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

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FORM 10-Q

|(Mark one)                                                    |                                                                                          
|------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|For the quarterly period ended June 30, 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 July 30, 2004
|----------------------------- |  | ----------------------------
|Common Stock, $0.01 par value |  | 187,718,517                 



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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 June 30, 2004 and December 31, 2003                                       
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003          
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2004 and 2003
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the six months ended June 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. Changes in Securities and Use of Proceeds                                             |                                                                                                                    
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                    
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                    
|SIGNATURES                    |                                                                                               | 57                                                                                                                 

2

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Item 1. Financial Statements

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

|                                                                |                                                      | June 30,
2004                                              |           | December 31,
2003 |          
|--------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------------- | --------- | ----------------- | ---------
|ASSETS                                                          |                                                      |                                                            |           |                   |          
|Current assets:                                                 |                                                      |                                                            |           |                   |          
|                                                                | Cash and cash equivalents                            |                                                            | $         | 595,023           |          
|                                                                | Short-term investments in marketable debt securities |                                                            |           | 235,964           |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Total cash and short-term investments                      |           |                   | 830,987  
|                                                                | Accounts receivable, net of allowances               |                                                            |           | 329,856           |          
|                                                                | Current portion of notes receivable                  |                                                            |           | 500               |          
|                                                                | Inventories, net of reserves                         |                                                            |           | 275,574           |          
|                                                                | Assets held for sale                                 |                                                            |           | 3,044             |          
|                                                                | Current net deferred income tax assets               |                                                            |           | 59,992            |          
|                                                                | Derivative financial instruments                     |                                                            |           | 3,871             |          
|                                                                | Other current assets                                 |                                                            |           | 78,217            |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Total current assets                                       |           |                   | 1,582,041
|Noncurrent investments in marketable debt securities            |                                                      |                                                            | 202,979   |                   |          
|Property, plant, equipment and leasehold improvements, at cost: |                                                      |                                                            |           |                   |          
|                                                                | Land and buildings                                   |                                                            |           | 368,791           |          
|                                                                | Laboratory, production and office equipment          |                                                            |           | 614,178           |          
|                                                                | Leasehold improvements                               |                                                            |           | 114,377           |          
|                                                                | Construction-in-progress                             |                                                            |           | 175,956           |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      |                                                            | 1,273,302 |                   |          
|                                                                | Less accumulated depreciation and amortization       |                                                            |           | (544,635          | )        
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | Property, plant, equipment and leasehold improvements, net |           |                   | 728,667  
|Purchased technologies, net                                     |                                                      |                                                            | 226,297   |                   |          
|Goodwill                                                        |                                                      |                                                            | 806,759   |                   |          
|Other intangible assets, net                                    |                                                      |                                                            | 464,695   |                   |          
|Investments in equity securities and affiliated companies       |                                                      |                                                            | 114,633   |                   |          
|Equity method investments                                       |                                                      |                                                            | 889       |                   |          
|Noncurrent notes receivable                                     |                                                      |                                                            | 7,500     |                   |          
|Noncurrent derivative financial instruments                     |                                                      |                                                            |          |                   |          
|Other noncurrent assets                                         |                                                      |                                                            | 51,031    |                   |          
|                                                                |                                                      |                                                            |           |                   |          
|                                                                |                                                      | $                                                          | 4,185,491 |                   | $        
|                                                                |                                                      |                                                            |           |                   |          

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)

|                                               |                                                                                                       | June 30,
2004              |           | December 31,
2003 |          
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ----------------- | ---------
|LIABILITIES AND STOCKHOLDERS' EQUITY           |                                                                                                       |                            |           |                   |          
|Current liabilities:                           |                                                                                                       |                            |           |                   |          
|                                               | Accounts payable                                                                                      |                            | $         | 112,778           |          
|                                               | Accrued compensation and related expenses                                                             |                            |           | 64,296            |          
|                                               | Current portion of capital lease                                                                      |                            |           | 244               |          
|                                               | Current portion of unearned revenue                                                                   |                            |           | 60,334            |          
|                                               | Income taxes payable                                                                                  |                            |           | 16,192            |          
|                                               | Other current liabilities                                                                             |                            |           | 124,940           |          
|                                               |                                                                                                       |                            |           |                   |          
|                                               |                                                                                                       | Total current liabilities  |           |                   | 378,784  
|Long-term debt                                 |                                                                                                       |                            | 938,087   |                   |          
|Capital lease                                  |                                                                                                       |                            | 157,075   |                   |          
|Noncurrent derivative financial instruments    |                                                                                                       |                            | 3,677     |                   |          
|Noncurrent net deferred income tax liabilities |                                                                                                       |                            | 90,848    |                   |          
|Noncurrent unearned revenue                    |                                                                                                       |                            | 35,330    |                   |          
|Other noncurrent liabilities                   |                                                                                                       |                            | 85,776    |                   |          
|Minority interest                              |                                                                                                       |                            | 7,984     |                   |          
|                                               |                                                                                                       |                            |           |                   |          
|                                               |                                                                                                       | Total liabilities          |           |                   | 1,697,561
|                                               |                                                                                                       |                            |           |                   |          
|Commitments and contingencies                  |                                                                                                       |                            |           |                   |          
|Stockholders' equity:                          |                                                                                                       |                            |           |                   |          
|                                               | Common stock                                                                                          |                            |           | 1,917             |          
|                                               | Additional paid-in capital                                                                            |                            |           | 2,527,313         |          
|                                               | Deferred stock compensation                                                                           |                            |           | (18,929           | )        
|                                               | Retained earnings (Accumulated deficit)                                                               |                            |           | 7,562             |          
|                                               | Accumulated other comprehensive income                                                                |                            |           | 171,779           |          
|                                               | Treasury stock, at cost (4,063,000 shares at June 30, 2004 and 4,567,000 shares at December 31, 2003) |                            |           | (201,712          | )        
|                                               |                                                                                                       |                            |           |                   |          
|                                               |                                                                                                       | Total stockholders' equity |           |                   | 2,487,930
|                                               |                                                                                                       |                            |           |                   |          
|                                               |                                                                                                       | $                          | 4,185,491 |                   | $        
|                                               |                                                                                                       |                            |           |                   |          

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
June 30, |        | Six Months Ended
June 30, |        
|----------------------------------------------------- | ---------------------------------------- | --------------------------- | ------ | ------------------------- | -------
|
|Revenues:                                             |                                          |                             |        |                           |        
|                                                      | Product sales, net                       |                             | $      | 295,092                   |        
|                                                      | Revenues from joint business arrangement |                             |        | 28,532                    |        
|                                                      | Collaborative agreement revenues         |                             |        | 3,828                     |        
|                                                      | Royalty and license fee revenues         |                             |        | 55,196                    |        
|                                                      | Other revenues                           |                             |        | 10,975                    |        
|                                                      |                                          |                             |        |                           |        
|                                                      |                                          | Total revenues              |        |                           | 393,623
|                                                      |                                          |                             |        |                           |        
|Operating expenses:                                   |                                          |                             |        |                           |        
|                                                      | Cost of sales                            |                             |        | 130,725                   |        
|                                                      | Research and development                 |                             |        | 100,326                   |        
|                                                      | Selling, general and administrative      |                             |        | 106,857                   |        
|                                                      | Amortization expense                     |                             |        | 21,179                    |        
|                                                      | Other operating expenses                 |                             |        | 4,643                     |        
|                                                      |                                          |                             |        |                           |        
|                                                      |                                          | Total operating expenses    |        |                           | 363,730
|                                                      |                                          |                             |        |                           |        
|Income from operations                                |                                          |                             | 29,893 |                           |        
|Interest expense                                      |                                          |                             | (6,452 | )                         |        
|Interest and other income, net                        |                                          |                             | 19,809 |                           |        
|Minority interest                                     |                                          |                             | (459   | )                         |        
|                                                      |                                          |                             |        |                           |        
|Income from continuing operations before income taxes |                                          |                             | 42,791 |                           |        
|Provision for income taxes                            |                                          |                             | 10,698 |                           |        
|                                                      |                                          |                             |        |                           |        
|Income from continuing operations                     |                                          |                             | 32,093 |                           |        
|Gain from discontinued operations                     |                                          |                             | 12,459 |                           |        
|                                                      |                                          |                             |        |                           |        
|Net income                                            |                                          | $                           | 44,552 |                           | $      
|                                                      |                                          |                             |        |                           |        
|Basic earnings per share:                             |                                          |                             |        |                           |        
|                                                      | Income from continuing operations        |                             | $      | 0.17                      |        
|                                                      |                                          |                             |        |                           |        
|                                                      | Net income                               |                             | $      | 0.24                      |        
|                                                      |                                          |                             |        |                           |        
|Diluted earnings per share:                           |                                          |                             |        |                           |        
|                                                      | Income from continuing operations        |                             | $      | 0.17                      |        
|                                                      |                                          |                             |        |                           |        
|                                                      | Net income                               |                             | $      | 0.23                      |        
|                                                      |                                          |                             |        |                           |        

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
June 30,                                                                                                                                                                                                                                                   |        | Six Months Ended
June 30, |        
|---------------------------------- | ------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------------------------- | -------
|
|Net income                         |                                                                     | $                                                                                                                                                                                                                                                                             | 44,552 |                           | $      
|                                   |                                                                     |                                                                                                                                                                                                                                                                               |        |                           |        
|Other comprehensive income (loss): |                                                                     |                                                                                                                                                                                                                                                                               |        |                           |        
|                                   | Change in foreign currency translation adjustment during the period |                                                                                                                                                                                                                                                                               |        | (15,810                   | )      
|                                   | Unrealized gains (losses) from investments:                         |                                                                                                                                                                                                                                                                               |        |                           |        
|                                   |                                                                     | Net unrealized holding gains (losses) arising during the period, net of tax (provision) benefit of $4,610 and ($1,541) for the three months ended June 30, 2004 and 2003, respectively, and $2,112 and ($1,284) for the
six months ended June 30, 2004 and 2003, respectively |        |                           | 6,267  
|                                   |                                                                     | Reclassification adjustment for net gains included in net income, net of tax provision of $2,965 and $1,834 for the three months ended June 30, 2004 and 2003, respectively, and $9,353 and $3,626 for the six months ended
June 30, 2004 and 2003, respectively              |        |                           | (11,361
|                                   |                                                                     |                                                                                                                                                                                                                                                                               |        |                           |        
|                                   |                                                                     | Net unrealized gains (losses) from investments                                                                                                                                                                                                                                |        |                           | (5,094 
|                                   |                                                                     |                                                                                                                                                                                                                                                                               |        |                           |        
|                                   | Other comprehensive income (loss)                                   |                                                                                                                                                                                                                                                                               |        | (20,904                   | )      
|                                   |                                                                     |                                                                                                                                                                                                                                                                               |        |                           |        
|Comprehensive income               |                                                                     | $                                                                                                                                                                                                                                                                             | 23,648 |                           | $      
|                                   |                                                                     |                                                                                                                                                                                                                                                                               |        |                           |        

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)

|                                                     |                                                                                 | Six Months Ended
June 30,                 |        
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------- | -------
|
|Net cash provided by operating activities            |                                                                                 | $                                         | 74,730 
|                                                     |                                                                                 |                                           |        
|Cash flows from investing activities:                |                                                                                 |                                           |        
|                                                     | Purchases of investments in marketable debt securities                          |                                           |        
|                                                     | Proceeds from sales and 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 provided by investing activities |        
|                                                     |                                                                                 |                                           |        
|Cash flows from financing activities:                |                                                                                 |                                           |        
|                                                     | Net repayment of short-term borrowings                                          |                                           |        
|                                                     | Repayment of debt and capital leases                                            |                                           |        
|                                                     | Payments to acquire treasury stock                                              |                                           |        
|                                                     | Proceeds from reissuance of treasury stock                                      |                                           |        
|                                                     | Proceeds from issuance of debt                                                  |                                           |        
|                                                     | Payment of bond issuance costs                                                  |                                           |        
|                                                     | Proceeds from issuance of convertible debentures                                |                                           |        
|                                                     | Proceeds from put options                                                       |                                           |        
|                                                     |                                                                                 |                                           |        
|                                                     |                                                                                 | Net cash used in financing activities     |        
|                                                     |                                                                                 |                                           |        
|                                                     | Effect of exchange rate changes on cash and cash equivalents                    |                                           |        
|                                                     |                                                                                 |                                           |        
|                                                     |                                                                                 | Net 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       |                                                                                 | $                                         | 595,023
|                                                     |                                                                                 |                                           |        

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        June 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 June 30, 2004, and for the three and six months ended June 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 $36.5 million was paid through June 30, 2004. Chiron accounts for these investments under the equity method of accounting.

Adoption of New Accounting Pronouncements

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 VIEs 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

8

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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.

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 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 had
accounted for revenues relating to Ortho-Clinical Diagnostics' 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 Ortho-Clinical Diagnostics' non-U.S. affiliate sales became available in the first quarter 2003, and as a result, Chiron is able to recognize revenues
relating to Ortho-Clinical Diagnostics' 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 six months ended June 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 and Chiron expects to complete the
sale of this facility within one year of the date it became available for sale. 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 June 30, 2004.

9

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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 second quarter 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.

Inventories,
net of reserves, consisted of the following:

June 30,
2004

December 31,
2003Finished goods

$
49,734

$
38,640Work-in-process


169,715


105,359Raw materials


56,125


55,626$
275,574

$
199,625


Income Taxes

The effective tax rate for the three and six months ended June 30, 2004 and 2003 was 25% of pretax income from continuing operations. The effective tax
rate may be affected in future periods by changes in Chiron's estimates with respect to the deferred tax assets, acquisitions and other items affecting the overall tax rate.

Put Options

Chiron has, in the past, used written put options to reduce the effective costs of repurchasing its common stock. After expiration of existing put options in the
second quarter of 2003, Chiron discontinued the use of put options. Chiron had no put options outstanding at June 30, 2004.

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

10

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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.

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

|                              |             | Three Months Ended
June 30,                                                                                                               |   | Six Months Ended
June 30,
|----------------------------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------
|
|
|Net income:                   |             |                                                                                                                                           |   |                          
|                              | As reported |                                                                                                                                           | $ | 44,552                   
|                              |             | Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                |   |                          
|                              |             | Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |   |                          
|                              |             |                                                                                                                                           |   |                          
|                              |             | Pro forma                                                                                                                                 |   | $                        
|                              |             |                                                                                                                                           |   |                          
|Basic net income per share:   |             |                                                                                                                                           |   |                          
|                              | As reported |                                                                                                                                           | $ | 0.24                     
|                              | Pro forma   |                                                                                                                                           | $ | 0.12                     
|Diluted net income per share: |             |                                                                                                                                           |   |                          
|                              | As reported |                                                                                                                                           | $ | 0.23                     
|                              | Pro forma   |                                                                                                                                           | $ | 0.12                     

Comprehensive Income

For the three and six months ended June 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 $4.7 million and $30.1 million for the three and six months ended June 30, 2004, respectively, and $16.3 million and $23.8 million
for the three and six months ended June 30, 2003, respectively, to "Retained earnings"/ "Accumulated deficit" in the Condensed Consolidated Balance Sheets.

11

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Note 2Earnings Per Share

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

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

|                           |                                                                                  | Three Months Ended
June 30,   |      | Six Months Ended
June 30,
|-------------------------- | -------------------------------------------------------------------------------- | ----------------------------- | ---- | -------------------------
|
|Income (Numerator):        |                                                                                  |                               |      |                          
|                           | Income from continuing operations                                                |                               | $    | 32,093                   
|                           |                                                                                  |                               |      |                          
|Shares (Denominator):      |                                                                                  |                               |      |                          
|                           | Weighted-average common shares outstanding                                       |                               |      | 188,275                  
|                           | Effect of dilutive securities:                                                   |                               |      |                          
|                           |                                                                                  | Stock options and equivalents |      |                          
|                           |                                                                                  | Put options                   |      |                          
|                           |                                                                                  |                               |      |                          
|                           | Weighted-average common shares outstanding, plus impact from assumed conversions |                               |      | 190,985                  
|                           |                                                                                  |                               |      |                          
|Basic earnings per share   |                                                                                  | $                             | 0.17 |                          
|                           |                                                                                  |                               |      |                          
|Diluted earnings per share |                                                                                  | $                             | 0.17 |                          
|                           |                                                                                  |                               |      |                          

12

---



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

|                           |                                                                                  | Three Months Ended
June 30,   |      | Six Months Ended
June 30,
|-------------------------- | -------------------------------------------------------------------------------- | ----------------------------- | ---- | -------------------------
|
|Income (Numerator):        |                                                                                  |                               |      |                          
|                           | Net income                                                                       |                               | $    | 44,552                   
|                           |                                                                                  |                               |      |                          
|Shares (Denominator):      |                                                                                  |                               |      |                          
|                           | Weighted-average common shares outstanding                                       |                               |      | 188,275                  
|                           | Effect of dilutive securities:                                                   |                               |      |                          
|                           |                                                                                  | Stock options and equivalents |      |                          
|                           |                                                                                  | Put options                   |      |                          
|                           |                                                                                  |                               |      |                          
|                           | Weighted-average common shares outstanding, plus impact from assumed conversions |                               |      | 190,985                  
|                           |                                                                                  |                               |      |                          
|Basic earnings per share   |                                                                                  | $                             | 0.24 |                          
|                           |                                                                                  |                               |      |                          
|Diluted earnings per share |                                                                                  | $                             | 0.23 |                          
|                           |                                                                                  |                               |      |                          

For
the three months ended June 30, 2004 and 2003, stock options to purchase 11.8 million and 16.8 million shares, respectively, and for the six months ended
June 30, 2004 and 2003, stock options to purchase 7.6 million and 17.1 million shares, respectively, with exercise prices greater than the average market prices of common stock,
were excluded from the respective computations of diluted earnings per share as their inclusion would be antidilutive.

For
the three and six months ended June 30, 2004, 4.1 million and 6.2 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 six months ended June 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 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 7 "Debt Obligations".

Chiron
issued contingently convertible debentures in the second quarter of 2004 as discussed in Note 7 "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 terms were not met during the second quarter of 2004.

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 terms were not met during the second quarter of 2004.

13

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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.

In
the first quarter 2003, Chiron and Bayer Corporation reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase Agreement dated
September 17, 1998, between Chiron and Bayer 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 reported as a "Gain from discontinued operations" for the six months ended June 30, 2003.

In
the second quarter 2003, we reversed approximately $0.5 million related to unutilized reserves of Chiron Diagnostics and Chiron Vision, which were recorded as a "Gain from
discontinued operations" for the three and six months ended June 30, 2003.

Chiron
and Bayer also were involved in a separate 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 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 in excess of the required payments for the indemnity obligations in the first quarter of 2004. This
settlement resulted in a benefit of $0.3 million and an income tax benefit of $12.5 million, resulting in a net gain of $12.8 million, which was reported as a "Gain from
discontinued operations" for the six months ended June 30, 2004.

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 reported as a "Gain from discontinued operations" for the three and six months ended June 30, 2004.

Note 4Acquisitions

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 preliminary purchase price of approximately $947.8 million.

During
the second quarter of 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 tax assets 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. Also during second quarter of 2004, Chiron adjusted the
previously recorded obligation related to an assumed defined benefit plan,

14

---



which
resulted in an increase to goodwill of $8.1 million. The purchase price includes accruals for estimated exit costs and certain other direct acquisition costs. As a result of the
adjustment to exit liabilities and estimated direct acquisition costs, the purchase price was revised to $925.8 million. The aggregate purchase price and the allocation of the purchase price
may change upon finalization of these estimates.

PowderJect
Pharmaceuticals is part of Chiron's vaccines segment. PowderJect Pharmaceuticals' products, including vaccines for influenza, expand Chiron's portfolio of vaccine products.
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 June 30, 2004


20,739Acquisition costs not yet paid as of June 30, 2004


14,883Total purchase price

$
925,801Allocation 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


513,520Acquired intangible assets


335,500Other assets


4,876Income taxes payable


(17,741
)Current liabilities


(54,383
)Net deferred tax liability


(69,566
)Long-term liabilities


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


45,300Total purchase price

$
925,801


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

15

---



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. However, these assumptions may be incomplete
or inaccurate, and unanticipated events and circumstances may occur. 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.

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 $4.0 million for the six months ended June 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 six months ended June 30, 2004.

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 six months ended June 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 six months ended June 30, 2003.

16

---





Note 5Intangible Assets

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

|                                                |                               | June 30, 2004 |           | December 31, 2003
|----------------------------------------------- | ----------------------------- | ------------- | --------- | -----------------
|
|Purchased technologies                          |                               | $             | 332,338   |                  
|                                                |                               |               |           |                  
|Patents                                         |                               | $             | 123,804   |                  
|Trademarks                                      |                               |               | 60,033    |                  
|Licenses and technology rights                  |                               |               | 48,473    |                  
|Developed product technologies                  |                               |               | 353,195   |                  
|Customer relationships                          |                               |               | 27,912    |                  
|Know how (1)                                    |                               |               | 12,676    |                  
|Databases                                       |                               |               | 7,100     |                  
|Other                                           |                               |               | 34,884    |                  
|                                                |                               |               |           |                  
|                                                | Total other intangible assets |               | $         | 668,077          
|                                                |                               |               |           |                  
|Total intangible assets subject to amortization |                               | $             | 1,000,415 |                  
|                                                |                               |               |           |                  

---

Aggregate
amortization expense is as follows (in thousands):

For the six months ended June 30, 2004 (reported)

$
47,549For the remaining six months in the year ended December 31, 2004 (estimated)


44,640For the year ended December 31, 2004 (estimated)

$
92,189For the year ended December 31, 2005 (estimated)

$
89,732For the year ended December 31, 2006 (estimated)

$
94,130For the year ended December 31, 2007 (estimated)

$
91,987For the year ended December 31, 2008 (estimated)

$
67,474For the year ended December 31, 2009 (estimated)

$
43,825


17

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

|                                |                                     | Biopharmaceuticals |         | Vaccines |   | Total  
|------------------------------- | ----------------------------------- | ------------------ | ------- | -------- | - | -------
|Balance as of December 31, 2003 |                                     | $                  | 187,492 |          | $ | 600,095
|                                | PowderJect adjustments (See Note 4) |                    |         |          |   |        
|                                | Effect of exchange rate changes     |                    |         |         |   |        
|                                |                                     |                    |         |          |   |        
|Balance as of June 30, 2004     |                                     | $                  | 187,492 |          | $ | 619,267
|                                |                                     |                    |         |          |   |        

Note 6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 Incorporated 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 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.

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.

18

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

|         |                     | Three Months Ended
June 30,              |                                   | Six Months Ended
June 30, |        
|-------- | ------------------- | ---------------------------------------- | --------------------------------- | ------------------------- | -------
|
|Revenues |                     |                                          |                                   |                           |        
|         | Blood-testing:      |                                          |                                   |                           |        
|         |                     | Product sales, net:                      |                                   |                           |        
|         |                     |                                          | Procleix® System                  |                           | $      
|         |                     |                                          | Ortho-Clinical Diagnostics        |                           |        
|         |                     |                                          |                                   |                           |        
|         |                     | Total product sales, net                 |                                   |                           | 67,197 
|         |                     | Revenues from joint business arrangement |                                   |                           | 28,532 
|         |                     | Collaborative agreement revenues         |                                   |                           | 2,325  
|         |                     | Royalty and license fee revenues         |                                   |                           | 16,267 
|         |                     | Other revenues                           |                                   |                           | 235    
|         |                     |                                          |                                   |                           |        
|         |                     |                                          | Total blood-testing revenues      |                           |        
|         | Vaccines:           |                                          |                                   |                           |        
|         |                     | Product sales, net:                      |                                   |                           |        
|         |                     |                                          | Influenza vaccines                |                           |        
|         |                     |                                          | Menjugate®                        |                           |        
|         |                     |                                          | Travel vaccines                   |                           |        
|         |                     |                                          | Pediatric and other vaccines      |                           |        
|         |                     |                                          |                                   |                           |        
|         |                     | Total product sales, net                 |                                   |                           | 100,974
|         |                     | Collaborative agreement revenues         |                                   |                           | 1,214  
|         |                     | Royalty and license fee revenues         |                                   |                           | 25     
|         |                     | Other revenues                           |                                   |                           | 5,914  
|         |                     |                                          |                                   |                           |        
|         |                     |                                          | Total vaccines revenues           |                           |        
|         | Biopharmaceuticals: |                                          |                                   |                           |        
|         |                     | Product sales, net                       |                                   |                           |        
|         |                     |                                          | Betaseron®                        |                           |        
|         |                     |                                          | TOBI®                             |                           |        
|         |                     |                                          | Proleukin®                        |                           |        
|         |                     |                                          | Other                             |                           |        
|         |                     |                                          |                                   |                           |        
|         |                     | Total product sales, net                 |                                   |                           | 126,921
|         |                     | Collaborative agreement revenues         |                                   |                           | 289    
|         |                     | Royalty and license fee revenues         |                                   |                           | 15,183 
|         |                     | Other revenues                           |                                   |                           | 4,826  
|         |                     |                                          |                                   |                           |        
|         |                     |                                          | Total biopharmaceuticals revenues |                           |        
|         | Other:              |                                          |                                   |                           |        
|         |                     | Royalty and license fee revenues         |                                   |                           | 23,721 
|         |                     |                                          |                                   |                           |        
|         |                     |                                          | Total revenues                    |                           | $      
|         |                     |                                          |                                   |                           |        
|         |                     |                                          |                                   |                           |        

19

---



| | Income (loss) from continuing operations |                                                       |                                |   |         |        |   |        |        |   |         |         |   |        
| | ---------------------------------------- | ----------------------------------------------------- | ------------------------------ | - | ------- | ------ | - | ------ | ------ | - | ------- | ------- | - | -------
| |                                          | Blood-testing                                         |                                | $ | 59,208  |        | $ | 62,441 |        | $ | 122,848 |         | $ | 113,003
| |                                          | Vaccines                                              |                                |   | (33,938 | )      |   | 794    |        |   | (83,977 | )       |   | (4,508 
| |                                          | Biopharmaceuticals                                    |                                |   | 8,777   |        |   | 8,353  |        |   | 28,026  |         |   | 33,452 
| |                                          | Other                                                 |                                |   | (4,154  | )      |   | 2,163  |        |   | (10,631 | )       |   | 2,774  
| |                                          |                                                       |                                |   |         |        |   |        |       
| |                                          |                                                       | Segment income from operations |   |         | 29,893 |   |        | 73,751 |   |         | 56,266  |   |        
| |                                          |                                                       | Interest expense               |   |         | (6,452 | ) |        | (2,839 | ) |         | (12,377 | ) |        
| |                                          |                                                       | Interest and other income, net |   |         | 19,809 |   |        | 11,613 |   |         | 35,883  |   |        
| |                                          |                                                       | Minority interest              |   |         | (459   | ) |        | (581   | ) |         | (1,079  | ) |        
| |                                          |                                                       |                                |   |         |        |   |        |       
| |                                          | Income from continuing operations before income taxes |                                | $ | 42,791  |        | $ | 81,944 |        | $ | 78,693  |         | $ | 163,370
| |                                          |                                                       |                                |   |         |        |   |        |       

Note 7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 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.

20

---



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 payable in cash.

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.

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 approximated 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 June 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 June 30,
2004, there remains outstanding $80.1 million in aggregate principal amount at maturity and an accreted balance of $46.8 million for the LYONs.

21

---



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 11.0 million Euro ($13.4 million at
June 30, 2004) for research purposes. Under these facilities, Chiron has an outstanding balance of 3.0 million Euro ($3.6 million) as of June 30, 2004 with interest rates
that range from 2% to 6% and maturities that range from 2010 to 2013.

Note 8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 June 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 an aggregate of
approximately $17.5 million in lease payments through 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 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

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

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

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

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 reported as a "Gain from discontinued operations", as discussed in Note 3 "Discontinued Operations" and a continuing operations tax
benefit of $1.1 million for the three and six months ended June 30, 2004.

Note 9Subsequent Events

On July 2, 2004, Chiron acquired Sagres Discovery (Sagres), a privately held company headquartered in Davis, California. Sagres focuses on the discovery
and validation of targets with potential application to the development of cancer therapeutics. Sagres will be part of the Biopharmaceuticals segment. Chiron acquired Sagres for a preliminary purchase
price of $11.8 million.

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

Overview

This 10-Q contains forward-looking statements regarding our expectations, hopes or intentions regarding the future, including
statements relating to sales growth, product development initiatives, new product marketing, acquisitions, competition, in- and out-licensing activities and expected cost
savings that involve risks and uncertainties and are subject to change. You should read the discussion below in conjunction with Part I, Item 1.,"Financial Statements," of this 10-Q
and Part II, Items 7., 7A. and 8., "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and
"Financial Statements and Supplementary Data," respectively, of our Annual Report on Form 10-K for the year ended December 31, 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. Our actual
performance may differ from current expectations due to many factors, including the outcome of clinical trials, regulatory review and approvals, manufacturing capabilities, intellectual property
protections and defenses, stock-price and interest-rate volatility, and marketing effectiveness. In particular, there can be no assurance that we will increase sales of existing products,
successfully develop and receive approval to market new products, or achieve market acceptance for such new products. There can be no assurance that our out-licensing activity will
generate significant revenue, 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. Consistent
with SEC Regulation FD, we do not undertake an obligation to update the forward-looking information contained in this 10-Q.

We
are a global pharmaceutical company that participates in three healthcare markets: blood-testing, vaccines and biopharmaceuticals. Chiron is 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.

The
blood-testing segment consists of an alliance with Gen-Probe Incorporated 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
vaccines segment consists of flu vaccines, including Fluvirin®, a product we obtained as part of our third quarter 2003 acquisition of PowderJect Pharmaceuticals
(discussed below), a meningococcal vaccine, travel vaccines, which include rabies and tick-borne encephalitis vaccines and two other products we obtained as part of our acquisition of
PowderJect Pharmaceuticals, 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.

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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.

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.

On
July 8, 2003, we acquired PowderJect Pharmaceuticals plc, a company based in Oxford, England that develops and commercializes vaccines. We accounted for the acquisition of this
business under the purchase method of accounting and included PowderJect Pharmaceuticals' operating results in our
consolidated operating results beginning July 8, 2003. PowderJect Pharmaceuticals is part of our vaccines segment.

Income
from continuing operations was $32.1 million, or $0.17 per diluted share, and $61.5 million or $0.32 per diluted share, for the three months ended June 30,
2004 and 2003, respectively and $59.0 million, or $0.31 per diluted share, and $122.5 million, or $0.65 per diluted share, for the six months ended June 30, 2004 and 2003,
respectively. These declines were primarily due to (i) the effect of our acquisition of PowderJect, which includes amortization expense from intangible assets associated with the acquisition
and (ii) the contractual decline in the Betaseron® royalty rate. As a result of our acquisition of PowderJect, which has flu sales primarily in the second half of the year, our
earnings per share from continuing operations declined $0.12 per diluted share for the three months ended June 30, 2004 and $0.23 per diluted share for the six months ended June 30,
2004. Our earnings per share from continuing operations declined $0.04 per diluted share for the three months ended June 30, 2004 and $0.08 per diluted share for the six months ended
June 30, 2004 as a result of the decline in the Betaseron® royalty rate.

Total
revenues were $393.6 million and $350.3 million for the three months ended June 30, 2004 and 2003, respectively, and $773.3 million and
$671.3 million for the six months ended June 30, 2004 and 2003, respectively. Product sales were $295.1 million and $245.9 million for the three months ended
June 30, 2004 and 2003, respectively, and $576.2 million and $464.5 million for the six months ended June 30, 2004 and 2003, respectively. 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 six months ended June 30, 2004, respectively. However, since our Euro and British Pound expenses have also increased due to the movement in exchange rates, our earnings per
share from continuing operations declined $0.01 and $0.03 per diluted share for the three and six months ended June 30, 2004, respectively, due to higher expenses compared to revenues in Euros
and British Pounds.

For
the three months ended June 30, 2004, increases in product sales were seen across all three of our business units, in particular Procleix® products,
TOBI® tobramycin, travel vaccines and Proleukin®. For the six months ended June 30, 2004, increases in product sales were also seen across all three of our business
units, in particular Procleix® products, TOBI®, pediatric and other vaccines, travel vaccines and Proleukin®. Revenues from the joint business arrangement, royalty
and license fees, collaborative agreement revenues and other revenues were $98.5 million and $104.3 million for the three months ended June 30, 2004 and 2003, respectively, and
$197.1 and $206.8 million for the six months ended June 30, 2004 and 2003, respectively. For the three months ended June 30, 2004 as compared to the three months ended
June 30, 2003, these revenues decreased primarily due to the decline in the Betaseron® royalty rate and the timing of license fees from our intellectual property portfolio. The

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decrease
was offset by increased profitability of the joint business arrangement and contract manufacturing activities. For the six months ended June 30, 2004 compared to the six months ended
June 30, 2003, these revenues decreased primarily due to the Biogen and Serono settlements in connection with the McCormick patents owned by Schering's U.S. subsidiary, Berlex, reported in the
six months ended June 30, 2003, the decline in the Betaseron® royalty rate and the timing of license fees from our intellectual property portfolio. This decrease was offset by
increased profitability of the joint business arrangement, contract manufacturing activities and royalties from our hepatitis C virus and HIV-related patents.

Gross
margins were 56% and 60% for the three months ended June 30, 2004 and 2003, respectively, and 55% and 61% for the six months ended June 30, 2004 and 2003,
respectively. For the three and six months ended June 30, 2004, gross margins decreased due to a decline in the gross margin of the vaccines business, a reduction in the royalty rate related to
Betaseron® and the increased cost of producing the Betaseron® pre-filled diluent syringe.

Research
and development expenses were $100.3 million and $89.9 million for the three months ended June 30, 2004 and 2003, respectively, and $198.7 million
and $172.0 million for the six months ended June 30, 2004 and 2003, respectively. Research and development expenses for PowderJect Pharmaceuticals were $0.9 million and
$7.7 million for the three and six months ended June 30, 2004. Research and development expenses associated with PowderJect Pharmaceuticals declined for the three months ended
June 30, 2004 as we completed the planned divestiture of certain research operations in Madison, Wisconsin and Oxford, England. For the three and six months ended June 30, 2004,
excluding PowderJect, the main beneficiaries of this increase include tifacogin, our meningococcal vaccines franchise, our flu cell culture program, cyclosporine solution for inhalation,
CHIR-258, a growth factor kinase inhibitor and our first small molecule oncology compound in development, and a dry powder formulation of inhaled TOBI®. These increases were
partially offset by decreases due to transfer of responsibility for the SILCAAT trial, discontinuance of development of tezacitabine and PA-2794 and lower costs related to the development
of new manufacturing processes for Betaseron®.

Selling,
general and administrative expenses were $106.9 million and $80.2 million for the three months ended June 30, 2004 and 2003, respectively, and
$211.6 million and $153.3 million for the six months ended June 30, 2004 and 2003, respectively. PowderJect Pharmaceuticals, including associated integration costs, contributed
approximately $8.0 million and $18.6 million for the three and six months ended June 30, 2004. The remaining increase in selling, general and administrative expenses resulted from
additional costs associated with increase in sales across our businesses, investment in geographic penetration, defense of our patents and technology, increased headcount and ongoing sales and
marketing programs.

The
effective tax rate for the three and six months ended June 30, 2004 and 2003 was 25% of pretax income from continuing operations.

Critical Accounting Policies and The Use of Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures of 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

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not
readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

Our
blood-testing segment includes 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 2003, we had 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 six months ended June 30, 2003.

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.

Results of Operations

Blood-testing

Product salesOur blood-testing segment recognized product sales of $67.2 million and $53.1 million for the
three months ended June 30, 2004 and 2003, respectively, and $135.3 million and $101.6 million for the six months ended June 30, 2004 and 2003, respectively.

Procleix®On February 27, 2002, the U.S. Food and Drug Administration approved the Procleix®
HIV-1/HCV Assay. Under a collaboration agreement with Gen-Probe Incorporated, we market and sell the Procleix® HIV-1/HCV Assay and the related
instrument system. In addition to selling directly in the U.S., we also sell in various European and Asia/Pacific markets, directly and through distributors. We 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 the provision of service on the instruments, we recognize
revenue ratably over the life of the service agreement.

Worldwide
product sales related to tests, instruments and the provision of services were $60.6 million and $46.0 million for the three months ended June 30, 2004 and
2003, respectively, and $122.5 million and $88.1 million for the six months ended June 30, 2004 and 2003, respectively. The increase in product sales for the three and six months
ended June 30, 2004 as compared with the three and six months ended June 30, 2003 primarily related to (i) the introduction of the West Nile virus assay on an
investigational-use basis in the U.S. and (ii) market share gains in the U.S. and continued
penetration into several markets abroad for the Procleix® HIV-1/HCV Assay. In March 2003, the U.S. Food and Drug Administration accepted an investigational new drug
(IND) for the West Nile virus assay. The new assay runs on the same instrumentation platform as the currently approved Procleix® HIV-1/HCV assay.

Ortho-Clinical DiagnosticsUnder the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., we
manufacture bulk reagents and antigens and confirmatory test kits for

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immunodiagnostic
products. We recognized product sales under this arrangement of $6.6 million and $7.1 million for the three months ended June 30, 2004 and 2003, respectively, and
$12.8 million and $13.5 million for the six months ended June 30, 2004 and 2003, respectively. The decrease in product sales for the three and six months ended June 30,
2004 as compared with the three and six months ended June 30, 2003, primarily related to the timing of manufacturing services under the arrangement. We also supply bulk antigens for
Ortho-Clinical Diagnostics to be included in products to be sold by Bayer under a June 2001 agreement with Ortho-Clinical Diagnostics and Bayer Corporation (see also "Royalty and license fee
revenuesBayer" below).

We
expect competitive pressures related to our blood-testing products to continue, primarily as a result of the introduction of competing products into the market, as listed in
Part I, Item 1. "Business-Competition" of our Annual Report on Form 10-K for the year ended December 31, 2003.

Revenue from joint business arrangementRevenues from our joint business contractual arrangement with Ortho-Clinical
Diagnostics, Inc. were $28.5 million and $27.5 million for the three months ended June 30, 2004 and 2003, respectively, and $58.9 million and $53.9 million
for the six months ended June 30, 2004 and 2003, respectively. The increase in revenues from our joint business arrangement for the three months ended June 30, 2004 as compared with the
three months ended June 30, 2003 primarily resulted from (i) increased profitability of Ortho-Clinical Diagnostics' foreign affiliates and (ii) an increase in royalties. These
increases were offset by the timing of Ortho-Clinical Diagnostics' shipments to third parties and an adjustment of the first quarter 2004 estimate of revenue to actual results. The increase in
revenues from our joint business arrangement for the six months ended June 30, 2004 as compared with the six months ended June 30, 2003 primarily resulted from (i) higher profits
from Ortho-Clinical Diagnostics' U.S. operations and foreign affiliates and (ii) an increase in royalties. These increases are offset by a one-time benefit 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 the Ortho-Clinical Diagnostics, Inc.'s non-U.S. affiliate
sales.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Under the Ortho-Clinical Diagnostics, Inc. joint business arrangement, we conduct research and development services related to immunodiagnostic
products. Our blood-testing segment recognized total collaborative agreement revenues of $2.3 million and $2.3 million for the three months ended June 30, 2004 and 2003,
respectively, and $4.4 million and $4.3 million for the six months ended June 30, 2004 and 2003, respectively. The majority of collaborative agreement revenues recognized by our
blood-testing segment related to immunodiagnostic products.

Collaborative
agreement revenues tend to fluctuate based on the amount and timing of research services performed, the status of projects under collaboration and the achievement of
milestones. Due to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate
additional collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners.

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 blood-testing segment recognized royalty and license fee revenues of $16.3 million and $23.2 million for the three months ended
June 30, 2004 and 2003, respectively, and $32.7 million and $38.8 million for the six months ended June 30, 2004 and 2003, respectively. The decrease in royalty and license
fees for the three months ended June 30, 2004 as

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compared
to the three months ended June 30, 2003 as well as the six months ended June 30, 2004 compared with the six month ended June 30, 2003 primarily related to two license
agreements with Baxter A.G. for which we recognized a license fee in the second quarter 2003.

F. Hoffmann-La Roche settlementIn October 2000, we entered into three license agreements with F.
Hoffmann-La Roche Limited and several of its affiliated companies related to the settlement of certain litigation in the U.S. and certain other countries for the use of our hepatitis C
virus and HIV intellectual property. Two agreements relate toin vitrodiagnostic products. See "OtherRoyalty and license fee revenues"
below. The third agreement for blood screening was superseded in May 2001 by two new agreements, one for each of hepatitis C virus and HIV. Revenues under these agreements were
$14.6 million and $14.2 million for the three months ended June 30, 2004 and 2003, respectively, and $29.6 million and $28.6 million for the six months ended
June 30, 2004 and 2003, respectively. The increase for the six months ended June 30, 2004 as compared with the six months ended June 30, 2003 related to a positive adjustment of
the fourth quarter 2003 estimate to actual results. Under these new agreements, royalties continue through the lives of the hepatitis C virus and HIV-related patents covering F.
Hoffmann-La Roche's nucleic acid testing products. Currently, the applicable issued hepatitis C virus-related patents begin to expire in 2015 for the U.S. and in 2010 for Europe.
Currently, the applicable issued HIV-related patent in Europe expires in 2005. An HIV-related patent was issued in the U.S. on March 13, 2003. This patent will expire
seventeen years from the date of issuance. As permitted under the terms of its licensing agreement, F. Hoffmann-La Roche instituted arbitration proceedings in regard to the application of
the U.S. patent. We have
deferred recognition of $5.5 million and $1.3 million as of June 30, 2004 and 2003, of royalty revenue, respectively. During any pending arbitration proceedings, F.
Hoffmann-La Roche remains obligated to make all quarterly royalty payments, subject to a right to be reimbursed by us if it is determined in the arbitration that such royalty payments were
not due.

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

Baxter A.G.In June 2003, we entered into two license agreements with Baxter A.G. related to our hepatitis C virus and
HIV technology for use in the plasma fractionation market for which we recognized a license fee in the second quarter 2003.

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

Gross profitBlood-testing gross profit as a percentage of net product sales was 42% and 46% for the three months ended
June 30, 2004 and 2003, respectively, and 42% and 44% for the six months ended June 30, 2004 and 2003, respectively. The blood-testing gross profit margins for the three months ended
June 30, 2003 as well as for the six months ended June 30, 2003 were positively impacted by an adjustment to cost of goods sold pursuant to our collaboration agreement with
Gen-Probe Incorporated. The blood-testing gross profit margins for the three and six months ended June 30, 2004 benefited from an amendment in November 2003 to the worldwide
blood screening collaboration agreement between Chiron and Gen-Probe Incorporated 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

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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 percentages may fluctuate in future periods as the blood-testing product and customer mix changes.

Research and developmentOur blood-testing segment recognized research and development expenses of $6.3 million and
$5.6 million for the three months ended June 30, 2004 and 2003, respectively, and $11.4 million and $10.8 million for the six months ended June 30, 2004 and 2003,
respectively. The research and development spending in 2004 and 2003 related to the continued development of nucleic acid testing products and activities under the Ortho-Clinical Diagnostics joint
business arrangement.

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

Selling, general, and administrativeOur blood-testing segment recognized selling, general and administrative expenses of
$10.3 million and $9.6 million for the three months ended June 30, 2004 and 2003, respectively, and $19.6 million and $17.6 million for the six months ended
June 30, 2004 and 2003, respectively. The increased selling, general and administrative expenses for the three months ended June 30, 2004 as compared with the three months ended
June 30, 2003, as well as for the six months ended June 30, 2004 compared with the six months ended June 30, 2003, related to increased headcount to support the expansion of our
customer base for the Procleix® HIV-1/HCV Assay in the U.S., Europe and other international markets.

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

Vaccines

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. Vaccine product sales were $101.0 million and $85.6 million for the three months ended June 30, 2004 and 2003, respectively,
and $187.4 million and $154.0 million for the six months ended June 30, 2004 and 2003, respectively.

Sales
of our flu vaccines were $8.2 million and $3.8 million for the three months ended June 30, 2004 and 2003, respectively, and $15.9 million and
$8.0 million for the six months ended June 30, 2004 and 2003, respectively. Flu vaccines sales increased for the three months ended June 30, 2004 as compared with the three month
ended June 30, 2003 primarily as a result of sales to South Korea. PowderJect Pharmaceuticals flu vaccine sales were $2.4 million for the six months ended June 30, 2004. Excluding
PowderJect Pharmaceuticals, sales of our remaining flu vaccines increased for the six months ended June 30, 2004 compared with the six months ended June 30, 2003 primarily as a result of
additional sales
to South Korea and Argentina and the benefit of the movement in the Euro to U.S. Dollar exchange rate.

Sales
of Menjugate®, our conjugate vaccine against meningococcal infection caused by the bacterium N. meningitidis serogroup C, were $5.0 million and
$13.7 million for the three months ended June 30, 2004 and 2003, respectively, and $9.6 million and $21.2 million for the six months ended June 30, 2004 and 2003,
respectively. The decrease in Menjugate® sales for the three months ended June 30, 2004 as compared with the three months ended June 30, 2003 as well as for the six months
ended June 30, 2004 compared with the six months ended June 30, 2003 was primarily driven by (i) an Australian tender in the state of New South Wales in the second quarter 2003,
(ii) the timing of

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outbreaks
and vaccination programs in various countries and (iii) increased competition for tender sales.

Sales
of our travel vaccines, comprised of tick-borne encephalitis and rabies vaccines and two products we obtained as part of our third quarter 2003 acquisition of
PowderJect Pharmaceuticals, Arilvax, and Dukoral, were $40.1 million and $23.1 million for the three months ended June 30, 2004 and 2003, respectively, and $63.1 million
and $48.8 million for the six months ended June 30, 2004 and 2003, respectively. The increase in travel vaccines for the three months ended June 30, 2004 as compared with the
three months ended June 30, 2003 as well as the six months ended June 30, 2004 as compared with the six months ended June 30, 2003 is primarily due to (i) increased demand
for our rabies vaccines in the U.S., primarily due to a product recall from a competitor, Europe and Asia, (ii) increased sales of our tick-borne encephalitis vaccines, which is
typically sold in the first half of the year and (iii) additional sales of travel vaccine products following our acquisition of PowderJect Pharmaceuticals.

Sales
of our pediatric and other vaccines were $47.6 million and $45.0 million for the three months ended June 30, 2004 and 2003, respectively, and
$98.8 million and $75.9 million for the six months ended June 30, 2004 and 2003, respectively. The increase in pediatric and other vaccines sales for the three months ended
June 30, 2004 as compared with the three months ended June 30, 2003 was primarily due to increased sales following our acquisition of PowderJect Pharmaceuticals. The increase in
pediatric and other vaccines for the six months ended June 30, 2004 compared with the six months ended June 30, 2003 was primarily due to (i) the timing of tender sales for our
polio vaccines and diphtheria, tetanus and pertussis vaccines and (ii) increased sales following our acquisition of PowderJect Pharmaceuticals, partially offset by the timing of tender sales of
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. 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 many of our vaccine products to continue into the future, primarily as a result of the introduction of competing products into the market,
including, but not limited to, new combination vaccines, as listed in Part I, Item 1., "BusinessCompetition" of our Annual Report on Form 10-K for the year ended
December 31, 2003.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Our vaccines segment recognized collaborative agreement revenues of $1.2 million for the three months ended June 30, 2004 primarily related to
increased collaboration agreement revenues following our acquisition of PowderJect Pharmaceuticals. Our vaccines segment recognized collaborative agreement revenues of $5.2 million for the six
months ended June 30, 2004 primarily related to an agreement to supply a vaccine for meningococcal meningitis caused by the bacterium N. meningitidis serogroup B to the Ministry of Health in
New Zealand and increased collaborative agreement revenues following our acquisition of PowderJect Pharmaceuticals.

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

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Royalty and license fee revenuesOur vaccines segment earns royalties on third party sales of, and license fees on, several
products. The vaccines segment recognized royalty and license fee revenues of $3.3 million for the three months ended June 30, 2003, and $2.7 million and $6.5 million for
the six months ended June 30, 2004 and 2003, respectively. Royalty and license fee revenues for the vaccines segment for the three months ended June 30, 2004 were not material.

GlaxoSmithKlineAn agreement with GlaxoSmithKline plc provides for royalties on sales of certain vaccine products. Under this
agreement, we recognized $1.4 million and $3.4 million of such royalties for the six months ended June 30, 2004 and 2003, respectively. Under this agreement, any future royalties
have ceased.

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.

Other revenuesOur vaccines segment recognized other revenues of $5.9 million and $3.2 million for the three
months ended June 30, 2004 and 2003, respectively, and $9.6 million and $6.0 million for the six months ended June 30, 2004 and 2003, respectively.

Grant and contract revenuesOur vaccines segment other revenues included grant and contract revenues of $5.1 million
and $2.5 million for the three months ended June 30, 2004 and 2003, respectively, and $8.0 million and $4.7 million for the six months ended June 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 $3.1 million and $2.3 million for the three months ended June 30, 2004 and 2003, respectively, and $5.5 million and $4.1 million
for the six months ended June 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 profitVaccines gross profit as a percentage of net product sales was 42% and 56% for the three months ended
June 30, 2004 and 2003, respectively, and 38% and 52% for the six months ended June 30, 2004 and 2003, respectively. The decrease in gross profit margins for the three months ended
June 30, 2004 as compared with the three months ended June 30, 2003 was primarily due to additional product reserves in the second quarter 2004 as well as reduced sales and margins of
the Menjugate® product. The decrease in gross profit margins for the six months ended June 30, 2004 as compared with the six months ended June 30, 2003 was primarily due to
the addition of PowderJect facilities, a portion of which traditionally is not in flu production for a significant part of the first quarter, and additional product reserves in the second quarter 2004
as well as reduced sales and margins of the Menjugate® product.

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

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Research and developmentOur vaccines segment recognized research and development expenses of
$31.9 million and
$26.8 million for the three months ended June 30, 2004 and 2003, respectively, and $66.3 million and $47.4 million for the six months ended June 30, 2004 and 2003,
respectively. The increase in research and development spending for the three months ended June 30, 2004 as compared with the three months ended June 20, 2003, as well as for the six
months ended June 30, 2004 compared with the six months ended June 30, 2003, resulted mainly from the advancement of several programs in our meningococcal franchise and flu cell culture.
Also, there was $0.9 million and $7.7 million of incremental research and development expenses for the three and six months ended June 30, 2004, respectively, following our third
quarter of 2003 acquisition of PowderJect. Research and development expenses associated with PowderJect declined for the three months ended June 30, 2004 as we completed the planned divestiture
of certain research operations in Madison, Wisconsin and Oxford, England.

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

Selling, general, and administrativeOur vaccines segment recognized selling, general and administrative expenses of
$35.9 million and $24.7 million for the three months ended June 30, 2004 and 2003, respectively, and $74.9 million and $46.8 million for the six months ended
June 30, 2004 and 2003, respectively. The increase in selling, general and administrative expenses for the three months ended June 30, 2004 as compared with the three months ended
June 30, 2003, as well as the six months ended June 30, 2004 compared with the six months ended June 30, 2003 primarily related to additional expenses following our third quarter
of 2003 acquisition of PowderJect. Excluding $8.0 million and $18.6 million of additional selling, general and administrative expenses, including integration costs, associated with
PowderJect Pharmaceuticals for the three and six months ended June 30, 2004, respectively, the remaining increase in selling, general and administrative resulted from ongoing sales and
marketing programs and headcount additions.

Amortization expenseOur vaccines segment recognized amortization expense of $14.9 million and $1.5 million for
the three months ended June 30, 2004 and 2003, respectively, and $30.0 million and $2.9 million for the six months ended June 30, 2004 and 2003. The increase in
amortization expense for the three months ended June 30, 2004 as compared with the three months ended June 30, 2003, as well as the six months ended June 30, 2004 compared with
six months ended June 30, 2003 related to the intangibles acquired following our third quarter of 2003 acquisition of PowderJect.

Biopharmaceuticals

Product salesBiopharmaceutical product sales were $126.9 million and $107.3 million for the three months ended
June 30, 2004 and 2003, respectively, and $253.4 million and $209.0 million for the six months ended June 30, 2004 and 2003, respectively. Biopharmaceutical 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

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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, discussed in "Royalty and license fee revenuesBetaferon® interferon beta-1b" below,
(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®.

Betaseron®
product sales were $31.6 million and $30.5 million for the three months ended June 30, 2004 and 2003, respectively, and $61.8 million
and $59.8 million for the six months ended June 30, 2004 and 2003, respectively. The increase in Betaseron® product sales for the three months ended June 30, 2004 as
compared with the three months ended June 30, 2003 primarily related to (i) increased sales of clinical materials, (ii) price increases and (iii) increased patient demand
attributed to key marketing programs. These increases were partially offset by a decline in the royalty rate by five percentage points pursuant to our contractual agreement with Schering and by
fluctuations in ordering patterns.

The
increase in Betaseron® product sales for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 primarily related to
(i) price increases, (ii) increased patient demand attributed to key marketing programs, (iii) increased sales of clinical materials and (iv) the benefit of foreign
exchange rates. These increases were partially offset by a decline in the royalty rate by five percentage points pursuant to our contractual agreement with Schering and by fluctuations in ordering
patterns.

TOBI® tobramycinWe sell TOBI® directly in the U.S. and certain international markets. We recognized
TOBI® sales of $51.3 million and $39.0 million for the three months ended June 30, 2004 and 2003, respectively, and $103.9 million and $79.7 million for
the six months ended June 30, 2004 and 2003, respectively. Increased TOBI® sales for the three months ended June 30, 2004 as compared with the three months ended
June 30, 2003, as well as for the six months ended June 30, 2004 compared with the six months ended June 30, 2003, primarily related to (i) wholesaler ordering patterns,
(ii) increased patient demand in the U.S., (iii) price increases and (iv) the benefit of the movement in the Euro to U.S. Dollar exchange rate.

Proleukin® (aldesleukin)Sales were $35.1 million and $29.4 million for the three months ended
June 30, 2004 and 2003, respectively, and $66.9 million and $55.4 million for the six months ended June 30, 2004 and 2003, respectively. The increase in
Proleukin® product sales for the three months ended June 30, 2004 as compared with the three months ended June 30, 2003, as well as for the six months ended June 30,
2004 as compared with the six months ended June 30, 2003 is primarily related to (i) wholesaler ordering patterns, (ii) price increases and (iii) the benefit of the
movement in the Euro to U.S. Dollar exchange rate.

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.
We expect competitive pressures related to many of our biopharmaceutical products to continue into the future, primarily as a result of the introduction of competing products into the market, as
listed in

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Part I,
Item 1., "BusinessCompetition" of our Annual Report on Form 10-K for the year ended December 31, 2003.

Collaborative agreement revenuesWe recognize collaborative agreement revenues for fees received as we perform research
services and achieve specified milestones. Our biopharmaceuticals segment recognized collaborative agreement revenues of $0.3 million and $1.1 million for the three months ended
June 30, 2004 and 2003, respectively, and $0.8 million and $3.3 million for the six months ended June 30, 2004 and 2003, respectively. The decline for the three months
ended June 30, 2004 as compared with the three months ended June 30, 2003 is due to the near completion of our fourth quarter 2002 collaboration activities under our collaboration
agreement and license agreement with GlaxoSmithKline plc related to certain of our MC-4R compound patents. The decline for the six months ended June 30, 2004 as compared with the
six months ended June 30, 2003 is due to the near completion of our fourth quarter 2002 collaboration activities under our collaboration agreement and license agreement with GlaxoSmithKline plc
related to certain of our MC-4R compound patents and due to completion in the first quarter 2003 of our 2001 collaboration agreement with Taisho Pharmaceuticals Co. Ltd. to target
macrolide mediated gene discovery.

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. The biopharmaceuticals segment recognized royalty and license fee revenues of $15.2 million and $20.8 million for the three months ended
June 30, 2004 and 2003, respectively, and $32.5 million and $38.6 million for the six months ended June 30, 2004 and 2003, respectively.

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 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.

For
the three months ended June 30, 2004 and 2003, we recognized Betaferon® royalties of $11.6 million and $17.2 million, respectively, and for the six
months ended June 30, 2004 and 2003, we recognized Betaferon® royalties of $25.4 million and $31.1 million, respectively, under this arrangement.
Betaferon® royalties decreased for the three months ended June 30, 2004 as compared with the three months ended June 30, 2003 as well as for the six months ended
June 30, 2004 as compared with the six months ended June 30, 2003 primarily due to a decline in the royalty rate by five percentage points, pursuant to our contractual agreement with
Schering, partially offset by (i) an increase in demand, (ii) the benefit of the movement in the Euro to U.S. Dollar exchange rate and (iii) the benefit of a reduction of the
allocated cost under a three-year limited cost sharing arrangement under the transitional supply agreement with Schering.

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We
began supplying Betaferon® to Schering in the fourth quarter 2002 for certain additional European markets, which was previously supplied by Boehringer Ingelheim. 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 exact 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. We recognized
$0.9 million and $1.9 million for the three months ended June 30, 2004 and 2003, respectively, and $2.3 million and $3.9 million for the six months ended
June 30, 2004 and 2003, respectively, under this arrangement. Patents related to the production of insulin and glucagon began expiring in late 2003 and as a result, royalty revenues recognized
under this arrangement are declining significantly.

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. We have no assurance that we will be able to do so or that future royalty and license fee revenues will not decline.

Other revenuesOur biopharmaceuticals segment recognized other revenues of $4.8 million and $3.2 million for
the three months ended June 30, 2004 and 2003, respectively, and $7.9 million and $18.8 million for the six months ended June 30, 2004 and 2003, respectively.

Contract manufacturing revenuesOur biopharmaceuticals segment recognized contract manufacturing revenues of
$4.7 million and $3.0 million for the three months ended June 30, 2004 and 2003, respectively, and $7.5 million and $3.1 million for the six months ended
June 30, 2004 and 2003, respectively. The fluctuation resulted from the level of activity and the timing of contract manufacturing activities.

Biogen and Serono settlementsA U.S. Court of Appeals partially reversed a District Court ruling in connection with certain
patents owned by Chiron and licensed exclusively to Schering AG's U.S. subsidiary, Berlex Laboratories. As a result of the ruling and prior agreements between Biogen and Berlex, Biogen was required to
make a settlement payment to Schering. In accordance with an earlier contract between Chiron and Berlex, we recognized approximately $13.0 million during the six months ended June 30,
2003, which represented our share of this settlement payment. In addition, there was a similar settlement between Berlex and Serono of which we recognized approximately $1.4 million during the
six months ended June 30, 2003.

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

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

Gross profitBiopharmaceutical gross profit as a percentage of net product sales was 74% and 71% for the three months ended
June 30, 2004 and 2003, respectively, and 75% for each of the six months ended June 30, 2004 and 2003, respectively. The increase in biopharmaceutical gross profit margins for the three
months ended June 30, 2004 as compared with the three months ended June 30, 2003 was
primarily the result of price increases and improved efficiencies in production, partially offset by 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 was consistent for the six months ended June 30, 2004 as
compared with the six months ended June 30, 2003. Price increases and improved efficiencies in production were offset by the contractual change in the royalty rate related to the sale of
Betaseron® and the increased costs associated with pre-filled diluent syringe for Betaseron®.

Biopharmaceutical
gross profit percentages 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, by five percentage points pursuant to our contractual agreement
with Schering and as the biopharmaceutical product and customer mix changes.

Research and developmentOur biopharmaceuticals segment recognized research and development expenses of $61.8 million
and $57.4 million for the three months ended June 30, 2004 and 2003, respectively, and $120.4 million and $113.7 million for the six months ended June 30, 2004 and
2003, respectively.

The
increase in research and development spending for the three months ended June 30, 2004 as compared with the three months ended June 30, 2003, as well as for the six
months ended June 30, 2004 as compared with the six months ended June 30, 2003, primarily related to activities related to the development of (i) tifacogin, as discussed
below,(ii) CHIR-258, a growth factor kinase inhibitor and our first small-molecule oncology compound in development, (iii) cyclosporine solution for inhalation, a therapy
under evaluation for the treatment of rejection and reduction of mortality in lung transplant patients, and (iv) a dry powder formulation of inhaler, TOBI®. These increases were
partially offset by (i) 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, (ii) decline in spending due to discontinuance of development of PA-2794, (iii) decrease in spending on development of manufacturing processes for
Betaseron®, and (iv) decrease in spending on the SILCAAT trial, as described below.

In
the fourth quarter 2002, we reached an agreement in principle to transfer responsibility for the SILCAAT (referred to also as Proleukin® (aldesleukin) for HIV) 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 are
expected to decrease in 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 $9.0 million has been paid through June 30, 2004.

In
October 2003, we acquired all of Pfizer, Inc.'s, formerly Pharmacia Corp.'s, interest in tifacogin, in return for which Pfizer will receive royalties on future sales of
tifacogin. In the second quarter 2004, we began enrolling patients in our Phase III trial for tifacogin as a treatment for patients with severe community-acquired pneumonia.

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

Selling, general, and administrativeOur biopharmaceuticals segment recognized selling, general and administrative expenses
of $33.2 million and $28.7 million for the three months ended June 30, 2004 and 2003, respectively, and $65.2 million and $54.9 million for the six months ended
June 30, 2004 and 2003, respectively. The increase in selling, general and administrative expenses for the three months ended June 30, 2004 as compared with the three months ended
June 30, 2003, as well as the six months ended June 30, 2004 compared with six months ended June 30, 2003, related to increased expenses for programs and headcount in support of
TOBI® and Proleukin®, and the Euro to U.S. Dollar exchange rate fluctuation, partially offset by lower consulting costs to enhance business processes.

Amortization expenseOur biopharmaceuticals segment recognized amortization expense of $6.2 million for each of the
three months ended June 30, 2004 and 2003, respectively, and $12.5 million and $12.4 million for the six months ended June 30, 2004 and 2003, respectively.

Other

Royalty and license fee revenuesOur other segment earns royalties on third party sales of, and license fees on, several
products. Our other segment recognized royalty and license fee revenues of $23.7 million and $19.6 million for the three months ended June 30, 2004 and 2003, respectively, and
$42.1 million and $36.4 million for the six months ended June 30, 2004 and 2003, respectively. 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.

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

Under
the hepatitis C virus agreement, we received $85.0 million, of which we recognized $40.0 million in the fourth quarter 2000. We deferred the remaining
$45.0 million, which becomes nonrefundable 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 F. Hoffmann-La Roche's use of our hepatitis C
virus-related patent in itsin vitrodiagnostic products. The agreement also provides for royalties on future sales related to F.
Hoffmann-La Roche's use of our hepatitis C virus-related patent in itsin vitrodiagnostic products, which commenced in the first quarter
2001. Royalty revenues increased for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003 as well as for the six months ended June 30, 2004 as
compared with the six months ended June 30, 2003, primarily as a result of an increase in quarterly minimum amounts we recognize under this agreement, an increase in the positive adjustment of
estimated to actual royalty revenue recorded in the subsequent quarter and increased product sales recognized by F. Hoffman-La Roche.

The
HIV agreement also provides for royalties on future sales related to F. Hoffmann-La Roche's use of our HIV-related patent in itsin
vitrodiagnostic products, which commenced in the first quarter 2001 when the European Patent Office Board of Technical Appeals upheld our HIV-related patent.
Royalty revenues recognized under this agreement for the three and six months ended June 30, 2004 were consistent with the three and six months ended June 30, 2003, respectively.

Under
these agreements, such royalties will continue through the lives of the hepatitis C virus and HIV-related patents covering F. Hoffmann-La Roche's nucleic
acid testing products. Currently, the applicable issued hepatitis C virus-related patents expire in 2015 for the U.S. and in 2010 for Europe.

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Currently,
the applicable issued HIV-related patent in Europe expires in 2005. An HIV-related patent directed to nucleic acid testing methods for HIV-1 was issued
in the U.S. on March 13, 2003. 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
F. Hoffmann-La Roche, which was received in April 2003. As permitted under the terms of its licensing agreement, F. Hoffmann-La Roche has decided to institute
arbitration proceedings in regard to the application of the U.S. patent. We have deferred recognition of this $10.8 million milestone payment and interest as of June 30, 2004 and
$16.3 million and $3.8 million of royalty revenue as of June 30, 2004 and 2003, respectively. During any pending arbitration proceedings, F. Hoffmann-La Roche remains
obligated to make all quarterly royalty payments, subject to a right to be reimbursed by Chiron if it is determined in the arbitration that such royalty payments were not due.

BayerA cross-license agreement provides for royalties to us on HIV and hepatitis C virus products sold by Bayer, which
increased for the three months ended June 30, 2004 as compared with the three months ended June 30, 2003, due to increased donations. The six months ended June 30, 2004 as
compared with the six months ended June 30, 2003 increased primarily due to (i) additional royalties under the HIV-related patent issued in the U.S. in March 2003,
discussed above, (ii) increased royalty rates and (iii) increase donations.

Abbott LaboratoriesA cross-license agreement provides for royalties to us on HIV and hepatitis C virus products sold by
Abbott. We recognized royalty and license fee revenues under this agreement in the second quarter 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 administrativeOur other segment recognized selling, general and administrative expenses of
$27.4 million and $17.2 million for the three months ended June 30, 2004 and 2003, respectively, and $52.0 million and $34.0 million for the six months ended
June 30, 2004 and 2003, respectively. The increases in selling, general and administrative for the three and six months ended June 30, 2004 as compared with the three and six months
ended June 30, 2003 were primarily due to higher litigation costs related to the defense of our patents and technology, higher facility related costs, higher employee related expenses and
higher consulting expenses.

Interest expenseWe recognized interest expense of $6.5 million and $2.8 million for the three months ended
June 30, 2004 and 2003, respectively, and $12.4 million and $6.3 million the six months ended June 30, 2004 and 2003, respectively. The increase in interest expense for the
three and six months ended June 30, 2004 as compared with the three and six months ended June 30, 2003 primarily related to interest expense recognized on the $500.0 million
convertible debentures that were issued on July 30, 2003.

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 $5.8 million and $6.3 million for the three months ended June 30, 2004
and 2003, respectively, and $10.9 million and $13.3 million for the six months ended June 30, 2004 and 2003, respectively. The decreases in interest income for the three and six
months ended June 30, 2004 as compared with the three and six months ended June 30, 2003 were primarily due to lower average cash and investment balances following the acquisition of
PowderJect Pharmaceuticals.

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We
recognized gains of $14.3 million and $4.8 million for the three months ended June 30, 2004 and 2003, respectively, and $24.0 million and
$9.4 million for the six months ended June 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 six months ended
June 30, 2004 and 2003, respectively.

Income taxesThe effective tax rate for the three and six months ended June 30, 2004 and 2003 was 25% of pretax income
from continuing operations. 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 Pharmaceuticals 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 Pharmaceuticals' profits are earned in the United Kingdom subject to a 30% marginal tax rate.

Discontinued operationsDuring the three months ended June 30, 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 for the three months ended June 30, 2004 a tax benefit of $12.5 million for
discontinued operations.

Chiron
and 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 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 in excess of the required payments for
the indemnity obligations in the first quarter of 2004. This settlement resulted in a benefit of $0.3 million and an income tax benefit of $12.5 million, resulting in a net gain of
$12.8 million, which was reported as a "Gain from discontinued operations" for the six months ended June 30, 2004.

During
the three months ended June 30, 2003, we reversed approximately $0.5 million related to unutilized reserves of Chiron Diagnostics and Chiron Vision, which were
recorded as a "Gain from discontinued operations" for the three months ended June 30, 2003.

During
the three months ended March 31, 2003, Chiron and Bayer Corporation reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase
Agreement dated September 17, 1998, between Chiron and Bayer 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 reported as a "Gain from discontinued operations" for the six months ended June 30, 2003.

Liquidity and Capital Resources

Our capital requirements have generally been funded by cash flow from operations, borrowings from commercial banks and issuance of debt securities and common
stock. Our cash, cash equivalents and investments in marketable debt securities, which totaled $1,034.0 million at June 30, 2004, are invested in a diversified portfolio of financial
instruments, including money market funds and

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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.

On
June 12, 2004, certain Liquid Yield Option Notes (LYONs) holders, at their option, tendered $649.9 million in aggregate principal amount at maturity of LYONs, which were
purchased by us. 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 June 30, 2004, there remains $80.1 million in aggregate principal amount at maturity and an accreted balance of $46.8 million for the LYONs.

On
June 22, 2004, we 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 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 leasing arrangements, will be sufficient to meet our foreseeable
operating cash requirements including any cash utilized under our stock repurchase program and our contractual obligations. In addition, we believe we could access additional funds from the debt and
capital markets.

Sources and uses of cashWe had cash and cash equivalents of $595.0 million and $876.0 million at
June 30, 2004 and 2003, respectively.

Operating activitiesFor the six months ended June 30, 2004, net cash provided by operating activities was
$74.7 million as compared with $112.7 million for the six months ended June 30, 2003. The decrease in cash provided by operating activities primarily was due to lower income from
continuing operations before depreciation and amortization and non-cash charges mainly from higher costs in our vaccines segment related to the effect of our acquisition of PowderJect.
This was partially offset by higher royalty payments received under the Roche royalty arrangements for the six months ended June 30, 2004. In addition, the cash provided by operations for the
six months ended June 30, 2003 was negatively impacted by tax payments and a payment to Bayer Corporation as a result of a settlement agreement relating to certain claims raised by Bayer in
connection with the Stock Purchase Agreement dated September 17, 1998 and positively impacted by $14.4 million of cash received as a result of the Biogen and Serono settlements in
connection with the McCormick patents during the six months ended June 30, 2003.

Investing activitiesFor the six months ended June 30, 2004, net cash provided by investing activities consisted of
proceeds from sales and maturities of investments in marketable debt securities of $508.1 million, proceeds from the sale of equity securities and interests in affiliated companies of
$16.3 million and other proceeds of $0.8 million. Cash provided by investing activities was offset by purchases of investments in marketable debt securities of $218.8 million,
capital expenditures of $93.8 million, cash paid for acquisitions, net of cash acquired of $19.5 million, which consists of $15.5 million of cash delivered on the divestiture of
certain research operations in Madison, Wisconsin and Oxford, England and certain vaccines operations in Sweden and $4.0 million for previously accrued costs in connection with the acquisition
of PowderJect, purchases of equity securities and interests in affiliated companies of $4.3 million.

In
2003, our Board of Directors approved $50.7 million in expenditures for a 25-year lease for buildings and $42.2 million for capital improvements, both of
which are part of a $97.0 million project for a new flu vaccines manufacturing facility in Liverpool, England. The new manufacturing facility will replace existing flu vaccines manufacturing
facilities in Liverpool, England. In December 2003, we

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entered
into a 25-year lease for these buildings. As of June 30, 2004, we have incurred $6.3 million for these capital improvements.

For
the six months ended June 30, 2003, net cash provided by investing activities consisted of proceeds from sales and maturities of investments in marketable debt securities of
$917.8 million and proceeds from the sale of equity securities and interests in affiliated companies of $7.4 million. Cash provided by investing activities was offset by purchases of
investments in marketable debt securities of $277.5 million, capital expenditures of $52.4 million, purchases of equity securities and interests in affiliated companies of
$36.9 million, cash paid for acquisitions, net of cash acquired of $1.2 million and other uses of cash of $0.8 million.

Financing activitiesFor the six months ended June 30, 2004, net cash used in financing activities consisted of
$380.0 million for the repayment of debt and capital leases, $71.7 million for the acquisition of treasury stock and $7.8 million for the payment of debt issuance costs. Cash used
in financing activities was offset by $385.0 million of proceeds from issuance of convertible debentures, $45.0 million of proceeds from the reissuance of treasury stock and
$2.3 million of proceeds from the issuance of debt.

Our
Board of Directors has authorized the repurchase of our common stock on the open market. In 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 June 30, 2004, 1.5 million shares were repurchased.

For
the six months ended June 30, 2003, net cash used in financing activities consisted of $68.1 million for the acquisition of treasury stock, $0.1 million for the
net repayment of short-term borrowings and $0.1 million for the repayment of debt. Cash used in financing activities was offset by $24.5 million of proceeds from the
reissuance of treasury stock (related to stock option exercises), and $2.1 million of proceeds from put options.

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 June 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.

As
of June 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.

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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. 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.

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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 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.

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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.

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. Currently, 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.

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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 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
infringes 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 June 30, 2004, our total debt was $938.0 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 June 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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Volatility of our stock price could negatively impact our profitability.

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, 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.

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:



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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. Future 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.

Item 4. Controls and Procedures



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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 asserts 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 disputes 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. The arbitration was held in June 2004 and the arbitrator is expected to render
an award during the third quarter of this year.

Chiron
does not know the basis upon which this matter will be resolved.

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

In January 2001, Dade Behring Marburg GmbH and Dade Behring S.p.A. (collectively, "Dade Behring") filed suit in the Court of Milan, Italy against Chiron
seeking a pan European declaration that its Enzygnost® HIV 1/2 plus immunoassay kit does not infringe Chiron's European Patent No. 0 181 150 (the " '150 patent")
relating to HIV technology, and to nullify the Italian portion of the '150 patent. In April 2001, Chiron filed a counterclaim seeking a declaration of infringement of the Italian portion of the
'150 patent by the Enzygnost® HIV 1/2 plus kit and related damages. In June 2002, the Court of Milan declared that it lacked jurisdiction over the non-Italian parts of
the '150 patent, thereby limiting the lawsuit to issues involving only the Italian portion of the '150 patent. In May 2004, the parties entered into a cross-license agreement pursuant to which
the parties agreed, inter alia, to dismiss the matters discussed above. The matter is thus concluded.

Item 2. Changes in 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 5 million shares of Chiron common stock and
authorized such repurchases through December 31, 2004 under the stock repurchase program.

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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 Plan |     | Maximum
Number of
Shares that
May Yet Be
Purchased
Under Plan
|------------------------------ |  | -------------------------------- |  | ---------------------------- | ----- | ------------------------------------------------------------------- | --- | -------------------------------------------------------------
|April 1, 2004  April 30, 2004 |  |                                 |  | $                            |      |                                                                     |    |                                                              
|May 1, 2004  May 31, 2004     |  | 1.2                              |  | $                            | 43.68 |                                                                     | 1.2 |                                                              
|June 1, 2004  June 30, 2004   |  | 0.3                              |  | $                            | 45.17 |                                                                     | 0.3 |                                                              
|                               |  |                                  |  |                              |       |                                                                     |     |                                                              
|Total                          |  | 1.5                              |  | $                            | 43.95 |                                                                     | 1.5 |                                                              
|                               |  |                                  |  |                              |       |                                                                     |     |                                                              

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

(i)    The
following votes were cast for or were withheld with respect to each of the nominees for director:

DIRECTORS

FOR

WITHHELDClass of 2007Vaughn D. Bryson

165,892,843

6,831,004Pierre E. Douaze

169,739,784

2,984,063Edward E. Penhoet

169,556,989

3,166,858


All
nominees were declared to have been elected as directors to hold their respective offices until the Annual Meeting of Stockholders in the year 2007 as noted above. No abstentions or
broker non-votes were cast for the election of directors.

The
following directors shall continue in office after Chiron's Annual Meeting of Stockholders held on May 27, 2004:    Lewis W. Coleman, J. Richard Fredericks, Paul
L. Herrling and Howard H. Pien until the Annual Meeting of Stockholders in the year 2005, and Raymund Breu, Denise M. O'Leary and Pieter J. Strijkert until the Annual Meeting of Stockholders in the
year 2006.

(ii)   With
respect to the proposal to approve the amendment and restatement of the Chiron 1991 Stock Option Plan, renamed the Chiron 2004 Stock Compensation Plan (the "Stock
Plan"), 110,380,017 votes were cast for the proposal, 40,308,665 votes were cast against the proposal, and 1,369,878 votes abstained. No broker non-votes were cast in connection with this
proposal. The approval of the Chiron Stock Plan was declared to have been approved.

(iii)  With
respect to the proposal to ratify the appointment of Ernst & Young LLP as Chiron's independent auditors, 170,960,642 votes were cast for the proposal,
496,385 votes were cast against the proposal, and 1,266,820 votes abstained. No broker non-votes were cast in connection with the proposal. The selection of Ernst & Young LLP as the
Chiron's independent auditors for the year ending December 31, 2004 was declared to have been ratified.

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Item 6. Exhibits and Reports on Form 8-K

|Exhibit
Number |  | Exhibit                                                                                                                                                                                                                                                                                                                          
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.01           |  | Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on August 17, 1987, incorporated by reference to Exhibit 3.01 of Chiron's report on Form 10-K for fiscal year
1996.                                                                                              
|3.02           |  | Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on December 12, 1991, incorporated by reference to Exhibit 3.02 of Chiron's report on Form 10-K for
fiscal year 1996.                                                                
|3.03           |  | Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04 of Chiron's report on Form 10-Q for the period
ended June 30, 1996.                                                       
|3.04           |  | Bylaws of Chiron, as amended 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.                                                                               
|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.                                                                                                                                                                                                                              
|4.08           |  | Registration Rights Agreement dated as of June 22, 2004, between Chiron, Credit Suisse First Boston, LLC and Morgan Stanley & Co.                                                                                                                                                                                                
|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 the period ended June 30, 2004) issued on June 22, 2004.                                                                                                                               
|               |  |                                                                                                                                                                                                                                                                                                                                  

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|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.
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.501 |  | Chiron 2004 Stock Compensation Plan.*                                                                                                                                                                                                                   
|10.508 |  | Form of Performance Share Rights Agreement (Executive Officers).*                                                                                                                                                                                       
|10.519 |  | Corporate Governance Guidelines, as amended and restated.                                                                                                                                                                                               
|10.520 |  | Finance Committee Charter.                                                                                                                                                                                                                              
|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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On
April 21, 2004, Chiron filed a current report on Form 8-K, furnishing under Item 12, Chiron's preliminary results for its first quarter ended
March 31, 2004 via a press release.

On
May 14, 2004, Chiron filed a current report on Form 8-K, filed under Item 5, announcing that it had filed a Tender Offer Statement on Schedule
TO-1 with the Securities and Exchange Commission (the "Commission") relating to Chiron's repurchase offer of its 30-year Liquid Yield Option Notes due 2031 (Zero
Coupon-Senior) [the "LYONS"] at a purchase price of $584.31 per $1,000 principal amount at maturity outstanding.

On
May 18, 2004, Chiron filed a current report on Form 8-K, filed under Item 5, announcing that: (i) Chiron had sold all of the shares of its subsidiary,
SBL Vaccin AB, to the management team of SBL Vaccin AB, and (ii) disposed of its needle-free particle mediated delivery technology and related DNA vaccine development programs
through the sale of its shares of PowderJect Vaccines, Inc. and substantially all the assets held by two Chiron subsidiaries, PowderJect Research Limited and PowderJect Technologies Limited, to
PowderMed Limited, a U.K. company.

On
June 15, 2004, Chiron filed a current report on Form 8-K, filed under Item 5, announcing that it had filed an amendment to its Tender Offer Statement on
Schedule TO/A with the Commission to report the results of its offer to purchase the LYONS, which repurchase offer expired at 5:00 p.m. New York City time on June 14, 2004, as more fully
described in Chiron's Schedule TO/A.

On
June 17, 2004, Chiron filed a current report on Form 8-K, filed under Item 5, announcing that it had agreed to the sale of 30-year convertible
debentures to qualified institutional buyers. The debentures are convertible under certain circumstances into cash and, if applicable, Chiron common stock.

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CHIRON CORPORATION
June 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: August 9, 2004 |  | By:               
|DATE: August 9, 2004 |  | By:               

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