629Total preliminary purchase price

$
12,023


Chiron
allocated the preliminary purchase price based on the fair value of the assets acquired and liabilities assumed. Chiron allocated a portion of the preliminary purchase price to
purchased in-process research and development, which it charged to earnings in the third quarter 2004.

For
acquisition costs related to Sagres, Chiron paid $1.1 million for the nine months ended September 30, 2004. These payments are reflected in the Condensed Consolidated
Statement of Cash Flows as a component of "Cash paid for acquisitions, net of cash acquired" for the nine months ended September 30, 2004.

The
deferred tax assets primarily related to future utilization of net operating loss carryforwards. Chiron acquired federal and state net operating loss carryforwards of approximately
$25.0 million and $20.6 million, respectively and federal and state business credits attributed to Sagres of approximately $1.7 million and $1.3 million, respectively. The
available utilization of such net operating loss and business tax credit carryforwards is limited in any one year to approximately $0.2 million per annum

16

---



over
the next twenty years under provisions of the Internal Revenue Code. As such, a significant portion of Sagres's net operating loss carryforwards is expected to expire unutilized.

PowderJect Pharmaceuticals plcOn July 8, 2003, Chiron acquired PowderJect Pharmaceuticals, a company based in Oxford,
England that develops and commercializes vaccines. Chiron acquired all of the outstanding shares of common stock of PowderJect Pharmaceuticals for 550 pence per ordinary
share, which, including estimated acquisition costs, resulted in a total purchase price of approximately $940.3 million.

During
the second quarter 2004, Chiron completed the planned divestiture of certain research operations in Madison, Wisconsin and Oxford, England and certain vaccines operations in
Sweden. The divestiture of these operations included the disposition of net assets of $14.7 million (which included $15.5 million of cash), deferred taxes of $9.4 million, and
exit liabilities of $21.6 million. The net impact of the divestiture resulted in an increase to goodwill of $2.5 million in the second quarter 2004. Also, during the second quarter of
2004, Chiron adjusted the previously recorded obligation related to an assumed defined benefit plan, which resulted in an increase to goodwill of $8.1 million.

During
the third quarter 2004, Chiron revised estimates of exit costs associated with certain contractual obligations under supply and research agreements related to the divested
research operations and other direct acquisition costs. Also, during the third quarter 2004, Chiron revised estimates of exit costs associated with the divestiture of certain research operations in
Madison, Wisconsin. The net impact of the revision of these estimates resulted in an increase to goodwill of $14.0 million, an increase to acquisition costs of $14.5 million and a
decrease to current liabilities assumed of $0.5 million. As a result of these adjustments to exit costs, the purchase price was revised to $940.3 million.

PowderJect
Pharmaceuticals is part of Chiron's vaccines segment. Chiron accounted for the acquisition as a business combination and included PowderJect Pharmaceuticals' operating results
in its consolidated operating results beginning July 8, 2003.

The
components of the purchase price, and the allocation thereof based on estimated fair values are summarized in the following table (in thousands).

Consideration and acquisition costs:Cash paid for common stock

$
831,026Cash paid for options on common stock


59,153Acquisition costs paid as of September 30, 2004


22,340Acquisition costs not yet paid as of September 30, 2004


27,827Total purchase price

$
940,346


17

---



Allocation of purchase price:Cash and cash equivalents

$
76,685Short-term marketable securities


8,840Accounts receivable, net


39,600Inventories


64,924Property, plant and equipment


60,589Goodwill


527,492Acquired intangible assets


335,500Other assets


4,876Income taxes payable


(17,741
)Current liabilities


(53,810
)Net deferred tax liability


(69,566
)Long-term liabilities


(82,343
)Purchased in-process research and development


45,300Total purchase price

$
940,346


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 research and development, which it charged to earnings in 2003. Purchased in-process research and development represented the valuation of acquired,
to-be-completed research projects. Purchased in-process research and development was determined using the income approach, which is based on the premise that the
value of a security or asset is the present value of the future earning capacity that is available for distribution to the subject investors in the security or asset. In valuing the purchased
in-process research and development, Chiron used probability-of-success-adjusted cash flows and a 14% discount rate. Cash
flows from projects including those relating to (i) certain travel vaccines and (ii) vaccines for allergies were assumed to commence between 2004 and 2012. Given the high risk associated
with the development of new drugs, Chiron probability-adjusted the revenue and expense forecasts to reflect the risk of advancement through the regulatory approval process based on the stage of
development in the regulatory process. Such a valuation requires significant estimates and assumptions. Chiron believes that the fair value assigned to purchased in-process research and
development is based on reasonable assumptions. To assist in determining the value of the purchased in-process research and development, a third-party valuation was obtained as of the
acquisition date.

Acquired
intangible assets included the fair value of distribution rights, a contract manufacturing agreement and developed product technologies. The distribution rights and the contract
manufacturing agreement are being amortized on a straight-line basis over 1 to 4 years. The weighted average amortization period for these intangible assets is 2 years.
Developed product technologies are being amortized using either the estimated sales method over 10 years or on a straight-line basis over 1 to 15 years. The weighted average
amortization period for these intangible assets is 11 years. The weighted average amortization period for total acquired intangible assets is 10 years.

18

---





Income taxes payable of $17.7 million relates to current tax liabilities associated with PowderJect Pharmaceuticals at the date of acquisition. The net
deferred tax liability of $69.6 million is comprised of current and non-current deferred tax assets of $31.1 million primarily related to net operating losses incurred from
April 1, 2003 through the acquisition date, reserves and depreciation timing differences and a non-current deferred tax liability of $100.7 million related to acquired
intangibles.

For
acquisition costs related to PowderJect Pharmaceuticals, Chiron paid $5.6 million and $5.5 million for the nine months ended September 30, 2004 and
September 30, 2003, respectively. For the acquisition of PowderJect Pharmaceuticals, cash paid for common stock and options on common stock was $890.2 million for the nine months ended
September 30, 2003. These payments are reflected in the Condensed Consolidated Statement of Cash Flows as a component of "Cash paid for acquisitions, net of cash acquired" for the nine months
ended September 30, 2004 and 2003, respectively.

Chiron
paid $1.0 million and $0.2 million related to severance payments included in acquisition costs for PathoGenesis Corporation and Matrix Pharmaceutical, respectively,
for the nine months ended September 30, 2003. These payments are reflected in the Condensed Consolidated Statement of Cash Flows as a component of "Cash paid for acquisitions, net of cash
acquired" for the nine months ended September 30, 2003.

Note 5Roche Settlement

In October 2000, Chiron entered into three license agreements with F. Hoffmann-La Roche Limited (Roche) and several of its affiliated companies
related to the settlement of certain litigation in the U.S. and certain other countries for use of Chiron's hepatitis C virus and HIV nucleic acid testing intellectual property. Two agreements relate
toin vitrodiagnostics products. The third agreement relates to blood screening, which was superseded in May 2001 by two new agreements, one for
hepatitis C virus and one for HIV.

An
HIV-related patent directed to nucleic acid testing methods for HIV-1 was issued in the U.S. on March 13, 2003. This patent will expire seventeen years
from the date of issuance. The issuance of the patent triggered a milestone payment to Chiron of $10.0 million from Roche, which was received in April 2003. As permitted under the terms
of its licensing agreement, Roche decided to institute arbitration proceedings in regard to the application of the U.S. patent. Chiron had deferred recognition of the $10.0 million milestone
payment, interest, royalties received and royalties accrued under the patent until the resolution of this dispute. On September 10, 2004, Chiron reached a settlement agreement with Roche. Under
the terms of the settlement agreement, the milestone payment along with any royalties received prior to March 31, 2004 became non-refundable. Accordingly, for the three months ended
September 30, 2004, Chiron has recognized $10.0 million in license fees and $21.8 million in royalties up until June 30, 2004, which had previously been deferred, of which
$16.3 million has been recognized as revenue in Chiron's other segment and $5.5 million has been recognized as revenue in Chiron's blood testing segment. Chiron also recognized
$0.8 million in interest on the license fee. Also under the settlement agreement, in the first quarter of 2005, Chiron is entitled to receive a lump-sum payment of
$78.0 million in lieu of royalties beyond January 1, 2005. Roche may

19

---



elect
under the terms of the agreement to obtain a partial refund and revert to paying royalties on the sales of its products in North America. The amount of such potential refund ranges between
$64.0 million and $0.0 million. The refund available decreases in equal quarterly increments over the eight quarters of 2005 and 2006. As such, Chiron expects to recognize
$64.0 million of the payment as revenue over those eight quarters. The remaining $14.0 million is nonrefundable and was recognized as revenue for the three months ended
September 30, 2004, of which $9.3 million has been recognized as revenue in Chiron's other segment and $4.7 million has been recognized as revenue in Chiron's blood testing
segment.

The
one time impact on revenues for the three and nine months ended September 30, 2004 from these items from the September 10, 2004 settlement with Roche is summarized
below (in thousands).

|                                               |  | Other Segment |        | Blood-testing Segment |   | Total 
|---------------------------------------------- |  | ------------- | ------ | --------------------- | - | ------
|Deferred revenues recognized                   |  | $             | 16,313 |                       | $ | 5,453 
|Deferred license fee recognized                |  |               | 10,000 |                       |   |      
|Non-refundable portion of Roche settlement     |  |               | 9,333  |                       |   | 4,667 
|                                               |  |               |        |                       |   |       
|Total one time royalty and license fee revenue |  | $             | 35,646 |                       | $ | 10,120
|                                               |  |               |        |                       |   |       

20

---



Note 6Intangible Assets

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

|                                                |                               | September 30, 2004 |           | December 31, 2003
|----------------------------------------------- | ----------------------------- | ------------------ | --------- | -----------------
|
|Purchased technologies                          |                               | $                  | 332,434   |                  
|                                                |                               |                    |           |                  
|Patents                                         |                               | $                  | 126,847   |                  
|Trademarks                                      |                               |                    | 60,750    |                  
|Licenses and technology rights                  |                               |                    | 48,783    |                  
|Developed product technologies                  |                               |                    | 350,828   |                  
|Customer relationships                          |                               |                    | 28,334    |                  
|Know how(1)                                     |                               |                    | 12,868    |                  
|Databases                                       |                               |                    | 7,100     |                  
|Other                                           |                               |                    | 34,992    |                  
|                                                |                               |                    |           |                  
|                                                | Total other intangible assets |                    | $         | 670,502          
|                                                |                               |                    |           |                  
|Total intangible assets subject to amortization |                               | $                  | 1,002,936 |                  
|                                                |                               |                    |           |                  

---

Aggregate
amortization expense is as follows (in thousands):

For the nine months ended September 30, 2004

$
71,668For the remaining three months in the year ended December 31, 2004 (estimated)


23,883For the year ended December 31, 2004 (estimated)

$
95,551For the year ended December 31, 2005 (estimated)

$
96,449For the year ended December 31, 2006 (estimated)

$
100,881For the year ended December 31, 2007 (estimated)

$
98,735For the year ended December 31, 2008 (estimated)

$
74,231For the year ended December 31, 2009 (estimated)

$
50,580


21

---



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

Biopharmaceuticals

Vaccines

TotalBalance as of December 31, 2003

$
187,492

$
600,095

$
787,587PowderJect adjustment (See Note 4)





24,531


24,531Effect of exchange rate changes





7,968


7,968Balance as of September 30, 2004

$
187,492

$
632,594

$
820,086


Chiron
performed its annual impairment test for goodwill in the third quarter 2004, as of July 1, 2004. Subsequent to the third quarter 2004, given the developments with respect
to Fluvirin discussed in
"Note 9Commitments and Contingencies," Chiron considered the impact of recent Fluvirin developments on goodwill. Based on this revised analysis, Chiron has no indication of an
impairment loss. Chiron will continue to monitor goodwill for any impairment associated with future developments related to the Fluvirin matters.

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) blood-testing, (ii) vaccines and (iii) biopharmaceuticals. The blood-testing segment consists of an alliance with Gen-Probe and Chiron's one-half share
in the pretax operating earnings generated by the joint business contractual arrangement 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 arrangement with Ortho-Clinical Diagnostics is operated under a contractual arrangement and is not a separate and distinct legal entity. Through Chiron's joint
business contractual arrangement with Ortho-Clinical Diagnostics, Chiron 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. The blood-testing segment also earns royalties from third parties based on their sales of
immunodiagnostic and nucleic acid testing probe diagnostic products utilizing Chiron's hepatitis C virus and HIV-related patents, for use in blood screening and plasma fractionation
markets. The vaccines segment consists principally of adult and pediatric vaccines for viral and bacterial infections. Chiron sells these vaccines primarily in the U.S., Germany, Italy, and the United
Kingdom, as well as in other international markets. The vaccines segment is also involved in the development of novel vaccines and vaccination technology. 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 biopharmaceuticals segment earns royalties on third party sales of several products, including Betaferon® and recombinant insulin and glucagons products and earns license
fees for technologies, such as hepatitis C virus-related patents, used by third parties to develop therapeutic products.

22

---



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.

The
accounting policies of Chiron's reportable segments are the same as those described in Note 1Basis of Presentation and Summary of Significant Accounting Policies
above and in Chiron's Annual Report on Form 10-K for the year ended December 31, 2003. Chiron evaluates the performance of its segments based on each segment's income (loss)
from continuing operations excluding certain special items such as purchased in-process research and development, which is shown as a reconciling item in the table below.

23

---



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

|         |                     | Three Months Ended
September 30,         |                                   | Nine Months Ended
September 30, |        
|-------- | ------------------- | ---------------------------------------- | --------------------------------- | ------------------------------- | -------
|
|Revenues |                     |                                          |                                   |                                 |        
|         | Blood-testing:      |                                          |                                   |                                 |        
|         |                     | Product sales, net:                      |                                   |                                 |        
|         |                     |                                          | Procleix® System                  |                                 | $      
|         |                     |                                          | Ortho-Clinical Diagnostics        |                                 |        
|         |                     |                                          |                                   |                                 |        
|         |                     | Total product sales, net                 |                                   |                                 | 70,727 
|         |                     | Revenues from joint business arrangement |                                   |                                 | 34,017 
|         |                     | Collaborative agreement revenues         |                                   |                                 | 1,616  
|         |                     | Royalty and license fee revenues         |                                   |                                 | 34,115 
|         |                     | Other revenues                           |                                   |                                 | 243    
|         |                     |                                          |                                   |                                 |        
|         |                     |                                          | Total blood-testing revenues      |                                 |        
|         | Vaccines:           |                                          |                                   |                                 |        
|         |                     | Product sales, net:                      |                                   |                                 |        
|         |                     |                                          | Flu vaccines                      |                                 |        
|         |                     |                                          | Meningococcus vaccines            |                                 |        
|         |                     |                                          | Travel vaccines                   |                                 |        
|         |                     |                                          | Pediatric and other vaccines      |                                 |        
|         |                     |                                          |                                   |                                 |        
|         |                     | Total product sales, net                 |                                   |                                 | 167,707
|         |                     | Collaborative agreement revenues         |                                   |                                 | 2,230  
|         |                     | Royalty and license fee revenues         |                                   |                                 | 1,213  
|         |                     | Other revenues                           |                                   |                                 | 3,006  
|         |                     |                                          |                                   |                                 |        
|         |                     |                                          | Total vaccines revenues           |                                 |        
|         | Biopharmaceuticals: |                                          |                                   |                                 |        
|         |                     | Product sales, net                       |                                   |                                 |        
|         |                     |                                          | Betaseron®                        |                                 |        
|         |                     |                                          | TOBI®                             |                                 |        
|         |                     |                                          | Proleukin®                        |                                 |        
|         |                     |                                          | Other                             |                                 |        
|         |                     |                                          |                                   |                                 |        
|         |                     | Total product sales, net                 |                                   |                                 | 131,546
|         |                     | Collaborative agreement revenues         |                                   |                                 | 278    
|         |                     | Royalty and license fee revenues         |                                   |                                 | 15,412 
|         |                     | Other revenues                           |                                   |                                 | 1,201  
|         |                     |                                          |                                   |                                 |        
|         |                     |                                          | Total biopharmaceuticals revenues |                                 |        
|         | Other:              |                                          |                                   |                                 |        
|         |                     | Royalty and license fee revenues         |                                   |                                 | 60,656 
|         |                     |                                          |                                   |                                 |        
|         |                     |                                          | Total revenues                    |                                 | $      
|         |                     |                                          |                                   |                                 |        
|         |                     |                                          |                                   |                                 |        

24

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| | Income (loss) from continuing operations |                                                       |                                               |   |         |        |   |        |          |   |          |         |   |        
| | ---------------------------------------- | ----------------------------------------------------- | --------------------------------------------- | - | ------- | ------ | - | ------ | -------- | - | -------- | ------- | - | -------
| |                                          | Blood-testing                                         |                                               | $ | 80,690  |        | $ | 56,994 |          | $ | 203,538  |         | $ | 169,997
| |                                          | Vaccines                                              |                                               |   | (70,194 | )      |   | 69,848 |          |   | (154,171 | )       |   | 65,340 
| |                                          | Biopharmaceuticals                                    |                                               |   | 1,683   |        |   | 15,663 |          |   | 29,709   |         |   | 48,959 
| |                                          | Other                                                 |                                               |   | 34,788  |        |   | (4,349 | )        |   | 24,157   |         |   | (1,419 
| |                                          |                                                       |                                               |   |         |        |   |        |         
| |                                          |                                                       | Segment income from operations                |   |         | 46,967 |   |        | 138,156  |   |          | 103,233 |   |        
| |                                          | Operating expense reconciling item:                   |                                               |   |         |        |   |        |          |   |          |         |   |        
| |                                          |                                                       | Purchased in-process research and development |   |         | (9,629 | ) |        | (122,700 | ) |          | (9,629  | ) |        
| |                                          |                                                       |                                               |   |         |        |   |        |         
| |                                          | Income from operations                                |                                               |   | 37,338  |        |   | 15,456 |          |   | 93,604   |         |   | 160,177
| |                                          |                                                       | Interest expense                              |   |         | (7,063 | ) |        | (6,222   | ) |          | (19,440 | ) |        
| |                                          |                                                       | Interest and other income, net                |   |         | 5,369  |   |        | 5,239    |   |          | 41,252  |   |        
| |                                          |                                                       | Minority interest                             |   |         | (504   | ) |        | (443     | ) |          | (1,583  | ) |        
| |                                          |                                                       |                                               |   |         |        |   |        |         
| |                                          | Income from continuing operations before income taxes |                                               | $ | 35,140  |        | $ | 14,030 |          | $ | 113,833  |         | $ | 177,400
| |                                          |                                                       |                                               |   |         |        |   |        |         

Note 8Debt Obligations

Convertible Debentures

On June 22, 2004, Chiron issued $385.0 million aggregate principal amount of convertible debentures, which mature on June 30, 2034. The
convertible debentures accrue interest at a rate of 2.75% per year and interest is payable on June 30 and December 30 commencing on December 30, 2004. The debentures are senior,
unsecured obligations of Chiron and rank equal in right of payment with all of Chiron's existing and future unsecured and unsubordinated indebtedness.

The
holders of the debentures may convert their debentures when certain Chiron common stock price targets have been met at certain times, if the trading price for the debentures falls
below certain levels
for a specified period of time, if the debentures have been called for redemption, if the credit rating assigned to Chiron's long-term senior debt is below specified levels, upon the
occurrence and continuance of specified corporate transactions or in connection with a transaction or event constituting a change in control. The initial conversion rate is 14.9254 shares of Chiron
common stock per $1,000 principal amount of debentures. This is equivalent to an initial conversion price of approximately $67.00 per share of Chiron common stock.

If
the debentures are tendered for conversion, the value ("Conversion Value") of cash and shares of Chiron's common stock, if any, to be received by a holder converting $1,000 principal
amount of the debentures will be determined by multiplying the applicable conversion rate by a weighted average price. Chiron will deliver the Conversion Value to debenture holders as follows:
(1) an amount in cash ("Principal Return") equal to the lesser of (a) the aggregate Conversion Value of the debentures to be

25

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converted
and (b) the aggregate principal amount of the debentures to be converted and (2) if the aggregate Conversion Value of the debentures to be converted is greater that the
Principal Return, an amount in shares ("Net Shares") equal to the aggregate Conversion Value less the Principal Return ("Net Share Amount"). The number of Net Shares to be paid will be determined by
dividing the Net Share Amount by a weighted average price.

If
a change in control occurs on or prior to July 5, 2010, under certain circumstances, holders of the debentures will receive a make whole premium on debentures tendered for
repurchase and for debentures converted in connection with a change in control. The amount of the make whole premium will be based on the price paid per share of Chiron common stock in a transaction
constituting a change in control and is payable in Chiron common stock.

The
holders of the debentures may require Chiron to repurchase for cash all or part of the debentures on June 30, 2010, June 30, 2014, June 30, 2019, June 30,
2024 and June 30, 2029. The repurchase price will be equal to 100% of the principal amount of the debentures to be repurchased, plus accrued and unpaid interest, if any, up to the repurchase
date.

On
or after July 5, 2010, Chiron may redeem for cash all or part of the debentures at a redemption price equal to 100% of principal amount of the debentures to be redeemed, plus
accrued and unpaid interest, if any, up to the redemption date.

Bond
issuance costs in connection with the issuance of the debentures amounted to approximately $8.6 million and are being amortized to interest expense on a
straight-line basis, which approximates the effective interest method, over six years, which represents the period from the issue date to the earliest put date. Bond issuance costs are
recorded in "Other intangible assets, net" in the Condensed Consolidated Balance Sheets at September 30, 2004.

Liquid Yield Option Notes

In June 2001, Chiron issued zero coupon Liquid Yield Option Notes (LYONs) with a face value of $730.0 million and a yield to maturity of 2.0%. The
LYONs were carried net of an original issue discount of $328.2 million, which was being accreted to interest expense over the life of the LYONs using the effective interest method. No
beneficial conversion feature existed at the time of the issuance of the LYONs. The LYONs mature on June 12, 2031, at a face value of $1,000 per note. The LYONs are uncollateralized and
unsubordinated, and rank equal in right of payment to Chiron's existing and future uncollateralized and unsubordinated indebtedness.

On
June 12, 2004, certain LYONs holders, at their option, tendered $649.9 million in aggregate principal amount at maturity for purchase by Chiron. The purchase price for
the LYONs was $584.31 in cash per $1,000 in principal amount at maturity. The aggregate purchase price for all the LYONs validly surrendered for purchase was $379.7 million. At
September 30, 2004, there remains outstanding $80.1 million in aggregate principal amount at maturity and an accreted balance of $47.1 million for the LYONs.

26

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At
the option of the holder, Chiron may be required to purchase all, or a portion, of the remaining LYONs on the following dates at the following prices for each note with face value of
$1,000:

Date

PriceJune 12, 2006

$
608.04June 12, 2011

$
671.65June 12, 2016

$
741.92June 12, 2021

$
819.54June 12, 2026

$
905.29


Other Loans Payable

Chiron has entered into various agreements with a governmental body in Italy for which Chiron may borrow up to 8.6 million Euros ($10.6 million at
September 30, 2004) for research purposes. Under these facilities, Chiron has an outstanding balance of 5.1 million Euros ($6.4 million) as of September 30, 2004 with
interest rates that range from 2% to 6% and maturities that range from 2010 to 2013.

Note 9Commitments and Contingencies

In March 2004, Chiron entered into a worldwide, exclusive, multi-product, collaborative arrangement with XOMA Ltd. for the development and
commercialization of antibody products for the treatment of cancer. Under the terms of the arrangement, the parties agreed to jointly research, develop, and commercialize multiple antibody product
candidates. Under the arrangement, the parties agreed to share development and commercialization expenses, including preclinical and clinical development, manufacturing and worldwide marketing costs,
as well as revenues, generally on a 70-30 basis, with Chiron's share being 70% and XOMA's share being 30%. Chiron agreed to make an initial payment of $10.0 million, which has been
paid as of September 30, 2004, and to make a loan facility of up to $50.0 million available to XOMA, starting on January 1, 2005 to fund XOMA's share of development expenses. The
collaboration will initially focus on preclinical, process development and scale up work, with a potential Investigative New Drug (IND) filing anticipated early in the collaboration.

On
June 1, 2004, Chiron renewed its lease for a manufacturing facility in Emeryville, California from June 1, 2004 through September 30, 2015 with two
3-year options to renew at the end of the lease term and with a right to cancel the lease as of May 31, 2014 without a cancellation fee. Chiron is obligated to pay approximately
$17.5 million up until May 31, 2014.

Chiron
is subject to 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

27

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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 September 30, 2004. Chiron has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

During
the third quarter of 2004, in conducting final internal release procedures for Fluvirin influenza virus vaccine, Chiron's quality systems identified lots that did not meet product
sterility specifications. As a result, Chiron determined at that time to delay releasing any Fluvirin doses pending completion of internal investigations. Subsequent to the third quarter, the UK
regulatory body, the Medicines and Healthcare products Regulatory Agency (MHRA), sent Chiron a letter prohibiting Chiron from releasing any Fluvirin doses manufactured at its Liverpool facility since
March 2, 2004. In that letter, the MHRA asserted that Chiron's manufacturing process did not comply with U.K. good manufacturing practices regulations. In addition to prohibiting release of
existing Fluvirin doses, the MHRA letter also suspended Chiron's license to manufacture further influenza virus vaccine in its Liverpool facility for three months. Following its own investigation, the
U.S. Food and Drug Administration, or FDA, announced that it would not permit release of any Fluvirin from our Liverpool facility into the United States. The MHRA could extend the license suspension
or even make it permanent. Chiron estimates that Fluvirin production must begin by March 2005 in order for Chiron to be able to release the product in September 2005, so any significant
extension of the suspension could result in Chiron being unable to release Fluvirin for the 2005-2006 season, which would harm its business and results of operations. Chiron cannot predict with any
certainty if or when it will be able to resume production of Fluvirin at its Liverpool facility. In addition, while Chiron is still in the process of assessing the appropriate corrective steps, its
remediation efforts could entail additional capital and other expenditures, which could be material. Chiron's inability to supply Fluvirin may also lead to loss of market share. As a result of the
license suspension, competitors have announced plans to introduce influenza vaccine products in the United States and are seeking expedited regulatory approval to do so. Even if the license suspension
expires, some of Chiron's customers may choose to purchase flu vaccine from other providers as their products become available in the United States. Loss of market share could have a material adverse
effect on its business and results of operations. Chiron is subject to investigations and litigation in connection with the events described above. Chiron has received a grand jury subpoena issued by
the U.S. Attorney's Office for the Southern District of New York requesting production of certain documents and materials relating to Chiron's influenza virus vaccine and the suspension by the MHRA of
Chiron's license. The Securities and Exchange Commission is also conducting an informal inquiry into whether Chiron has violated any federal securities laws. Additional investigations regarding these
matters may arise, including Congressional investigations. In addition, Chiron and certain of its officers and directors have also been named as defendants in several putative class action and
shareholder derivative lawsuits arising out of these developments. Investigations and litigation could cause Chiron to incur substantial expense, require significant time and attention from Chiron's
management and result in civil and/or criminal penalties against Chiron. The results of any such investigations or proceedings could have a material adverse effect on Chiron's consolidated financial
position and results of operations or cash flows.

28

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In
addition to the investigations, inquiry and lawsuits related to the recent Fluvirin developments, 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 it is possible that an adverse determination of any of such ordinary course matters could 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 ordinary course 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 effect upon Chiron's consolidated financial position and results of operations or cash flows. Adequate provisions have been made for these tax examinations.

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

Forward-Looking Statements

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, 2003. 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. Many factors could cause actual results, performance and outcomes to differ materially from those expressed or implied by these forward-looking statements. In particular, many factors
related to recent developments with respect to our influenza vaccine Fluvirin® could cause actual results, performance or outcomes to differ materially. These include, among other things,
(1) uncertainty with respect to our ability to deliver Fluvirin in time for the 2005-2006 or future seasons, (2) possible additional adverse developments with respect to
Fluvirin resulting from investigations or discussions with or actions taken or required by applicable regulatory authorities, such as the U.K. Medicines and Healthcare products Regulatory Agency and
the U.S. Food and Drug Administration, including further suspension or revocation of our license to manufacture Fluvirin at our Liverpool facility, (3) possible additional adverse developments
resulting from discussions with or actions taken or required by other governmental authorities and agencies, such as the U.S. Department of Health and Human Services and the Centers for Disease
Control, (4) significant expenses arising out of remediation efforts with respect to our Liverpool facility and in connection with the investigation by the U.S. Attorney's Office for the
Southern District of New York, the inquiry by the Securities and Exchange Commission and putative class action and shareholder derivative lawsuits related to the Fluvirin recent developments and
(5) additional significant competition in the U.S. influenza vaccines market stemming from the recent developments with respect to Fluvirin. Our actual performance may also differ from current
expectations due to the outcome of clinical trials, regulatory review and approvals generally, 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, or 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. We do not undertake an obligation to update the forward-looking information contained in this 10-Q.

Overview

We are a global pharmaceutical company that participates in three healthcare markets: blood-testing, vaccines and biopharmaceuticals. We are focused on developing
products for cancer, which include immune-based therapies, antibodies and novel small molecule anti-cancer agents and infectious disease, which have a range of products spanning all three
of our business units. Our revenues consist of product sales, revenues from a joint business contractual arrangement, collaborative agreement revenues, royalty and license fee revenues and other
revenues, primarily consisting of contract manufacturing and grant revenues.

30

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The
blood-testing segment consists of an alliance with Gen-Probe and our one-half share in the pretax operating earnings generated by the joint business
contractual arrangement 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 arrangement with Ortho-Clinical
Diagnostics is operated under a contractual arrangement and is not a separate and distinct legal entity. Through our joint business contractual arrangement with Ortho-Clinical Diagnostics, we sell a
line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provide supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data
collection. The blood-testing segment also earns royalties from third parties based on their sales of immunodiagnostic and nucleic acid testing probe diagnostic products utilizing our hepatitis C
virus and HIV-related patents, for use in blood screening and plasma fractionation markets.

The
vaccines segment consists of flu vaccines, including Fluvirin® and other flu vaccines, meningococcal vaccines, travel vaccines, which include rabies and
tick-borne encephalitis vaccines, Arilvax and Dukoral, and pediatric and other vaccines. We sell these vaccines primarily in the U.S., Germany, Italy and the
United Kingdom, as well as in other international markets. Our vaccines segment is also involved in the development of other novel vaccines and vaccination technology. We acquired Fluvirin, Arilvax
and Dukoral as part of our July 8, 2003 acquisition of PowderJect Pharmaceutical plc, or PowderJect, a company based in Oxford, England. We
accounted for that acquisition under the purchase method of accounting and included PowderJect's operating results in our consolidated operating results beginning July 8, 2003.

During
the third quarter 2004, in conducting final internal release procedures for our Fluvirin influenza virus vaccine, our quality systems identified lots that did not meet product
sterility specifications. As a result, we determined at that time to delay releasing any Fluvirin doses pending completion of internal investigations. Subsequent to the third quarter, the U.K.
regulatory body, the Medicines and Healthcare products Regulatory Agency, or MHRA, sent us a letter prohibiting us from releasing any Fluvirin doses manufactured at our Liverpool facility since
March 2, 2004. In that letter, the MHRA asserted that our manufacturing process did not comply with U.K. good manufacturing practices regulations. In addition to prohibiting release of existing
Fluvirin doses, the MHRA letter also suspended our license to manufacture further influenza virus vaccine in our Liverpool facility for three months. Following its own investigation, the U.S. Food and
Drug Administration, or FDA, announced that it would not permit release of any Flurivin from our Liverpool facility into the United States. Following our announcements of these events, we were served
with a grand jury subpoena issued by the U.S. Attorney's Office for the Southern District of New York requesting production of certain documents and materials relating to our influenza virus vaccine
and the suspension by the MHRA of our license. In addition, the Securities and Exchange Commission, or SEC, has informed us that it had opened an informal inquiry to determine whether we have violated
certain provisions of the federal securities laws and requesting that we voluntarily provide certain documents and materials, including materials relating to Fluvirin and the suspension of our license
to manufacture Fluvirin. We and certain of our officers and directors have also been named as defendants in several putative class action and shareholder derivative lawsuits arising out of these
developments.

These
recent developments with respect to Fluvirin had the following immediate impact on our results of operations for the three and nine months ended September 30, 2004:



31

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In
addition to the above, we do not expect to release any Fluvirin during the fourth quarter of 2004 or for the 2004-2005 flu season and cannot predict with any certainty if
or when we will be able to resume production of Fluvirin at our Liverpool facility. We cannot provide any assurances that we will be able to provide Fluvirin for the 2005-2006 season. As a
result, we expect that our results of operations for the fourth quarter 2004 will be materially adversely affected by these matters and possibly beyond. If we are unable to provide Fluvirin for the
2005-2006 season or afterward, we may also have to recognize an impairment charge with respect to the goodwill, certain other intangible assets and the Liverpool plant resulting from the
PowderJect acquisition and the new flu vaccines manufacturing facility under construction in Liverpool, which could have a material adverse effect on our results of operations. As a result of these
developments, if we are able to resume production and distribution of Fluvirin from our Liverpool facility, we may experience loss of market share in the U.S. flu vaccine market as competitors seek to
introduce their influenza products into the United States and as governmental authorities and agencies face increased pressure to diversify their sources of flu vaccine and find and approve
alternative suppliers of flu vaccine, which could further materially adversely affect our results of operations going forward. We also expect to incur expenses in connection with these Fluvirin
matters, which could be material, including in connection with (1) our remediation efforts at our Liverpool facility; and (2) responding to the U.S. Attorney for the Southern District of
New York, the SEC, the private lawsuits and other claims and investigations that may arise. For additional information concerning the risks we face as a result of these Fluvirin developments, see
"Factors That May Affect Future ResultsThe recent developments with respect to Fluvirin will harm our business and results of operations." For additional information on the U.S.
Attorney's investigation, SEC inquiry and private lawsuits, see Part II, Item 1 of this report on Form 10-Q.

The
biopharmaceuticals segment consists of therapeutic products and services, with an emphasis on the treatment of cancer and infectious diseases. Our in-house capabilities
span three types of therapeutics, including small molecules, therapeutic proteins and monoclonal antibodies. Our products include TOBI® (tobramycin solution for inhalation) for pseudomonal
lung infections in cystic fibrosis patients, Proleukin® (aldesleukin) for cancer (metastatic melanoma and renal cell carcinoma), and Betaseron® (interferon beta-1b)
for multiple sclerosis. The biopharmaceuticals segment also includes collaborations with Berlex Laboratories, Inc. and its parent company, Schering AG of Germany, related to
Betaseron® interferon beta-1b. The biopharmaceuticals segment earns royalties on third party sales of several products, including Betaferon® and recombinant insulin
and glucagons products and earns license fees for technologies, such as hepatitis C virus-related patents, used by third parties to develop therapeutic products.

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.

32

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SELECTED CONSOLIDATED FINANCIAL DATA

|                                         |                                                                                | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |   | $ Change |         | % Change |       
|---------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------- | ------ | ------------------------------- | - | -------- | ------- | -------- | ------
|
|
|
|                                         | Product sales, net                                                             |                                  | $      | 369,980                         |   | $        | 432,674 |          | $     
|                                         | Royalty and license fee revenues                                               |                                  |        | 111,396                         |   |          | 66,237  |          |       
|                                         | Total revenues                                                                 |                                  |        | 523,967                         |   |          | 540,473 |          |       
|                                         | Cost of sales (excludes amortization expense from acquired developed products) |                                  |        | 237,622                         |   |          | 174,380 |          |       
|                                         | Research and development                                                       |                                  |        | 103,000                         |   |          | 97,519  |          |       
|                                         | Selling, general and administrative                                            |                                  |        | 114,531                         |   |          | 105,818 |          |       
|                                         | Purchased in-process research and development                                  |                                  |        | 9,629                           |   |          | 122,700 |          |       
|Income (loss) from continuing operations |                                                                                |                                  | 23,948 |                                 |   | (20,153  | )       |          | 82,968
|Diluted earnings (loss) per share:       |                                                                                |                                  |        |                                 |   |          |         |          |       
|Income (loss) from continuing operations |                                                                                | $                                | 0.13   |                                 | $ | (0.11    | )       | $        | 0.43  
|Gross profit margin                      |                                                                                |                                  | 36     | %                               |   | 60       | %       |          | 48    

Income from continuing operations was $23.9 million, or $0.13 per diluted share and loss from continuing operations was
$20.2 million or $0.11 per diluted share for the three months ended September 30, 2004 and 2003, respectively. Income from continuing operations was $83.0 million or $0.43 per
diluted share and $102.4 million or $0.54 per diluted share for the nine months ended September 30, 2004 and 2003, respectively. Total revenues were $524.0 million and
$540.5 million for the three months ended September 30, 2004 and 2003, respectively, and $1.3 billion and $1.2 billion for the nine months ended September 30, 2004
and 2003, respectively. As described above, there were no sales of Fluvirin during the current quarter. Sales of Fluvirin influenza vaccine were $103.3 million for the three months ended
September 30, 2003. In addition, as described above, our entire Fluvirin product inventory has been written-off in the third quarter 2004, resulting in a $91.3 million charge
to cost of sales. This charge has resulted in an approximate $0.36 decrease in diluted earnings per share for the three and nine months ended September 30, 2004, respectively. The loss from
continuing operations for the three months ended September 30, 2003 was driven by a charge for purchased in-process research and development from our acquisition of PowderJect of
$122.7 million that was expensed for the three months ended September 30, 2003. This charge for purchased in-process research and development also negatively impacted the
nine months ended September 30, 2003. A contractual decline in the Betaseron® royalty rate, described in more detail below, resulted in $11.4 million and $32.7 million
declines in total revenues for the three and nine months ended September 30, 2004. Our total revenues were affected by the movement in exchange rates, in particular the movements in the Euro
and British Pound against the U.S. dollar. The movement in exchange rates added approximately 2% and 3% to our total revenues for the three and nine months ended September 30, 2004,
respectively. However, since our Euro and British Pound denominated expenses have also increased due to the movement in exchange rates, our earnings per share from continuing operations declined $0.05
and $0.07 per diluted share for the three and nine months ended September 30, 2004, respectively, due to higher expenses compared to revenues denominated in Euros and British Pounds.

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For
the three months ended September 30, 2004, product sales decreased compared to the three months ended September 30, 2003 as there were no Fluvirin influenza vaccine
sales for the current quarter. Product sales increased across our other two business units and with respect to our other vaccine products, in particular our other flu vaccines products,
TOBI® tobramycin, Procleix® products, travel vaccines and Betaseron®. For the nine months ended September 30, 2004, product sales increased due to increases
in Procleix® products, TOBI®, travel vaccines, Proleukin® and Betaseron®, even though we had no Fluvirin vaccine sales in the current quarter.

For
the three and nine months ended September 30, 2004, royalty and licenses fees increased significantly due to the F. Hoffmann-La Roche (Roche) settlement regarding
our HIV patent in the U.S. in the three months ended September 30, 2004. The settlement included a $78.0 million lump sum payment, of which $14.0 million was recognized in the
third quarter 2004. In addition, the settlement resulted in $31.8 million of previously deferred royalties and license payments being recognized in the three months ended September 30,
2004. The one time impact of these items from the Roche settlement was an approximate $0.18 increase in diluted earnings per share for the three and nine months ended September 30, 2004,
respectively. Also, there was an additional $7.9 million for the three and nine months ended September 30, 2004 due to recognition of a portion of the license fee under our license
agreements with the Blood Transfusion Centers of the German Red Cross (German Red Cross) for use of our HIV-1 and hepatitis C virus (HCV) technology.

The
declines in gross profit margins for the three and nine months ended September 30, 2004 as compared with the three and nine months ended September 30, 2003 were
primarily due to the write-off of our entire inventory of Fluvirin, resulting in a $91.3 million charge to cost of sales in the third quarter 2004, as well as the fact that there
were no Fluvirin vaccine sales in the third quarter 2004. The effect of the Fluvirin charge resulted in a 24% and 9% decrease in our gross margin percentage for the three and nine months ended
September 30, 2004.

Gross
profit margins do not include amortization expense from acquired developed products, intangible assets related to business combinations.

The
main components of the increase in research and development expenses for the nine months ended September 30, 2004 as compared to the nine months ended September 30,
2003 include tifacogin, our meningococcal vaccines franchise and our flu cell culture program. These increases were partially offset by the discontinuance of development of tezacitabine and
PA-2794.

The
increase in selling general and administrative expenses for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 mainly
reflects the timing of our acquisition of PowderJect on July 8, 2003. Selling, general and administrative expenses for the nine months ended September 30, 2004 include nine months of
selling, general and administrative expenses from PowderJect while the nine months ended September 30, 2003 included three months of such expenses. Selling, general and administrative expenses
increased also due to investment in geographic penetration for our products, marketing programs for our products and defense of our patents and technology.

The
effective tax rate for the three and nine months ended September 30, 2004 was 31.9% and 27.1% respectively, of pretax income from continuing operations, including the charge
for purchased in process research and development related to the Sagres acquisition. The effective tax rate for the three and nine months ended September 30, 2003 was 243.6% and 42.3%
respectively, of pretax income from continuing operations including the charge for purchased in-process research and development related to the PowderJect acquisition. The charges for the
purchased in-process research and development in 2003 and 2004 are not tax deductible. The effective tax rate for the three and nine months ended September 30, 2004 and 2003 was 25%
of pretax income from continuing operations, after excluding the impact of the purchased in-process research and development charges. The effective tax rate may

34

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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.

Critical Accounting Policies and the Use of Estimates

Our critical accounting policies, which incorporate our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial
Statements are the same as those described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Chiron's Annual Report on
Form 10-K for the year ended December 31, 2003, except for additional discussion in the following two paragraphs.

Purchased
in-process research and developmentWe allocate the purchase price of acquisitions based on the fair value of the assets acquired and liabilities
assumed. To assist in determining the value of the in-process research and development and certain other intangibles, a third party valuation is typically obtained as of the acquisition
date if the acquisition is significant. We generally use the income approach to value in-process research and development. The income approach is based on the premise that the value of a
security or asset is the present value of the future earning capacity that is available for distribution to the subject investors in the security or asset. We perform a discounted cash flow analysis,
utilizing anticipated revenues, expenses and net cash flow forecasts related to the technology. Given the high risk associated with the development of new drugs, we probability adjust the revenue and
expense forecasts to reflect the risk of advancement through the regulatory approval process based on the stage of development in the regulatory process. Such a valuation requires significant
estimates and assumptions. We believe the fair value assigned to the in-process research and development is based on reasonable assumptions. However, these assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur. Additionally, estimates for the purchase price allocation may change as subsequent information becomes available. On July 2,
2004, we acquired Sagres Discovery and accounted for the acquisition as an asset purchase. We allocated the purchase price based on fair value of the assets acquired and liabilities assumed. We
allocated $9.6 million of the purchase price to purchased in-process research and development, which we charged to operations in the third quarter 2004. We do not anticipate that
there will be any alternative future use for the purchased in-process research and development. On July 8, 2003, we acquired PowderJect and
accounted for the acquisition using the purchase method of accounting. We allocated the purchase price based on fair value of the assets acquired and liabilities assumed. We allocated
$122.7 million of the purchase price to purchased in-process research and development, which we charged to operations for the nine months ended September 30, 2003. In the
fourth quarter of 2003, upon completion of strategic assessments of the value of certain research and development projects, we revised the allocation of a portion of the purchase price resulting in a
$77.4 million decrease to purchased in-process research and development which we credited to operations and which was offset against goodwill. We do not anticipate that there will
be any alternative future use for the purchased in-process research and development. In valuing the purchased in-process research and development, we used
probability-of-success-adjusted cash flow and a 14% discount rate. Cash flows from projects including those related to (i) certain travel vaccines and
(ii) vaccines for allergies were assumed to commence between 2004 and 2012.

Product
returns and rebatesWe have extensive historical information on returns and rebates for our products. Historical information with respect to actual product returns
and rebates is the primary factor assessed in estimating product returns and rebates allowances. In determining the allowance for product returns, we primarily use one of the following methodologies
depending on the product: (i) we match the actual returns to the actual sale on a product-by-product basis to assess the historical trend for returns, and based on an
analysis of the historical trend, the appropriate return percentage for the current period is then applied to current period sales to arrive at the product returns charge against revenue for the
period or (ii) for seasonal products we analyze our actual returns over the previous

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seasons
to arrive at the average actual returns percentage, which is then applied to the current season's sales to arrive at the charge against revenue for the current period. In estimating rebates,
we use historical trends to analyze rebates against revenue on a product-by-product basis to arrive at an expected rebate percentage. This expected rebate percentage is applied
to current period sales to arrive at the rebates expense for the period. If actual product returns and rebates are greater than our estimates, additional product return and rebates accruals may be
required. If actual product returns and rebates are less than our estimates, we may have to reverse certain accruals.

The
preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to investments; inventories; derivatives; capital leases;
intangible assets; goodwill; purchased in-process research and development; 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 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.

Our
blood-testing segment includes in part our one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical
Diagnostics, Inc., a Johnson & Johnson company. Our joint business arrangement with Ortho-Clinical Diagnostics is a contractual arrangement and is not a separate and distinct legal
entity. Through our joint business contractual arrangement with Ortho-Clinical Diagnostics, we sell a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provide
supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. Prior to the first quarter of 2003, we accounted for revenues relating to
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 of our joint business contractual arrangement became available for the three months ended March 31, 2003, and as a result, we are able to recognize revenues relating to
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 revenues from the joint business
arrangement for the nine months ended September 30, 2003.

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Results of Operations

Blood-testing

|                                        |                            | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |   | $ Change |        | % Change |        
|--------------------------------------- | -------------------------- | -------------------------------- | ------- | ------------------------------- | - | -------- | ------ | -------- | -------
|
|
|
|Product sales, net:                     |                            |                                  |         |                                 |   |          |        |          |        
|                                        | Procleix®                  |                                  | $       | 63,629                          |   | $        | 53,663 |          | $      
|                                        | Ortho-clinical Diagnostics |                                  |         | 7,098                           |   |          | 6,235  |          |        
|                                        |                            |                                  |         |                                 |   |          |        |          |        
|                                        |                            |                                  | 70,727  |                                 |   | 59,898   |        |          | 206,044
|Revenue from joint business arrangement |                            |                                  | 34,017  |                                 |   | 26,058   |        |          | 92,910 
|Collaborative agreement revenues        |                            |                                  | 1,616   |                                 |   | 2,103    |        |          | 6,005  
|Royalty and license fee revenues        |                            |                                  | 34,115  |                                 |   | 20,576   |        |          | 66,817 
|Other revenues                          |                            |                                  | 243     |                                 |   |         |        |          | 673    
|                                        |                            |                                  |         |                                 |   |          |        |          |        
|Total blood-testing revenues            |                            | $                                | 140,718 |                                 | $ | 108,635  |        | $        | 372,449
|                                        |                            |                                  |         |                                 |   |          |        |          |        
|Gross profit margin                     |                            |                                  | 43      | %                               |   | 40       | %      |          | 42     
|Research and development                |                            | $                                | 8,387   |                                 | $ | 5,947    |        | $        | 19,754 
|Selling, general and administrative     |                            | $                                | 11,077  |                                 | $ | 9,661    |        | $        | 30,657 

Product sales

Procleix®On February 27, 2002, the U.S. Food and Drug Administration approved the
Procleix®HIV-1/ HCV Assay. We have marketed the Procleix® HIV-1/HCV Assay in Europe since 1999. On
January 15, 2004, the Procleix® Ultrio HIV-1/HCV/HBV Assay received European CE marking for use on the semi-automated eSAS system. Under a
collaboration agreement with Gen-Probe, we market and sell the Procleix®HIV-1/ HCV Assay, the Procleix Ultrio 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 record revenue based
upon the reported results obtained from the customer from the use of assays to screen donations or upon sale and delivery of the assays, depending on the underlying contract. In the case of equipment
sales or leases, we record revenue upon the sale and transfer of the title of the instrument or ratably over the life of the lease term, respectively. For provision of service on the instruments, we
recognize revenue ratably over the life of the service agreement.

The
increase in product sales for the three months ended September 30, 2004 as compared with the three months ended September 30, 2003 was primarily due to
$5.6 million from continued penetration into several markets abroad and $4.3 million from the U.S. market primarily due to market share gains in the U.S. for the Procleix®
HIV-1/ HCV Assay. The increase in product sales for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003 was primarily due to
(i) $19.2 million for the introduction of the West Nile virus assay on an investigational-use basis in the U.S. in March 2003, (ii) $15.3 million for the
continued penetration into several markets abroad and (iii) $9.5 million for market share gains in the U.S. for the Procleix® HIV-1/ HCV Assay.

Revenue from joint business arrangementThe increase in revenue from joint business arrangement for the three months ended
September 30, 2004 as compared with the three months ended September 30, 2003 was primarily due to $6.8 million for an increase in royalties. The increase in revenue from joint
business arrangement for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003 was primarily due to (i) $8.0 million for an

37

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increase
in royalties and (ii) $7.6 million for higher profits from Ortho-Clinical Diagnostics' U.S. operations and foreign affiliates. These increases were partially offset by a
one-time benefit of $4.3 million for the three months ended March 31, 2003 due to a change in estimate from a three-month lag to a one-month lag relating to
non-U.S. affiliate sales.

Collaborative agreement revenuesCollaborative 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.

Royalty and license fee revenuesOur blood-testing segment earns royalties from third parties based on their sales of
immunodiagnostic and nucleic acid testing probe diagnostic products utilizing our hepatitis C virus and HIV-related patents, for use in the blood screening and plasma fractionation
markets. Our blood-testing segment also earns license fees related to our hepatitis C virus and HIV-related patents for technologies used by third parties to develop products for use in
the blood screening and plasma fractionation markets. The increases in royalty and license fee revenues for the three and nine months ended September 30, 2004 as compared to the three and nine
months ended September 30, 2003 were primarily due to (i) $10.1 million for the Roche settlement, as described below and (ii) $7.9 million due to recognition of a
portion of the license fee under our license agreements with the German Red Cross for the use of our HIV-1 and hepatitis C virus (HCV) technology for use in molecular probe "home brew"
blood screening. The increases were partially offset by a $4.0 million one-time payment relating to back royalties, which was recognized in the three months ended
September 30, 2003, and was estimated under an agreement with Roche relating to back royalties. In addition, the nine months ended September 30, 2003 included a $7.0 million
license fee from Baxter A.G. related to our hepatitis C virus and HIV technology for use in the plasma fractionation market.

German Red Cross SettlementWe have granted a non-exclusive license to the German Red Cross for use of our
HIV-1 and hepatitis C virus (HCV) technology for use in molecular probe "home brew" blood screening through 2008, for a total license fee payment of $22.8 million. Of this license
fee payment, $7.9 million was recognized as royalty and license fee revenues in the current quarter, as discussed above, and the remaining balance is expected to be recognized through 2008, as
the cancellation privilege in the related agreements expires. In addition, the German Red Cross has the option to license our patents beyond 2008 upon payment of an additional fee. The licensing terms
also cover potential past infringements.

Roche settlementIn October 2000, we entered into three license agreements with Roche 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 nucleic acid testing intellectual property. Two
agreements relate toin vitrodiagnostic products. See "OtherRoyalty and license fee revenues" below. The third agreement for blood
screening was superseded in May 2001 by two new agreements, one for each of hepatitis C virus and HIV.

An
HIV-related patent directed to nucleic acid testing methods for HIV-1 was issued in the U.S. on March 13, 2003. This patent will expire seventeen years
from the date of issuance. As permitted under the terms of its licensing agreement, Roche decided to institute arbitration proceedings in regard to the application of the U.S. patent. Our
blood-testing segment had deferred recognition of royalties received and royalties accrued under the patent until the resolution of this dispute. On September 10, 2004, we reached a settlement
agreement with Roche. Under the terms of the settlement agreement royalties received prior to March 31, 2004 became non-refundable. For discussion regarding the impact of this
settlement on our in vitro diagnostics products, see "OtherRoyalty and license fee revenue"

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below.
Accordingly, for the three months ended September 30, 2004, our blood-testing segment recognized revenue of $5.5 million for royalties up until June 30, 2004, which had
previously been deferred. Also under the settlement agreement, in the first quarter of 2005, we are entitled to receive a lump-sum payment of $78.0 million in lieu of royalties
beyond January 1, 2005. Roche may elect under the terms of the agreement to obtain a partial refund and revert to paying royalties on the sales of its products in North America. The amount of
such potential refund ranges between $64.0 million and $0.0. The amount of the refund available decreases in equal quarterly increments over the eight quarters of 2005 and 2006. As such, we
expect to recognize $64.0 million of the payment as revenue over those eight quarters. This revenue will be split between our blood-testing segment and our other segment. The remaining
$14.0 million is nonrefundable and was recognized as revenue for the three months ended September 30, 2004, of which, $9.3 million has been recognized as revenue in our other
segment and $4.7 million has been recognized as revenue in our blood-testing segment.

The
one time impact on revenues for the three and nine months ended September 30, 2004 from these items from the September 10, 2004 settlement with Roche is summarized
under "OtherRoyalty and license fee revenues" below.

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 profit marginGross profit margin increased for the three months ended September 30, 2004 as compared with the
three months ended September 30, 2003 due to a positive impact by an adjustment to cost of goods sold pursuant to our collaboration agreement with Gen-Probe. The blood-testing gross
profit margin benefited from an amendment in November 2003 to the worldwide blood screening collaboration agreement between Chiron and Gen-Probe in order to adopt permanent, fixed
revenue shares for each party. Effective January 1, 2004, Gen-Probe's share was set at 45.75% of net revenues for assays, which include a test for the hepatitis C virus. For
commercial assays, which do not test for hepatitis C virus, such as the West Nile test, the agreement remains unchanged with each party retaining 50% of the net revenues after deduction of specified
expenses.

Blood-testing
gross profit margin may fluctuate in future periods as the blood-testing product and customer mix changes.

Research and developmentThe increases in research and development expenses for the three and nine months ended
September 30, 2004 as compared to the three and nine months ended September 30, 2003 were primarily due to (i) $1.0 million related to acquisition of in-process
technologies, focused primarily on research into variant Creutzfeldt-Jakob disease (vCJD) and (ii) the remainder of the increase is driven by 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 administrativeThe increases in selling, general and administrative expenses for the three months ended
September 30, 2004 as compared to the three months ended September 30, 2003 were primarily due to (i) $0.6 million from the geographic expansion of our customer base for
the Procleix® HIV-1/HCV Assay particularly in Latin America and Asia markets and (ii) $0.5 million from the support and pre-launch costs associated
with TIGRIS, a fully automated testing system. The increases in selling, general and administrative expenses for the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003 were primarily due to (i) $1.6 million from the geographic expansion of our customer base for the Procleix® HIV-1/HCV Assay particularly
in Latin America and Asia markets and (ii) $0.9 million from the support and pre-launch costs associated with TIGRIS, a fully automated testing system.

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We expect continued growth in selling, general and administrative expenses related to nucleic acid testing technology and products as our sales opportunities expand in new markets
through anticipated additional nucleic acid testing adoption.

Vaccines

|                                    |                              | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |   | $ Change |         | % Change |        
|----------------------------------- | ---------------------------- | -------------------------------- | ------- | ------------------------------- | - | -------- | ------- | -------- | -------
|
|
|Product sales, net:                 |                              |                                  |         |                                 |   |          |         |          |        
|                                    | Flu vaccines:                |                                  |         |                                 |   |          |         |          |        
|                                    | Other Flu vaccines           |                                  | $       | 93,486                          |   | $        | 79,960  |          | $      
|                                    | Fluvirin                     |                                  |         |                                |   |          | 103,290 |          |        
|                                    |                              |                                  |         |                                 |   |          |         |          |        
|                                    | Flu vaccines                 |                                  |         | 93,486                          |   |          | 183,250 |          |        
|                                    | Meningococcus vaccines       |                                  |         | 8,865                           |   |          | 10,642  |          |        
|                                    | Travel vaccines              |                                  |         | 20,865                          |   |          | 11,229  |          |        
|                                    | Pediatric and other vaccines |                                  |         | 44,491                          |   |          | 57,598  |          |        
|                                    |                              |                                  |         |                                 |   |          |         |          |        
|                                    |                              |                                  | 167,707 |                                 |   | 262,719  |         |          | 355,127
|Collaborative agreement revenues    |                              |                                  | 2,230   |                                 |   | 4,349    |         |          | 7,410  
|Royalty and license fee revenues    |                              |                                  | 1,213   |                                 |   | 3,023    |         |          | 3,888  
|Other revenues                      |                              |                                  | 3,006   |                                 |   | 2,679    |         |          | 12,563 
|                                    |                              |                                  |         |                                 |   |          |         |          |        
|Total Vaccines revenues             |                              | $                                | 174,156 |                                 | $ | 272,770  |         | $        | 378,988
|                                    |                              |                                  |         |                                 |   |          |         |          |        
|Gross profit margin                 |                              |                                  | 8       | %                               |   | 58       | %       |          | 24     
|Research and development            |                              | $                                | 30,985  |                                 | $ | 35,298   |         | $        | 97,313 
|Selling, general and administrative |                              | $                                | 44,806  |                                 | $ | 43,419   |         | $        | 119,696
|Amortization expense                |                              | $                                | 14,326  |                                 | $ | 13,604   |         | $        | 44,352 

Product salesWe sell flu, meningococcal, travel, pediatric, and other vaccines in the U.S., Germany, Italy,
and the United Kingdom, as well as in other international markets.

Flu vaccinesAs described above under "Overview," as a result of recent developments with respect to Fluvirin, we had no
Fluvirin sales in the three or nine months ended September 30, 2004 (other than, with respect to the nine months ended September 30, $2.4 million in late 2003-2004
season sales). Sales of Fluvirin influenza vaccine were $103.3 million for the three and nine months ended September 30, 2003. Sales of our remaining flu vaccines increased in the three
and nine months ended September 30, 2004 as compared with the three and nine months ended September 30, 2003 primarily due to approximately $5.1 million for the favorable movement
in the Euro to U.S. Dollar exchange rate as well as price increases.

Meningococcus vaccinesThe decrease in meningococcus vaccines sales for the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003 was primarily due to a reduction of $8.0 million in sales of Menjugate® product due to the timing of outbreaks and
vaccination programs in various countries and increased competition for tender sales. This decrease was partially offset by sales in 2004 of $6.2 million of MeNZB meningococcal B
vaccine to the Ministry of Health in New Zealand. The decrease in meningococcus vaccines sales for the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003 was primarily due to a reduction of $19.6 million in sales of Menjugate® product due to the timing of outbreaks and vaccination programs in various
countries and increased competition for tender sales of certain meningococcus vaccines, which was partially offset by the $6.2 million MeNZB sales in 2004 to the Ministry of Health
in New Zealand.

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Travel vaccinesThe increase in travel vaccines sales for the three months ended September 30, 2004 as compared with
the three months ended September 30, 2003 was primarily due to (i) $5.4 million driven by increased demand for our rabies vaccines in the U.S., primarily due to a product recall
from a competitor and (ii) $2.6 million driven by increased late seasonal sales of our tick-borne encephalitis vaccines, which is typically sold in the first half of the
year. The increase in travel vaccines sales for the nine months ended September 30, 2004 as compared with the nine months ended
September 30, 2003 was primarily due to (i) increased demand for our rabies vaccines in the U.S., primarily due to a product recall from a competitor and increased demand for our rabies
vaccines in Europe and Asia, in the amount of $12.9 million and (ii) additional sales of travel vaccine products in the amount of $5.1 million reflecting the fact that the nine
months ended September 30, 2003 represented only approximately one quarter's worth of sales of certain travel vaccines acquired as part of the PowderJect acquisition.

Pediatric and other vaccinesSales of our pediatric and other vaccines decreased for the three months ended
September 30, 2004 as compared with the three months ended September 30, 2003 primarily due to (i) a reduction of $7.2 million due to the planned divestiture of certain
vaccines operations in Sweden in the second quarter 2004 acquired via our acquisition of PowderJect and (ii) a reduction of $2.9 million due to the timing of tender sales for our
diphtheria, tetanus and pertussis vaccines. Sales of our pediatric and other vaccines increased for the nine months ended September 30, 2004 as compared with nine months September 30,
2003 primarily due to an additional $12.6 million related to the timing of tender sales for our polio vaccines and diphtheria, tetanus and pertussis vaccines, offset partially by
$4.5 million due to the timing of tender sales for our measles, mumps and rubella vaccines.

Certain
of our vaccine products are seasonal, particularly our flu vaccines, which have higher sales primarily in the second half of the year. Certain of our vaccines require regulatory
approval for production or sale of the product and sales may fluctuate depending on these regulatory approvals. Due to the Fluvirin recent developments described above, we expect no sales of Fluvirin
influenza vaccine for the 2004-2005 season. There can be no assurance that we will resume manufacturing or sale of Fluvirin for the 2005-2006 season or future seasons. In
addition, we expect Menjugate® sales to continue to fluctuate as public health authorities consider adoption of broad vaccination programs and competitive pressures continue to increase.

We
expect competitive pressures related to our Menjugate® product to continue into the future. In addition, we expect increased competition for our flu vaccines business in
the future.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Collaborative agreement revenues for the three months ended September 30, 2004 as compared with the three months ended September 30, 2003
decreased primarily due to lower milestone payments related to an agreement to supply MeNZB meningococcal B vaccine to the Ministry of Health in New Zealand. Collaborative agreement
revenues for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003 increased primarily due to (i) $1.5 million due to higher
milestone payments related to an agreement to supply MeNZB meningococcal B vaccine to the Ministry of Health in New Zealand and (ii) $1.4 million due to increased
collaborative agreement revenues following our acquisition of PowderJect.

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. Also, our ability
to generate additional

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collaborative
agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners.

Royalty and license fee revenuesOur vaccines segment earns royalties on third party sales of, and license fees on, several
products.

GlaxoSmithKlineAn agreement with GlaxoSmithKline plc provides for royalties on sales of certain vaccine products. Under this
agreement, royalties were $0.8 million and $1.8 million for the three months ended September 30, 2004 and 2003, respectively. Royalties were $2.1 million and
$5.2 million for the nine months ended September 30, 2004 and 2003, respectively. These decreases were primarily due to the expiration of various patents under this agreement.

The
balance of royalty and license fee revenues recognized in our vaccines segment consisted of various other arrangements, 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 on our technologies.



Grant and contract revenuesOur vaccines segment other revenues included grant and contract revenues of $10.2 million
and $6.9 million for the nine months ended September 30, 2004 and 2003, respectively. We have entered into a series of agreements with the U.S. National Institutes of Health to advance
our
HIV vaccine program into human clinical trials. We recognized grant and contract revenues under these arrangements of $6.8 million and $6.1 million for the nine months ended
September 30, 2004 and 2003, respectively.

The
balance of other revenues consisted of various other agreements, 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.

Gross profit marginGross profit margin declined for the three months ended September 30, 2004 as compared with the
three months ended September 30, 2003 due to (i) the fact that there were no sales of Fluvirin in the third quarter of 2004 and (ii) a $91.3 million charge to cost of sales
resulting from the write-off of our entire inventory of Fluvirin. Each of these matters is described in more detail under "Overview." Gross profit margin for the three months ended
September 30, 2004 benefited from higher prices of our other flu vaccines products and increased sales of our rabies vaccine in the U.S. market. Gross profit margin decreased for the nine
months ended September 30, 2004 as compared with the nine months ended September 30, 2003 primarily due to the Fluvirin matters described above. Gross profit margin was also negatively
impacted by reduced sales and margins of the Menjugate® product. These decreases were offset by higher prices of our other flu vaccines products and increased sales of our rabies vaccine
in the U.S. market.

Vaccines
gross profit margin does not include amortization expense from acquired developed products, intangible assets related to business combinations. Such amortization expense is
included in the caption 'amortization expense' discussed below.

Vaccines
gross profit margin may fluctuate significantly in future periods due to product and customer mix, seasonality and ordering patterns, production yields, regulatory approvals and
competitive pressures.

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Research and developmentThe decrease in research and development expenses for the three months ended September 30,
2004 as compared to the three months ended September 30, 2003 was due to the planned divestiture of certain research operations, associated with our acquisition of PowderJect, in Madison,
Wisconsin and Oxford, England during the second quarter of 2004. Research and development expense associated with these operations was approximately $6.3 million for the three months ended
September 30, 2003. The increase in research and development expenses for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 was
primarily due to the advancement of several programs in our meningococcal franchise (an additional $6.1 million) and flu cell culture (an additional $5.8 million).

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 administrativeThe increase in selling, general and administrative expenses for the three months ended
September 30, 2004 as compared with the three months ended September 30, 2003 was due to (i) an additional $2.9 million from ongoing sales and marketing programs,
(ii) $2.9 million for headcount additions, (iii) $1.1 million due to the movement in the Euro and British pound to U.S. Dollar exchange rate and (iv) other increases
of $1.8 million, partially offset by a decline in PowderJect integration costs of $5.3 million and savings of $2.0 million from the second quarter 2004 divestiture of certain
PowderJect operations. The increase in selling, general and administrative expenses for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003
was primarily related to additional expenses of $10.1 million attributable to our third quarter 2003 PowderJect acquisition. The remaining increase in selling, general and administrative
resulted from $5.1million associated with ongoing sales and marketing programs, $12.8 million for headcount additions and other increases of $2.1 million. These increases were partially
offset by savings of $0.6 million from the second quarter 2004 divestiture of certain PowderJect operations.

Amortization expenseThe increase in amortization expense for the nine months ended September 30, 2004 as compared
with the nine months ended September 30, 2003 primarily related to the intangible assets acquired following our third quarter 2003 PowderJect acquisition.

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Biopharmaceuticals

|                                    |            | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |   | $ Change |        | % Change |        
|----------------------------------- | ---------- | -------------------------------- | ------- | ------------------------------- | - | -------- | ------ | -------- | -------
|
|
|Product sales, net:                 |            |                                  |         |                                 |   |          |        |          |        
|                                    | Betaseron® |                                  | $       | 35,171                          |   | $        | 29,010 |          | $      
|                                    | TOBI®      |                                  |         | 55,734                          |   |          | 43,022 |          |        
|                                    | Proleukin® |                                  |         | 31,739                          |   |          | 29,859 |          |        
|                                    | Other      |                                  |         | 8,902                           |   |          | 8,166  |          |        
|                                    |            |                                  |         |                                 |   |          |        |          |        
|                                    |            |                                  | 131,546 |                                 |   | 110,057  |        |          | 384,967
|Collaborative agreement revenues    |            |                                  | 278     |                                 |   | 1,364    |        |          | 1,052  
|Royalty and license fee revenues    |            |                                  | 15,412  |                                 |   | 23,523   |        |          | 47,892 
|Other revenues                      |            |                                  | 1,201   |                                 |   | 5,009    |        |          | 9,127  
|                                    |            |                                  |         |                                 |   |          |        |          |        
|Total Biopharmaceutical revenues    |            | $                                | 148,437 |                                 | $ | 139,953  |        | $        | 443,038
|                                    |            |                                  |         |                                 |   |          |        |          |        
|Gross profit margin                 |            |                                  | 67      | %                               |   | 74       | %      |          | 72     
|Research and development            |            | $                                | 63,252  |                                 | $ | 56,089   |        | $        | 183,627
|Selling, general and administrative |            | $                                | 33,322  |                                 | $ | 29,818   |        | $        | 98,496 
|Amortization expense                |            | $                                | 6,240   |                                 | $ | 6,217    |        | $        | 18,725 

Product salesBiopharmaceutical product sales in 2004 and 2003 consisted principally of
Betaseron®, TOBI® and Proleukin®.

Betaseron® interferon beta-1bWe 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 us, we recognize a portion of
revenue for product sales upon shipment to Schering and the remainder based on a contractual percentage of sales by Schering, both of which we record as product sales. For product manufactured by
Boehringer Ingelheim and marketed by Schering in Europe under the trade name Betaferon®, we receive royalties calculated at the same percentage of sales less the amount paid or incurred by
Schering for supply costs, which we record in royalty and license fee revenues. Starting in the fourth quarter 2003, the amount we record as product sales, based on a percentage of sales by Schering,
and Betaferon® royalties, declined by five percentage points pursuant to our contractual agreement with Schering. As a result, we estimate that the percentage of sales per unit on which
our payments are based will decrease, reducing our per unit revenue by approximately 18% (for sales of Chiron product) and approximately 34% (for royalties from sales of Boehringer Ingelheim product)
from that received prior to the decline. However, there are a number of mitigating considerations, including (i) the transitional supply agreement, (ii) the volume mix of Chiron product
and Boehringer Ingelheim product and (iii) the launch of product upgrades with ease-of-use features. We believe these considerations will partially offset
this contractual change. In order to supply Betaferon® to Schering, we continue to make capital improvements to our existing manufacturing facilities to increase capacity.

In
October 2003, the U.S. Food and Drug Administration approved a new pre-filled diluent syringe for Betaseron®. The pre-filled diluent syringe
was launched in January 2004 and enhances the delivery mode and shortens preparation, helping to simplify injections of Betaseron®.

The
increase in Betaseron® product sales for the three months ended September 30, 2004 as compared with the three months ended September 30, 2003 primarily
related to an additional (i) $9.5 million from inventory ordering patterns and (ii) $1.8 million from patient demand attributed

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to
key marketing programs. These increases were partially offset by a $6.3 million reduction due to a decline in the royalty rate by five percentage points pursuant to our contractual agreement
with Schering. The increase in Betaseron® product sales for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 primarily related
to an additional (i) $7.5 million from inventory ordering patterns, (ii) $6.4 million from price increases, (iii) $6.3 million from increased patient demand
attributed to key marketing programs, (iv) $2.7 million from increased sales of clinical materials and (iv) $2.3 million from the benefit of foreign exchange rates. These
increases were partially offset by a $17.1 million reduction due to a decline in the royalty rate by five percentage points pursuant to our contractual agreement with Schering.

TOBI® tobramycinWe sell TOBI® directly in the U.S. and certain international markets. The increase
in sales for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 was primarily due to an additional (i) $4.7 million due to
increased patient demand in the U.S., (ii) $4.3 million due to wholesaler ordering patterns, (iii) $2.1 million due to price increases and (iv) $1.3 million
due to the benefit of the movement in the Euro to U.S. Dollar exchange rate. The increase in sales for the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003 was primarily due to an additional (i) $11.9 million due to wholesaler ordering patterns, (ii) $8.8 million due to increased patient demand in the
U.S, (iii) $6.4 million due to price increases and (iv) $4.9 million due to favorable movement in the Euro to U.S. Dollar exchange rate.

Proleukin® (aldesleukin)The increase in sales for Proleukin (aldesleukin) for the three months ended
September 30, 2004 as compared with the three months ended September 30, 2003 was primarily due to price increases. The increase in sales for Proleukin (aldesleukin) for the nine months
ended September 30, 2004 as compared with the nine months ended September 30, 2003 was primarily due to an additional (i) $6.3 million due to wholesaler ordering patterns,
(ii) $3.7 million from price increases and (iii) $2.3 million due to favorable movement in the Euro to U.S. Dollar exchange rate, partially offset by a $1.2 million
reduction due to a decline in patient demand.

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

Wholesale
ordering patterns, reimbursement and government pressures, competition, foreign currency exchange rates and the level of rebates may influence future biopharmaceutical sales.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones.

Collaborative
agreement revenues tend to fluctuate based on the amount and timing of research services performed, the status of projects under collaboration and our achievement of
performance 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.
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.

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.

Betaferon® interferon beta-1bWe manufacture interferon beta-1b which is marketed by
Schering AG and its affiliates, including Berlex Laboratories, Inc. (collectively "Schering"), under the trade

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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 or incurred by Schering for supply costs, including
Schering's cost to purchase product from Boehringer Ingelheim.

The
decrease in Betaferon® royalties for the three months ended September 30, 2004 as compared with the three months ended September 30, 2003 was primarily due
to the reduction in the royalty rate of five percentage points ($5.1 million), pursuant to our contractual agreement with
Schering, partially offset by (i) $1.6 million due to an increase in demand and (ii) $1.0 million due to favorable movement in the Euro to U.S. Dollar exchange rate.

The
decrease for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003 was primarily due to the reduction in the royalty rate
of five percentage points ($15.5 million), pursuant to our contractual agreement with Schering, partially offset by (i) $4.5 million due to an increase in demand and
(ii) $3.9 million due to favorable movement in the Euro to U.S. Dollar exchange rate.

We
began supplying Betaferon®, which was previously supplied by Boehringer Ingelheim, to Schering in the fourth quarter 2002 for certain additional European markets. This
resulted in a shift of revenue recognized under this agreement to product sales, with a decrease in royalty revenues, beginning in the fourth quarter 2002. In 2003, Schering extended its supply
agreement with Boehringer Ingelheim through 2008. The magnitude of the shift of revenue in the future will be contingent on our production capacity, Schering's minimum purchase commitment under the
extended supply agreement with Boehringer Ingelheim and market demand. The shift to product sales is expected to increase over the next three years. Future Betaferon® royalties will be
influenced by demand, price changes and foreign currency exchange rates.

Novo NordiskWe earn royalty revenues on insulin and glucagon product sales by Novo Nordisk AS. Royalties were
$1.0 million for the three months ended September 30, 2004 as compared with $2.3 million for the three months ended September 30, 2003 and $3.4 million for the nine
months ended September 30, 2004 as compared with $6.2 million for the nine months ended September 30, 2003. The decreases were due to the expiration of patents beginning in late
2003 related to the production of insulin and glucagons.

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

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



Contract manufacturing revenuesOur biopharmaceuticals segment recognized contract manufacturing revenues of
$1.1 million and $4.7 million for the three months ended September 30, 2004 and 2003, respectively, and $8.6 million and $7.8 million for the nine months ended
September 30, 2004 and 2003, respectively. The fluctuation resulted from the level of activity and the timing of contract manufacturing activities.

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Biogen and Serono settlementsAs a result of a favorable federal court decision and prior agreements between Chiron and AG's
U.S. subsidiary, Berlex Laboratories, and Berlex and Biogen, 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 as revenue during the nine months ended September 30, 2003, which represented our share of this settlement payment. In addition, there was a
similar settlement between Berlex and Serono, S.A. of which we recognized approximately $1.4 million during the nine months ended September 30, 2003.

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 profit marginThe decreases in gross profit margin for the three and nine months ended September 30, 2004 as
compared to the three and nine months ended September 30, 2003 were primarily due to the contractual change in the royalty rate related to the sale of Betaseron® and the increased
costs associated with the pre-filled diluent syringe for Betaseron®.

Biopharmaceutical
gross profit margin does not include amortization expense from acquired developed products, intangible assets related to business combinations. Such amortization
expense is included in the caption "amortization expense'.

Biopharmaceutical
gross profit margin may fluctuate significantly in future periods due to production yields, increased cost to produce the Betaseron® pre-filled
diluent syringe, the decline in Betaseron® product sales, based on a percentage of sales by Schering, which decreased by five percentage points pursuant to our contractual agreement with
Schering and as the biopharmaceutical product and customer mix changes.

Research and developmentThe increase in research and development costs for the three months ended September 30, 2004
as compared with the three months ended September 30, 2003 was primarily the result of activities related to the development of tifacogin, as discussed below.

The
increase in research and development costs for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003 was primarily the
result of activities related to the development of tifacogin, as discussed below, (an additional $28.1 million). These increases were partially offset by (i) a reduction of
$9.0 million due to the discontinuance of development of tezacitabine in the first quarter of 2004 based on an analysis of the data from a Phase II trial in patients with gastroesophageal
cancer and a decline of $8.4 million in spending due to discontinuance of development of PA-2794.

In
the fourth quarter 2002, we reached an agreement in principle to transfer responsibility for the SILCAAT trial, a Phase III study for recombinant human interleukin-2
(IL-2, aldesleukin), to the National Institutes Allergy and Infectious Disease (NIAID) and the University of Minnesota. 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 have decreased for the three and nine months ended September 30,
2004 as a result of the transfer. Under the agreement, we are obligated to fund a maximum of $18.0 million over the lifetime of the trial and to supply clinical materials and certain other
support services of which $12.0 million has been paid through September 30, 2004.

In
October 2003, we acquired all of Pfizer, Inc.'s, formerly Pharmacia Corporation's, interest in tifacogin, in return for which Pfizer will receive royalties on future
sales of tifacogin. In the second

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quarter
2004, we began enrolling patients in our Phase III trial for tifacogin as a treatment for patients with severe community-acquired pneumonia.

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 administrativeThe increase in selling, general and administrative expenses for the three months ended
September 30, 2004 as compared with the three months ended September 30, 2003 was primarily due to $1.5 million for programs and headcount in support of TOBI® and $
1.0 million for the Euro to U.S. Dollar exchange rate fluctuation. The increase for the nine months ended September 30, 2004 as compared with the nine months ended September 30,
2003 was primarily due to (i) $ 3.3 million for the Euro to U.S. Dollar exchange rate fluctuation, (ii) $2.3 million for increased expenses for programs and headcount in
support of TOBI and (iii) $2.3 million for expenses to enhance business processes.

Other

|                                    |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |   | $ Change |  | % Change |        
|----------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | -------- |  | -------- | -------
|
|
|
|Royalty and license fee revenues    |  | $                                | 60,656 |                                 | $ | 19,115   |  | $        | 102,787
|Selling, general and administrative |  |                                  | 25,326 |                                 |   | 22,920   |  |          | 77,279 
|Interest expense                    |  |                                  | 7,063  |                                 |   | 6,222    |  |          | 19,440 
|Interest and other income, net      |  |                                  | 5,369  |                                 |   | 5,239    |  |          | 41,252 

Royalty and license fee revenuesOur other segment earns royalties on third party sales of, and license fees
on, several products. The majority of royalty and license fee revenues related to the use of our hepatitis C virus and HIV-related patents for diagnostic testing purposes by various third
parties.

Roche settlementIn October 2000, we entered into three license agreements with Roche and several of its affiliated
companies related to the settlement of certain litigation in the U.S. and certain other countries for use of our hepatitis C virus and HIV nucleic acid testing intellectual property. Two agreements
relate toin vitrodiagnostics products. The third agreement relates to blood screening. See "Blood TestingRoyalty and license fee
revenues" above for more information on these agreements.

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 ratably 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 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 Roche's use of our hepatitis C virus-related
patent in itsin vitrodiagnostic products, which commenced in the first quarter 2001. Royalty revenues increased for the nine months ended
September 30, 2004 as compared with the nine months ended September 30, 2003, by $4.6 million and 13.3%.

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The HIV agreement also provides for royalties on future sales related to 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 increased by $37.4 million for the three months ended September 30, 2004 as compared with the three months ended September 30, 2003, and $37.8 million for
the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003. These increases are mainly due to a settlement agreement with Roche, described in more
detail below, in which we recognized revenues for a license fee, deferred royalties and a portion of a nonrefundable royalty payment.

An
HIV-related patent directed to nucleic acid testing methods for HIV-1 was issued in the U.S. on March 13, 2003. This patent will expire seventeen years
from the date of issuance. The issuance of the patent triggered a milestone payment to us of $10.0 million from Roche, which was received in April 2003. As permitted under the terms of
its licensing agreement, Roche decided to institute arbitration proceedings in regard to the application of the U.S. patent. We had deferred recognition of the $10.0 million milestone payment,
interest, royalties received and royalties accrued under the patent until the resolution of this dispute. On September 10, 2004, we reached a settlement agreement with Roche. Under the terms of
the settlement agreement, the milestone payment along with any royalties received prior to March 31, 2004 became non-refundable. Accordingly, for the three months ended
September 30, 2004, we have recognized $10.0 million in license fees and $21.8 million in royalties up until June 30, 2004, which had previously been deferred, of which
$16.3 million has been recognized as revenue in our other segment and $5.5 million has been recognized as revenue in our blood testing segment. We also recognized $0.8 million in
interest on the license fee. Also under the settlement agreement, in the first quarter of 2005, we are entitled to receive a lump-sum payment of $78.0 million in lieu of royalties
beyond January 1, 2005. Roche may elect under the terms of the agreement to obtain a partial refund and revert to paying royalties on the sales of its products in North America. The amount of
such potential refund ranges between $64.0 million and $0.0 million. The amount of the refund available decreases in equal quarterly increments over the eight quarters of 2005 and 2006.
As such, Chiron expects to recognize $64.0 million of the payment as revenue over those eight quarters. The remaining $14.0 million is nonrefundable and was recognized as revenue for the
three months ended September 30, 2004, of which, $9.3 million has been recognized as revenue in our other segment and $4.7 million has been recognized as revenue in our blood
testing segment.

The
one time impact on revenues for the three and nine months ended September 30, 2004 from these items from the September 10, 2004 settlement with Roche is summarized
below (in thousands).

|                                               |  | Other Segment |        | Blood-testing Segment |   | Total 
|---------------------------------------------- |  | ------------- | ------ | --------------------- | - | ------
|Deferred revenues recognized                   |  | $             | 16,313 |                       | $ | 5,453 
|Deferred license fee recognized                |  |               | 10,000 |                       |   |      
|Non-refundable portion of Roche settlement     |  |               | 9,333  |                       |   | 4,667 
|                                               |  |               |        |                       |   |       
|Total one time royalty and license fee revenue |  | $             | 35,646 |                       | $ | 10,120
|                                               |  |               |        |                       |   |       

Currently,
the applicable issued hepatitis C virus-related patents expire in 2015 for the U.S. and in 2010 for Europe. Currently, the applicable issued HIV-related patent in
Europe expires in 2005.

Roche PCR agreementFor the three and nine months ended September 30, 2004, we recognized a $3.0 million
settlement with Roche regarding a July 1991 agreement between Roche and Cetus Corporation (a company acquired by us) under which we received royalties on sales of polymerase chain reaction
products and services sold by Roche and its licensees. Roche's royalty obligations, with certain limited exceptions for future products, expired in the fourth quarter of 2000.

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BayerA cross-license agreement provides for royalties to us on HIV and hepatitis C virus products sold by Bayer Corporation.
Royalties were consistent for the three months ended September 30, 2004 as compared with the three months ended September 30, 2003. Royalties increased $1.2 million for the nine
months ended September 30, 2004 as compared with the nine months ended September 30, 2003.

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 on our technologies.

Selling, general, and administrativeThe increase in selling, general and administrative expenses for the three months ended
September 30, 2004 as compared with the three months ended September 30, 2003 was primarily due to an increase in litigation costs of $4.1 million related to the defense of our
patents and technology and an increase in information systems costs of $1.8 million, offset by a $3.5 million reduction in employee related expenses. The increase in selling, general and
administrative expenses for the nine months ended September 30, 2004 as compared with the nine months ended September 30, 2003 was primarily due to an increase in litigation costs of
$8.4 million related to the defense of our patents and technology, an increase in facility related costs of $7.1 million, an increase in information systems costs of $3.5 million,
and an increase in corporate governance costs of $1.7 million, partially offset by lower employee related expenses of $1.8 million.

Interest expenseThe increase in interest expense for the nine months ended September 30, 2004 as compared to the nine
months ended September 30, 2003 primarily related to the effect of nine months versus two months of interest expense recognized on the $500.0 million convertible debentures that were
issued on July 30, 2003. The interest expense on the LYONs decreased significantly when the majority of the LYONs were put to us in June 2004. However, interest expense increased due to
interest on the $385.0 million convertible debentures that were issued on June 22, 2004.

Interest and other income, netInterest and other income, net, primarily consisted of interest income on our cash and
investment balances and other non-operating gains and losses. We recognized interest income of $6.6 million and $5.4 million for the three months ended September 30,
2004 and 2003, respectively, and $17.5 million and $18.7 million for the nine months ended September 30, 2004 and 2003, respectively. Interest income varied due to the fluctuating
cash balances from the acquisition of PowderJect and the retirement and issuance of long-term debt.

We
recognized gains of $1.0 million and $0.0 million for the three months ended September 30, 2004 and 2003, respectively, and $25.0 million and
$9.4 million for the nine months ended September 30, 2004 and 2003, respectively, related to the sale of certain equity securities.

On
December 31, 1998, we completed the sale of our 30% interest in General Injectibles & Vaccines, Inc., a distribution business, to Henry Schein, Inc. and
received payment in full of certain advances we made to General Injectibles & Vaccines. The agreement also provided for us to receive
additional payments, calculated as a pre-determined percentage of Henry Schein's gross profit, through 2003. We received $3.5 million for 2003 and $2.0 million for 2002
during the nine months ended September 30, 2004 and 2003, respectively.

There
were no losses attributable to impairment of equity securities for the three and nine months ended September 30, 2003. For the three and nine months ended
September 30, 2004, we recognized losses attributable to the impairment of certain equity securities of $1.4 million.

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Income taxesThe effective tax rate for the three and nine months ended September 30, 2004 was 31.9% and 27.1%
respectively, of pretax income from continuing operations, including the charge for purchased in-process research and development related to the Sagres acquisition. The effective tax rate
for the three and nine months ended September 30, 2003 was 243.6% and 42.3% respectively, of pretax income from continuing operations, including the charge for purchased in-process
research and development related to the PowderJect acquisition. The charges for the purchased in-process research and development in 2003 and 2004 are not tax deductible. The effective tax
rate for the three and nine months ended September 30, 2004 and 2003 was 25% of pretax income from continuing operations, after excluding the impact of the purchased in-process
research and development charges. 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.

Management
believes the acquisition of PowderJect may cause an increase in the future effective tax rate and is in the process of evaluating certain options that may mitigate any
potential increase. Specifically, most of PowderJect's profits are earned in the United Kingdom subject to a 30% marginal tax rate.

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

Chiron
and Bayer Corporation, or Bayer, were involved in a dispute with respect to their respective rights to certain royalty refunds receivable for which a settlement was reached in
2004. Under this settlement agreement, we made a settlement payment to Bayer in 2004. This settlement includes an agreement that all outstanding items with Bayer related to the sale of Chiron
Diagnostics are resolved and no future indemnity obligations are required. We released previously established reserves deemed to be excess following this settlement. This settlement resulted in a net
gain of $12.8 million, which was included in "Gain (loss) from discontinued operations" for the nine months ended September 30, 2004. This net gain primarily relates to a tax benefit as
a result of the settlement payment to Bayer.

In
the second quarter 2004, Chiron and the IRS entered into a settlement agreement closing the open tax years 1996 to 1998. Pursuant to this settlement agreement we recognized a tax
benefit of approximately $12.5 million, which was included in "Gain (loss) from discontinued operations" for the nine months ended September 30, 2004.

In
the third quarter 2003, we reversed approximately $1.2 million, net of tax, related to unutilized reserves for Chiron Diagnostics, which was included in "Gain (loss) from
discontinued operations" for the three and nine months ended September 30, 2003.

In
the first quarter 2003, Chiron and Bayer reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase Agreement dated September 17, 1998,
between Chiron and Bayer for Chiron Diagnostics. Under this settlement agreement, we were required to make a payment to Bayer during the first quarter 2003. Pursuant to this settlement, we recorded a
charge, net of adjustment to our previously provided reserve for indemnity obligations, 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 included in "Gain (loss) from discontinued operations" for the nine months ended September 30, 2003.

New Accounting Pronouncements

In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8 "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share," that the dilutive effect of contingent convertible debt instruments ("CoCo's") must be included in diluted earnings per share regardless of
whether the triggering contingency has been satisfied, if dilutive.

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Adoption
of Issue No. 04-8 would be on a retroactive basis and would require restatement of prior period diluted earnings per share, subject to certain transition provisions. It is
effective for all periods ending after December 15, 2004. Accounting pursuant to this Issue would not result in additional dilution to our diluted earnings per share for the three and nine
months ended September 30, 2004 from our $500.0 million convertible debentures due 2033 ("2033 Debentures") nor from our $385.0 million convertible debentures due 2034 ("2034
Debentures").

Financial
Accounting Standards Board (or FASB) Interpretation No. 46 (or FIN 46), "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" as revised, requires a variable interest entity (or VIE) to be consolidated by a company if that company absorbs a majority of the VIE's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership, contractual or other financial interest in the VIE. Prior to the adoption of FIN 46, VIEs were generally consolidated by
companies owning a majority voting interest in the VIE. The
consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003; however, the FASB deferred the effective date for VIEs created before February 1, 2003 to
the quarter ended March 31, 2004 for calendar year companies. Adoption of the provisions of FIN 46 prior to the deferred effective date was permitted.

We
adopted the remaining provisions of FIN 46 in the first quarter of 2004. The adoption of these provisions did not have a material effect on our condensed consolidated financial
statements.

On
March 31, 2004, the FASB issued an Exposure Draft (ED), "Share-Based PaymentAn Amendment of FASB Statements No. 123 and 95." The proposed Statement
addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB 25, and generally would require instead that such transactions be accounted for using a fair-value based method. As proposed, companies would be
required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. As proposed, the new rules would be
applied on a modified prospective basis as defined in the ED, and would be effective for us beginning July 1, 2005. We are currently evaluating option valuation methodologies and assumptions in
light of the evolving accounting standards related to employee stock options. Current estimates of option values using the Black-Scholes method may not be indicative of results from valuation
methodologies ultimately adopted in the final rules.

Liquidity and Capital Resources

Our capital requirements have generally been funded by cash flow from operations, borrowings from commercial banks and issuance of convertible debt securities and
common stock. Our cash, cash equivalents and investments in marketable debt securities, which totaled $1,012.3 million at September 30, 2004, are invested in a diversified portfolio of
financial instruments, including money market funds and 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.

Subsequent
to the third quarter of 2004, the UK regulatory body, the Medicines and Healthcare products Regulatory Agency, or MHRA, sent us a letter prohibiting us from releasing any
Fluvirin doses manufactured at our Liverpool facility since March 2, 2004. In that letter, the MHRA asserted that our manufacturing process did not comply with U.K. good manufacturing practices
(GMP) regulations. In addition to prohibiting release of existing Fluvirin doses, the MHRA letter also suspended our license to manufacture influenza virus vaccine in our Liverpool facility for three
months.

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Following
the MHRA's decision, the FDA conducted its own inspection of our Liverpool facility and provided a written report citing FDA observations concerning GMP compliance and other matters relating
to the manufacturing of Fluvirin. The FDA also announced that it would not permit release of any Fluvirin from our Liverpool facility into the United States. We cannot predict if or when we will be
able to resume production of Fluvirin at our Liverpool facility. Any significant extension of the suspension could result in our being unable to release Fluvirin for the 2005-2006 season,
which would diminish or eliminate any cash flows we receive from the sale of Fluvirin. Sales of Fluvirin influenza vaccine were $219.2 million in 2003. In addition, while we are still in the
process of assessing the appropriate corrective steps for our Liverpool plant, our remediation efforts could entail cash payments for additional capital and other expenditures, which could be
material. If we suffer a permanent loss of Fluvirin influenza vaccine sales, it would have a material adverse effect on our cash flow.

We
are subject to investigations and litigation in connection with this matter. We have received a grand jury subpoena issued by the U.S. Attorney's Office for the Southern District of
New York requesting production of certain documents and materials relating to our influenza virus vaccine and the suspension by the MHRA of our license. The Securities and Exchange Commission is also
conducting an informal inquiry into whether we have violated any federal securities laws. Additional investigations regarding these matters may arise, including Congressional investigations. We and
certain of our officers and directors have also been named as defendants in several putative class action and shareholder derivative lawsuits arising out of these developments. We are in the process
of addressing these investigations and litigation, which may entail substantial expense, and the results of which could have a material adverse effect on our consolidated financial position and
results of operations or cash flows. It is not known when or on what basis these matters will be concluded.

For
additional information concerning the risks we face as a result of these Fluvirin developments, see "Factors That May Affect Future ResultsThe recent developments with
respect to Fluvirin will harm our business and results of operations." For additional information on the U.S. Attorney's investigation, SEC inquiry and private lawsuits, see Part II, Item 1 of
this report on Form 10-Q.

On
June 12, 2004, certain holders of our Liquid Yield Option Notes (LYONs), at their option, tendered LYONs with $649.9 million in aggregate principal amount at maturity,
which we were required to purchase. The purchase price for the tendered LYONs was $584.31 in cash per $1,000 in principal amount at maturity. The aggregate purchase price for all the LYONs validly
surrendered for purchase
was $379.7 million. At September 30, 2004, there remains $80.1 million outstanding in aggregate principal amount at maturity with a current accreted balance of
$47.1 million.

On
June 22, 2004, we issued $385.0 million aggregate principal amount of new convertible debentures, which mature on June 30, 2034. The convertible debentures accrue
interest at a rate of 2.75% per year with interest payable each June 30 and December 30 commencing December 30, 2004. The debentures are senior, unsecured obligations and rank
equal in right of payment with all of our existing and future unsecured and unsubordinated indebtedness.

We
believe that our cash, cash equivalents and marketable debt securities, together with funds provided by operations and borrowing and leasing arrangements, will be sufficient to meet
our foreseeable operating cash requirements including any cash needed for remediation efforts for our Liverpool plant, cash utilized for our stock repurchase program and our current contractual
obligations. In addition, we believe we could access additional funds from the debt and capital markets should the need arise. As noted above, if we suffer a permanent loss of Fluvirin influenza
vaccine sales, it would have a material adverse effect on our cash flow.

Sources and uses of cashWe had cash and cash equivalents of $201.0 million and $499.9 million at
September 30, 2004 and 2003, respectively.

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Operating activitiesFor the nine months ended September 30, 2004, net cash provided by operating activities was
$132.6 million as compared with $253.9 million for the nine months ended September 30, 2003. The decrease in cash provided by operating activities was primarily due to lower
income from continuing operations before depreciation, amortization and other non-cash charges as a result of the suspension of our license to manufacture Fluvirin® influenza
virus vaccine in our Liverpool facility which prevented the release of any of the product during the 2004-2005 influenza season. Cash provided by operating activities also decreased due to
(i) lower royalty payments received under the Roche royalty arrangements for the nine months ended September 30, 2004 as opposed to the nine months ended September 30, 2003,
(ii) increased research and development costs and increased selling, general and administrative expenses for the nine months ended September 30, 2004 and
(iii) $14.4 million of cash received as a result of the Biogen and Serono settlements in connection with the McCormick patents in the nine months ended September 30, 2003. These
decreases were offset by lower tax payments for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 and a payment to Bayer Corporation during
the nine months ended September 30, 2003 from a settlement agreement relating to certain claims raised by Bayer in connection with the Stock Purchase Agreement dated September 17, 1998.

Investing activitiesFor the nine months ended September 30, 2004, net cash used in investing activities consisted of
purchases of investments in marketable debt securities of $724.6 million, capital
expenditures of $134.1 million, cash paid for acquisitions net of cash acquired of $32.3 million, purchases of equity securities and interests in affiliated companies of
$6.2 million and other uses of cash of $3.7 million. Included in net cash paid for acquisitions was $5.6 million for previously accrued costs in connection with the acquisition of
PowderJect, $15.5 million of cash delivered on the divestiture of certain operations in Wisconsin, the U.K., and Sweden and $11.2 million of cash paid for the acquisition of Sagres. Cash
used in investing activities was offset by proceeds from sales of investments in marketable debt securities of $415.1 million, proceeds from maturities of investments in marketable debt
securities of $226.0 million and proceeds from the sale of equity securities and interests in affiliated companies of $31.4 million.

In
2003, our Board of Directors approved $50.7 million in expenditures for a 25-year building lease and $42.2 million for capital improvements, both of which
are part of a $97.0 million project for expansion and replacement of our flu vaccines manufacturing facility in Liverpool, England. The new manufacturing facility will replace a portion of the
existing flu vaccines manufacturing facilities in Liverpool, England and is anticipated to be available in late 2007 for the manufacture of flu vaccines, subject to regulatory approval. In
December 2003, we entered into a 25-year lease for the building; as of September 30, 2004, we have incurred $6.8 million for the capital improvements portion of the
project. Management does not currently expect the recent Fluvirin developments to impact the timing of this project.

For
the nine months ended September 30, 2003, net cash used in investing activities consisted of cash paid for acquisitions, net of cash acquired of $804.7 million,
purchases of investments in marketable debt securities of $622.7 million, capital expenditures of $81.4 million, purchases of equity securities and interests in affiliated companies of
$4.3 million and other uses of cash of $12.2 million. For the nine months ended September 30, 2003, cash paid for acquisitions, net of cash acquired, primarily consisted of cash
paid to acquire PowderJect Pharmaceuticals, net of cash acquired, of $803.5 million. Cash used in investing activities was offset by proceeds from sales of investments in marketable debt
securities of $748.0 million, proceeds from the maturities of investments in marketable debt securities of $364.7 million and proceeds from the sale of equity securities and interests in
affiliated companies of $12.5 million.

Financing activitiesFor the nine months ended September 30, 2004, net cash used in financing activities consisted of
$380.2 million for the repayment of debt and capital leases, $129.7 million for the acquisition of treasury stock and $8.3 million for the payment of debt issuance costs. Cash
used in

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financing
activities was offset by $385.0 million of proceeds from issuance of convertible debentures, $64.2 million of proceeds from the reissuance of treasury stock and
$5.0 million of proceeds from the issuance debt.

Our
Board of Directors has authorized the repurchase of our common stock on the open market. On December 5, 2003, the Board of Directors granted authority to buy
5.0 million shares and authorized the
repurchases through December 31, 2004. From January 1, 2004 through September 30, 2004, 2.9 million shares were repurchased.

For
the nine months ended September 30, 2003, net cash provided by financing activities consisted of $500.0 million of proceeds from the issuance of convertible debentures,
$86.0 million of proceeds from the reissuance of treasury stock (related to stock option exercises), $2.1 million of proceeds from selling put options and $0.5 million of proceeds
from the issuance of debt. Cash provided by financing activities was offset by $132.7 million for the acquisition of treasury stock, $62.3 million for the repayment of debt and capital
lease and $2.3 million for the repayment of short-term borrowings.

From
time to time, we evaluate 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 issuing additional 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 September 30, 2004 and December 31, 2003. 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. The Novartis
loan guarantee will expire on December 31, 2007 unless certain debt ratings are triggered which would extend the guarantee on a declining basis ratably over the subsequent three year period.

As
of September 30, 2004, Novartis had also guaranteed $173.3 million of Chiron's lease commitments for a six-year lease to rent a research facility in
Emeryville, California.

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.

The recent developments with respect to Fluvirin will harm our business and results of operations.

During the third quarter of 2004, in conducting final internal release procedures for our Fluvirin influenza virus vaccine, our quality systems identified lots
that did not meet product sterility specifications. As a result, we determined at the time to delay releasing any Fluvirin doses pending completion of internal investigations. Subsequent to the third
quarter, the U.K. regulatory body, the Medicines and Healthcare products Regulatory Agency, or MHRA, sent us a letter prohibiting us from releasing any Fluvirin doses manufactured at our Liverpool
facility since March 2, 2004. In that letter, the MHRA asserted that our manufacturing process did not comply with U.K. good manufacturing practices regulations. Following the MHRA's decision,
the Food and Drug Administration, or FDA, conducted its own inspection of our Liverpool facility and provided a written report, known as an

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"FDA
Form 483" or simply a "483" citing FDA observations concerning GMP compliance and other matters relating to the manufacture of Fluvirin. If the nature of any noted issues requires it or if
Chiron fails to respond adequately to the Form 483 observations, the FDA may modify our license in an adverse manner, issue a warning letter against us and impose fines, require temporary or
permanent cessation of future manufacturing or selling of Fluvirin or take other action that could reduce our ability to produce or market Fluvirin. The FDA also announced that it would not permit
release of any Fluvirin from our Liverpool facility into the United States. We do not expect to release any Fluvirin product during the 2004-2005 influenza season.

In
addition to prohibiting release of existing Fluvirin doses, the MHRA letter suspended our license to manufacture influenza virus vaccine in our Liverpool facility for three months.
The MHRA could extend the license suspension or even make it permanent. We estimate that Fluvirin production must begin by March 2005 in order for us to be able to release the product in
September 2005, so any significant extension of the suspension could result in our being unable to release Fluvirin for the 2005-2006 season, which would harm our business and
results of operations. We cannot predict with any certainty if or when we will be able to resume production of Fluvirin at our Liverpool facility. In addition, while we are still in the process of
assessing the appropriate corrective steps, our remediation efforts could entail additional capital and other expenditures, which could be material. There can be no assurances that we will be able to
make changes to adequately address the issues identified by the FDA and MHRA, or that these regulatory agencies will be satisfied with our remediation efforts. If the license suspension is extended
beyond three months, certain assets related to Fluvirin, such as goodwill, certain other intangible assets, the existing Liverpool plant and the new flu vaccines manufacturing facility under
construction in Liverpool, with a total carrying value of $913.6 million at September 30, 2004, could be impaired. This could result in our recording impairment losses that could have a
material adverse effect on our results of operations. In addition, if we suffer a permanent loss of Fluvirin influenza vaccine sales, it would have a material adverse effect on our cash flow.

Our
inability to supply Fluvirin may also lead to loss of market share. As a result of the license suspension, competitors have announced plans to introduce influenza vaccine products in
the United States and are seeking expedited regulatory approval to do so. Even if the license suspension expires,
some of our customers may choose to purchase flu vaccine from other providers as their products become available in the United States. Loss of market share could have a material adverse effect on our
business and results of operations.

We
are subject to investigations and litigation in connection with the events described above. We have received a grand jury subpoena issued by the U.S. Attorney's Office for the
Southern District of New York requesting production of certain documents and materials relating to our influenza virus vaccine and the suspension by the MHRA of our license. The Securities and
Exchange Commission is also conducting an informal inquiry into whether Chiron has violated any federal securities laws. Additional investigations regarding these matters may arise, including
Congressional investigations. In addition, we and certain of our officers and directors have also been named as defendants in several putative class action and shareholder derivative lawsuits relating
to these developments. Investigations and litigation could cause us to incur substantial expense, require significant time and attention from our management and result in civil and/or criminal
penalties against Chiron. The results of any such investigations or proceedings could have a material adverse effect on our business and results of operations.

If our focus on the research and development of emerging technologies does not result in the creation of commercial products, our business could be harmed.

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.

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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.

Conflicts with or decisions by third parties we collaborate with could harm our business.

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 strategic 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 strategic partners as
to how best to realize the value associated with a current product or a product in development. In some cases, the strategic 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 strategic 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.

If we fail to obtain or maintain the regulatory approvals we need to market our products, our business will suffer.

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.
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 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.

Our products are complex and difficult to manufacture on a large-scale basis, which could cause us to delay product launches, experience shortages of products or prevent us
from offering products on a volume basis.

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

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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, or liability to a third party to the extent we are contract manufacturing products in our facilities for such
third party. 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, interruptions due to labor action, 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, licensees and clinical trial sites.

Our mishandling of hazardous materials could result in substantial costs and harm to our business.

In connection with our research and manufacturing activities, we utilize some hazardous materials. We believe we take great care 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.

If any of our third party suppliers or manufacturers cannot adequately meet our needs, our business could be harmed.

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.

We
purchase bulk powdered tobramycin, the primary basic raw material in TOBI® tobramycin, from two of the principal worldwide suppliers of the drug. We anticipate 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, our operations could be adversely affected by an interruption or reduction in the supply of bulk powdered tobramycin.

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We
have entered into contracts with third parties for the production and packaging of TOBI®. Over time, we 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, our operations could be disrupted until alternative sources are
secured.

We
have entered into contracts with third parties for the packaging of the pre-filled diluent syringe for Betaseron®. Over time, we can use alternative packaging
sources. However, if the contracted third parties become unable to produce or package sufficient quantities of the pre-filled diluent syringe for Betaseron® due to work
stoppages or other factors, our operations could be disrupted until alternative sources are secured.

In
connection with the production of our flu vaccine products, we must purchase large quantities of chicken eggs. For Fluvirin® vaccine, we purchase those eggs and incubation
services from a single supplier in the United Kingdom and, pursuant to the contract with that supplier, we are
required to make specified minimum purchases from that supplier through 2007. If our supplier were to fail to supply eggs in sufficient quantities or quality, including as a result of any health or
other issues related to the chickens, our business would be materially adversely affected.

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 West Nile virus assay, currently in use on an investigational-use basis in the U.S. and 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.

If we cannot obtain necessary licenses to third party patents for the manufacture or sale of our products, we may have to withdraw from the market or delay the introduction of
the affected product.

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 our strategic partners and us. 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 strategic 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.

Because most of our products are based on technologies that are unfamiliar to the healthcare community, they may not be accepted by healthcare providers and patients, which
could harm our business.

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

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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 a government entity withdrawing its recommendation to screen blood donations for certain viruses) or indirectly (for example, by
recommending a competitive product over our product).

If we are unable to avoid significant exposure to product liability claims, our business could be harmed.

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.

If we are unable to successfully compete in the highly competitive healthcare industry, our business could be harmed.

We operate in a highly competitive environment, and the competition is expected to increase. Competitors include large pharmaceutical, chemical and blood testing
companies, compounding pharmacies, and biotechnology companies. Some of these competitors, particularly large pharmaceutical and blood testing companies, have greater resources than us. 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.

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Our 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. 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 may decline as patents expire.

Sales of our products may be adversely affected by the availability and amount of reimbursement to the user of our products from third parties, such as the government and
insurance companies.

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. If the United States Congress enacts legislative proposals addressing parallel importation currently being
deliberated, revenues from certain products may be affected by this change in U.S. policy. 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.

If our efforts to integrate acquired or licensed businesses or technologies into our business are not successful, our business could be harmed.

As part of our business strategy, we expect to continue to grow our business through in-licensing, collaborations or acquisitions of products or
companies. The failure to adequately address the financial, operational or legal risks raised by such transactions, could harm our business. Financial aspects related to these transactions may alter
our financial position, reported operating results or stock price, and include:



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Operational
risks that could harm our existing operations or prevent realization of anticipated benefits from such transactions include:



Legal
risks may include requirements to obtain the consent of our stockholders or a third party, or the approval of various regulatory authorities.

If
such efforts to integrate acquired or licensed businesses or technologies into our business are not successful, our business could be harmed.

If we cannot initiate and maintain revenue-generating relationships with third parties, we may not be able to grow our revenues in the near to medium term.

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 may fail to establish such other sources of revenue.

Fluctuations in interest rates and foreign currency exchange rates could harm our business.

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.

Our level of debt could limit cash flow available for our operations and could adversely affect our ability to service our debt or obtain additional financing, if necessary.

As of September 30, 2004, our total debt was $940.3 million. Our level of debt could restrict our operations and make it more difficult for us to
satisfy our obligations under the 2033 and the 2034 convertible debentures ("the debentures"). Among other things, our level of debt may:



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We
and our subsidiaries may still be able to incur substantially more debt. The terms of our credit facility, the indentures governing the debentures and the agreements governing our
other debt permit additional borrowings. Our incurrence of additional debt could further exacerbate the risks described above.

Our
ability to satisfy our obligations under the debentures and our debt agreements will depend on our future operating performance, which will be subject, in part, to factors beyond our
control, including general economic and business conditions. If we are unable to generate sufficient cash flow to service our debt, we may be required to refinance all or a portion of our debt,
including the debentures, obtain additional financing, sell some of our assets or operations, reduce or delay capital expenditures, or revise or delay our strategic plans. If we are required to take
any of these actions, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that we would be able to take any of
these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt instruments, including
the indentures governing the debentures.

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 was approximately 42% as of September 30, 2004. 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.

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Our stock price could be volatile.

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



In
connection with our research and development collaborations, from time to time we may invest in equity securities of our strategic 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.

We are subject to taxation in a number of jurisdictions and changes to the corporate tax rate and laws of any of these jurisdictions could increase the amount of corporate
taxes we have to pay.

We pay taxes principally in the U.S., Germany, Italy, The Netherlands and, with the acquisition of PowderJect, the United Kingdom. All of these jurisdictions have
in the past and may in the future make changes to their corporate tax rates and other tax laws, which could increase our future tax provision. We have negotiated a number of rulings regarding income
and other taxes that are subject to periodic review and renewal. If such rulings are not renewed or are substantially modified, income taxes payable in particular jurisdictions could increase. While
we believe that all material tax liabilities are reflected properly in our balance sheet, we are presently under audit in several jurisdictions and 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, PowderJect Vaccines, Inc., SBL Vaccin AB, 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.

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Volatility of earnings could negatively impact our business.

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.

Revisions to accounting standards, financial reporting and corporate governance requirements and tax laws could result in changes to our standard practices and could require a
significant expenditure of time, attention and resources, especially by senior management.

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 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, changes in interest rates and changes in the fair value of equity securities held for sale. We attempt to limit our exposure to some or all of these market risks through the use of various
financial and derivative instruments. During the second quarter of 2004, we issued $385.0 million of new convertible debentures to replace the LYONs tendered for cash of $379.7 million
by certain holders of our LYONs. The new convertible debentures carry a coupon rate of 2.75% and were issued at par. Further changes in interest rates will not affect interest expense incurred on our
outstanding convertible debentures and remaining outstanding LYONs because these obligations bear interest at fixed rates. We seek to manage our exposures to market risks as discussed in further
detail in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in our annual Report on Form 10-K for the year ended December 31, 2003.

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Item 4. Controls and Procedures

(a)Evaluation of disclosure controls and proceduresAs of the
end of the period covered by this 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 Chiron's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) or 15d-15(e). 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 changes in
Chiron's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect internal controls over financial reporting during the most recent
fiscal quarter.

(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, 2003. 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, 2003.

F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc.HIV

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 asserted that under its October 10, 2000 HIV Probe License Agreement and January 1, 2001 HIV Blood Screening Agreement
(the "License Agreements") with F. Hoffman-La Roche Ltd. and Roche Molecular Systems (collectively, "Roche"), Roche is obligated to pay certain licensing fees and ongoing royalties
for the sale of certain Roche HIV nucleic acid tests which infringe the "276 Patent. Roche disputed these obligations on a variety of grounds including a limited claim of non-infringement
and invalidity. Roche initially contested the rate at which royalties must be paid if in fact its products are covered by the License Agreements, but later withdrew this claim. In
November 2003, Chiron initiated an arbitration against Roche pursuant to the rules of the CPR Institute for Dispute Resolution. In September 2004, the parties settled the matter. Under
the terms of the settlement, Roche irrevocably stipulates to the validity and enforceability of the "276 patent. The matter is thus concluded.

Fluvirin

As noted above, the U.K. regulatory body, the Medicines and Healthcare products Regulatory Agency (the "MHRA"), sent us a letter prohibiting us from releasing any
Fluvirin doses manufactured at our Liverpool facility since March 2, 2004. In that letter, the MHRA asserted that our manufacturing process did not comply with U.K. good manufacturing practices
regulations. In addition to prohibiting release of existing Fluvirin doses, the MHRA letter also suspended our license to manufacture influenza virus vaccine in our Liverpool facility for three months
(the "Fluvirin Suspension"). Following its own investigation, the U.S. Food and Drug Administration, or FDA, announced that it would not permit release of any Fluvirin from our Liverpool facility into
the United States.

On
October 11, 2004, Chiron received a grand jury subpoena issued by the U.S. Attorney's Office for the United States District Court for the Southern District of New York
requesting production of certain documents and materials relating to the Fluvirin Suspension.

On
October 12, 2004, the U.S. Securities and Exchange Commission (the "SEC") notified Chiron that it is conducting an informal inquiry into the Fluvirin Suspension to determine
whether provisions of the federal securities laws were violated. The SEC also requested copies of related records.

A.    Securities Class Actions

On
October 12, 2004, Richard Gregory, on behalf of purchasers of the publicly traded securities of Chiron between January 12, 2004 and October 4, 2004, filed a class
action lawsuit against Chiron and certain officers in the United States District Court for the Northern District of California. Gregory alleges, among other things, that named defendants violated
certain provisions of the federal securities laws by making false statements preceding the Fluvirin Suspension, and seeks damages.

On
October 13, 2004, Raphael Nach, on behalf of purchasers of the public traded securities of Chiron between July 23, 2004 and October 5, 2004, filed a class action
lawsuit against Chiron and

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certain
officers in the United States District Court for the Northern District of California. Nach alleges, among other things, that named defendants violated certain provisions of the federal
securities laws by making false statements preceding the Fluvirin Suspension, and seeks damages.

On
October 14, 2004, Jerome Fisher, on behalf of purchasers of the public traded securities of Chiron between January 12, 2004 and October 13, 2004, filed a class
action lawsuit against Chiron and certain officers in the United States District Court for the Eastern District of Pennsylvania. Fisher alleges, among other things, that named defendants violated
certain provisions of the federal securities laws by making false statements preceding the Fluvirin Suspension, and seeks damages.

On
October 19, 2004, Gerald Kramer, on behalf of purchasers of the public traded securities of Chiron between July 23, 2003 and October 5, 2004, filed a class action
lawsuit against Chiron and certain officers in the United States District Court for the Northern District of California. Kramer alleges, among other things, that named defendants violated certain
provisions of the federal securities laws by making false statements preceding the Fluvirin Suspension, and seeks damages.

B.    Derivative Actions

On
October 18, 2004, Ron Abramoff filed a shareholder derivative complaint against Chiron, certain current and former officers and directors, and Novartis A.G. in the Superior
Court of the State of California for the County of Alameda in connection with the recent Fluvirin developments. Abramoff alleges, among other things, breach of fiduciary duties, abuse of control,
gross mismanagement, waste of corporate assets, and violation of California Business & Professions Code § 17200, and seeks damages.

On
October 21, 2004, Edward Albertson filed a shareholder derivative complaint against Chiron and certain current and former officers and directors in the Superior Court of the
State of California for the County of Alameda in connection with the recent Fluvirin developments. Albertson alleges, among other things, breach of fiduciary duties, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment, and violation of California Corporations Code § 25402, and seeks damages.

On
October 21, 2004, Howard Pisnoy filed a shareholder derivative complaint against Chiron and certain current and former officers and directors in the Superior Court of the State
of California for the County of Alameda in connection with the recent Fluvirin developments. Pisnoy alleges, among other things, breach of fiduciary duties, abuse of control, gross mismanagement,
waste of corporate assets, unjust enrichment, and violation of California Corporations Code § 25402, and seeks damages.

On
October 21, 2004, David Jaroslawicz filed a shareholder derivative complaint against Chiron, certain current and former officers and directors, and Novartis A.G. in the United
States District Court for the Northern District of California in connection with the recent Fluvirin developments. Jaroslawicz alleges, among other things, breach of fiduciary duties, and seeks
damages.

On
October 29, 2004, the Plumbers and Pipefitters National Pension Fund and Harold E. Adelson (collectively, "Plaintiffs") filed a shareholder derivative complaint against Chiron,
certain current and former officers and directors, and Novartis A.G. in the Superior Court of the State of California for the County of Alameda in connection with the recent Fluvirin developments.
Plaintiffs allege, among other things, breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and violation of California Business &
Professions Code § 17200, and seek damages.

Additional
lawsuits may be filed against the Company regarding the Fluvirin Suspension. Chiron also anticipates that the United States Congress may conduct investigations related to
these recent Fluvirin developments.

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It
is not known when nor on what basis these matters will be concluded. For additional information concerning the risks we face as a result of these Fluvirin developments, see "Factors
That May Affect Future ResultsThe recent developments with respect to Fluvirin will harm our business and results of operations."

German Red Cross Donation Service and Working Society of Physicians

In October 2001, the German Red Cross Donation Service and Working Society of Physicians brought a complaint against Chiron and Hoffman-La
Roche before the Commission of the European Communities (the "Commission"). These matters generally alleged that Chiron and Roche have engaged in certain anticompetitive actions that violate Articles
81 and 82 of the Treaty Establishing the European Community (the "EC Treaty") in connection with HIV and hepatitis C virus nucleic acid tests in blood screening. The complainants sought a
determination that Roche pricing for its blood screening kits based upon the number of donations tested is unreasonable and should be prohibited through interim measures to be ordered by the
Commission prior to final resolution of the action. Blood banks from The Netherlands, United Kingdom, Finland and Luxembourg filed similar complaints against Chiron and Roche in about February of
2002. Chiron contested all of these complaints.

In
July 2003, the European Commission accepted a joint settlement proposal made by Chiron and Roche. As part of the settlement, Chiron and Roche agreed to modify certain terms of
their agreements under which Roche has licensed Chiron's hepatitis C virus and HIV-1 intellectual property for use in nucleic acid testing products in Europe. In resolving their inquiry,
the European Commission concluded that the modified agreements satisfy the criteria for an individual exemption under Article 81(3) of the Treaty. In October 2004, Chiron granted the
German Red Cross a
non-exclusive license with respect to HCV and HIV NAT technology. Under the agreement terms, the German Red Cross has agreed to withdraw its complaint before the Commission.

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 ("LabCorp Holdings"), Laboratory Corporation of America ("LabCorp") and National Genetics Institute ("NGI") (collectively, the "Defendants"), seeking damages and an injunction against
Defendants' manufacture, use and sale of the UltraQual HCV RT-PCR assay and HCV SUPERQUANT assay for infringing Chiron's U.S. Patent No. 6,074,816 (the
"816 patent"). The Defendants filed a complaint in the United States District Court for the District of Delaware against Chiron seeking a declaratory judgment that Defendants infringe neither the "816
patent, nor U.S. Patent Nos. 5,712,088, 5,863,719, 6,074,816, and 5,714,596 (collectively, the "Chiron Hepatitis C virus-related patents"), and that the Chiron Hepatitis C virus-related patents are
invalid. In August 2003, the Delaware Court granted Defendants' motion to enjoin Chiron from proceeding with the California action and compel Chiron to dismiss that action. Chiron appealed this
judgment to the United States Court of Appeals for the Federal Circuit, and a hearing was held in March 2004. In September 2004, the Federal Circuit affirmed the Delaware Court's
decision. The Delaware Court has scheduled a trial for May 2005.

In
August 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 injunction against Defendants manufacture, use and sale of certain HIV assays for
infringing Chiron's U.S. Patent No. 6,531,276 (the "276 patent"). In February 2004, Chiron voluntarily dismissed this case without prejudice and refiled the complaint before the United
States District Court for the Central District of California.

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

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(e)   Our
Board of Directors authorized the repurchase of our common stock on the open market to offset the dilution associated with the issuance of new shares under the stock
option and stock purchase plans and the granting of share rights. On December 5, 2003, the Board of Directors granted authority to buy an additional 5.0 million shares of Chiron common
stock and authorized such repurchases through December 31, 2004 under the stock repurchase program.

Our
stock repurchases under the above plan are summarized below (shares in millions):

|Period                                 |       | Total
Number of
Shares
Purchased |     | Average
Price Paid per
Share |       | Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs |     | Maximum
Number of
Shares that
May Yet Be
Purchased
Under Plans
or Programs
|-------------------------------------- | ----- | -------------------------------- | --- | ---------------------------- | ----- | -------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------
|July 1, 2004 - July 31, 2004           |       | 0.1                              |     | $                            | 44.57 |                                                                                  | 0.1 |                                                                           
|August 1, 2004 - August 31, 2004       |       | 0.5                              |     | $                            | 45.17 |                                                                                  | 0.5 |                                                                           
|September 1, 2004 - September 30, 2004 |       | 0.8                              |     | $                            | 44.20 |                                                                                  | 0.8 |                                                                           
|                                       |       |                                  |     |                              |       |                                                                                  |     |                                                                           
|                                       | Total |                                  | 1.4 |                              | $     | 44.56                                                                            |     | 1.4                                                                       
|                                       |       |                                  |     |                              |       |                                                                                  |     |                                                                           

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

None

Item 6. Exhibits



|Exhibit
Number |  | Exhibit                                                                                                                                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01           |  | Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on August 17, 1987, incorporated by reference to Exhibit 3.01 of Chiron's report on Form 10-K for fiscal year
1996.                                       
|3.02           |  | Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on December 12, 1991, incorporated by reference to Exhibit 3.02 of Chiron's report on Form 10-K for fiscal
year 1996.         
|3.03           |  | Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04 of Chiron's report on Form 10-Q for the period
ended June 30, 1996.
|3.04           |  | Bylaws of Chiron, as amended and restated, incorporated by reference to Exhibit 3.04 of Chiron's report on Form 10-K for fiscal year 2003.                                                                                                                                
|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.                        
|               |  |                                                                                                                                                                                                                                                                           

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|4.03   |  | Form of Liquid Yield Option Note due 2031 (Zero CouponSenior) (included as exhibits A-1 and A-2 to the Indenture filed as Exhibit 4.01 to Chiron's report on Form 10-Q for the period ended June 30, 2001), incorporated
by reference to Exhibit 4.03 of Chiron's report on Form 10-Q for the period ended June 30, 2001.                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.04   |  | Indenture between Chiron and U.S. Bank National Association, as trustee, dated as of July 30, 2003, incorporated by reference to Exhibit 4.1 of Chiron's registration statement on Form S-3 filed with the Commission on September 23,
2003.                                                                                                                                                        
|4.05   |  | Registration Rights Agreement dated as of July 30, 2003, between Chiron and Morgan Stanley & Co., Goldman, Sachs & Co., Banc of America Securities LLC and BNP Paribas Securities Corp., incorporated by reference to
Exhibit 4.3 of Chiron's registration statement on Form S-3 filed with the Commission on September 23, 2003.                                                                   
|4.06   |  | Form of Convertible Debentures (included in Exhibit 4.04), incorporated by reference to Exhibit 4.2 of Chiron's registration statement on Form S-3 filed with the Commission on September 23, 2003.                                                                                                                                                                                                 
|4.07   |  | Indenture between Chiron and U.S. Bank National Association, as trustee, dated as of June 22, 2004, incorporated by reference to Exhibit 4.07 of Chiron's report on Form 10-Q for the period ended June 30, 2004.                                                                                                                                                                                   
|4.08   |  | Registration Rights Agreement dated as of June 22, 2004, between Chiron, Credit Suisse First Boston, LLC and Morgan Stanley & Co., Goldman, Sachs & Co., Incorporated, incorporated by reference to Exhibit 4.08 of Chiron's report on Form 10-Q
for the period ended June 30, 2004.                                                                                                                
|4.09   |  | Specimen of Convertible Debentures (included as Exhibit A to the Indenture referenced as Exhibit 4.07 of Chiron's report on Form 10-Q for June 30, 2004) issued on June 22, 2004, incorporated by reference to Exhibit 4.09 of Chiron's report on Form
10-Q for the period ended June 30, 2004.                                                                                                     
|10.102 |  | Amended and Restated Revolving Credit Agreement, dated as of August 13, 2002, by and between Chiron and Bank of America, N.A., and exhibits thereto, incorporated by reference to Exhibit 10.102 of Chiron's report on Form 10-Q for September 30,
2002.                                                                                                                                            
|10.330 |  | Term Sheet effective as of September 3, 2004 with Roche Diagnostics GmbH. (We have omitted certain information from the Term Sheet 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".)
|10.519 |  | Corporate Governance Guidelines, as amended and restated.                                                                                                                                                                                                                                                                                                                                           
|10.626 |  | Letter Agreement dated July 7, 2004, between Ursula B. Bartels and Chiron.*                                                                                                                                                                                                                                                                                                                         
|10.627 |  | Supplemental Pension Agreement dated as of July 20, 2004, between Chiron and William G. Green.*                                                                                                                                                                                                                                                                                                     
|31.1   |  | Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                           
|31.2   |  | Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                           
|32.1   |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                              
|32.2   |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                              

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CHIRON CORPORATION        September 30, 2004        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: November 2, 2004 |  | BY:               
|DATE: November 2, 2004 |  | BY:               

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